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Impact of demonetization- two years down and still not over!

Suvigya 
on 27 February 2019

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On November 8, 2016, our honourable Prime Minister Narendra Modi announced his government's demonetization drive in a shock move. Today, when elections are in the vicinity the impact of all the decisions by Modi led government including the note ban and all its possible consequences are still being debated.

Announcing the same, PM Narendra Modi said, