Demonetization in India, the Global Economic Crisis and the Working Class

Basudev Nag Chowdhury

The evening before exactly the day that Donald Trump made a clear sweep in US, the Prime Minister of India Mr. Narendra Modi announced that his government is posing ban on Rs. 500 and Rs. 1,000 notes of the Indian currency which have to be exchanged within 50 days only. The Indian government has claimed that the decision has been made solely to retrieve the counterfeit notes and the domestic black money from the country. Almost all the front-liners of world economy including the newly elected government of US as well as the Chinese government have welcomed such firm step taken by the Modi-government in India. Even none of the mainstream political parties in opposition of Indian parliament, from the neoliberals to the rightist social democrats to the formal Communists and the Lefts, have questioned the government’s will and way in this regard. They are only concerned about the technical faults of the process such as the harassment faced by the people while exchanging or depositing the old notes so hurriedly.

A populist protest throughout the country by these opposition parties is indeed curtaining the real target of the ultra-right Modi-government in India, and in the other way trying to smoothen the process. Because, definitely no one can believe that the notes of the currency that represent 86% of the notes in circulation of a country may be decided to get withdrawn from circulation within 50 days only unless the economy has faced a severe challenge; especially since, according to the data of the Ministry of Finance itself, the counterfeit notes in Rs. 500 & Rs. 1,000 currencies is less than 0.002 % in value terms of that in circulation; and about black money, the government has no own estimation over it and it has significantly distorted the data of World Bank Report, July 2010, which it has referred as the only justification behind such firm stand, in fact reversed such data in its press release. Thus, it is essential to expose the scenario behind the scenes of this ‘historic’ demonetization which is nothing but an idiom of the current world economic crisis.

It is evident that if the paper money or notes in circulation of a country becomes superior over its real production, the value of each note will trim down or the price of production will face an equivalent rise, resulting to inflation. In the previous gold standard system, such a situation was conventionally managed by imports as the importers had to purchase gold from the central banks for the purpose of foreign trades and the corresponding paper money returned back to the central banks thereby controlling the inflation. In addition, the outflow of gold led to credit restriction thereby suppressing the demand that helped in declining the prices of goods and services. Since 1971, with the end of Bretton Woods system, the entire picture has changed as gold was replaced practically by the US dollar as the international exchange currency. For instance, now India has to export its goods and services or bring in foreign capital investments in US dollars, which then arrives its position at the RBI-reserve; and the RBI has to issue the corresponding paper money into its domestic circulation which is not balanced by the domestic products of India thereby resulting in the consequential inflation. The same dollars being out-flowed from the US controls its domestic inflation. Thus the inflation is certainly transported from US to India through such channel of the economic system. Such a system inevitably required a floating currency exchange rate instead of a fixed one in order to self-manipulate the importation of inflation.

We have depicted the state-of-the-art, compared to that 15 years back, of the prime centers of global economic game in the following table, which shows that the real growth of production in US, euro zone including UK and Japan is significantly low, i.e. less than 2% per annum, on an average, whereas it assumes almost 18%, 11% and 4% per annum in China, India and Russia, respectively.

Table 1: Percentage Change in Some Important Economic Parameters.

Change in 2001-2015


Euro Zone






GDP in constant price (%)








M1-Money Circulation (%)








Net Foreign Assets of the Central Bank (as % of real GDP)

– 4.6







2015 Inflation as

GDP-deflator / CPI

1.0 / 0.1

0.8 / 0.03

0.3 / 0.05

2.0 / 0.8

-0.4 / 1.4

1.0 / 5.9

7.7 / 15.5

Data sources: World Bank & OECD

It is apparent from the data that the inflation rate in terms of consumer price index (CPI) of the US, Japan and UK along with the entire euro zone is almost one order smaller than the corresponding inflation levels as measured by the GDP deflator. However, the picture is absolutely reverse for China, India and Russia. At this point, it is to be mentioned that the GDP deflator accounts only for the domestic goods and services, not the imported ones, whereas the CPI includes also the imported foreign commodities. This is a clear indication, as explained above, how a ‘slice of inflation’ is transferred from the former countries to the later ones through the current economic mode. As an obvious consequence, the later nations, except Russia, had to raise their money supply with respect to their real growth of domestic products by slower rate than the former nations in order to control the inflation. Although the situation is still under control in China, for Russia, both the domestic as well as the transported inflation are now beyond the limit of control.

This indeed is the very result of the capitalist counter-revolution organized 25 years past in Russia which, a century ago, had experienced the first successful socialist revolution. The above data also show that the net foreign assets held by the central banks as a percentage of the corresponding GDP in value terms has changed in last 15 years accordingly in order to transport inflation from the former countries to the later ones, except for the case of Japan, which had already been holding a huge amount of foreign assets in ’90s after the 1992 asset price bubble collapse, and since the years in fact it has increased its foreign assets at much slower rate than the euro zone or UK. Grossly we can say that the former nations are suffering from lower growth rate with controlled inflation whereas the later ones having satisfactory growth rate are under tremendous transported inflationary pressure.

Such a contradiction is inherent of the current capitalist system and is actually manifested also in each of the countries in the form of ‘repo rate’. The corporate firms are looking for aggressive rate cut in order to boost up the financers which would lead to GDP growth, whereas such rate cut results in obvious increase in the inflation rate caused by more paper money in circulation due to smaller interest rates. However, the origin of the crisis is something other than this. Currently, in value terms, the Rs. 500 & Rs. 1,000 notes, those are the higher denominations, amount almost 86% of the total paper money in circulation in India, which was only 26% in 2001. We have plotted in the figure below the distribution of larger and smaller denominations (in value terms) in circulation of US and India from 2001 to 2015.

Fig.1. The plots of smaller (up to $50 for US and up to Rs. 100 for India) and larger ($100 for US and Rs.500+Rs.1,000 for India) denominations (in value terms) in circulation of US and India from 2001 to 2015. The values are normalized to 2015 total as 100.

It is apparent that the amount of smaller denominations has elevated by negligible margin whereas the larger denominations have increased significantly for either of the nations in the past one and half decade. Indeed it is a trend of a continuous fall in the smaller denominations and a corresponding rise of the larger ones as percentage value of currencies in circulation that almost all major economies have observed throughout the era of neo-liberalism. This is indicative of one of the most important feature of neo-liberalism; that is, unlike the previous days of capitalism that produced huge number of low-price commodities at a time, a new trend of the large capitals toward the repetitive production of costly but less-lasting commodities, comparatively, in smaller numbers but with newer applicative quality. Such a trend leads to an obvious future of the smaller denominations to die out whereas the larger denominations of currencies toward transforming into much larger ones and further toward plastic money. For instance, the current demonetization project in India is withdrawing Rs. 1,000 and instead Rs. 2,000 is put into circulation. It is also important that such ‘repetitive production’ based economy is inherently futuristic in its nature and thus is compelled to construct an unprecedented credit dependent system. Speculation over real stocks has therefore been continuously dominated by the derivatives and the system is approaching toward corresponding crises repetitively, with more irresolvable complexities. The share price index compared to the real GDP of all the above mentioned nations are now growing rapidly toward peaks from their temporary dips after the 2007 peak that resulted in the recession in 2008. We are approaching another crisis, possibly, much more widen and intense than the 2008-one.

Thus the entire demonetization project in India is aimed at minimizing the paper money in circulation, in totality as well as in comparison to the deposit, in order to control the ‘domestic inflation’ catalyzed by the rate cuts without disturbing the ‘transported inflation’. The very decision of Modi-government is thus not to retrieve the black money at all, rather to sustain the mechanism of retrieving profit, out of the entire surplus of the working class and poor peasants and the numerous other below poverty working people, by the global finance led capital oligarchy. The current system will no longer be able to provide the conventional democratic rights to its people, not only in India, but also in either of the US and the other above mentioned nations. All the pictures of today are indicating a global rise of fascism. Social democratic resists will willingly or unwillingly advocate such rise. Nothing but an across-the-nations unity between the revolutionary working class along with the other working people is a need of the time.

The author is associated with People’s Brigade.



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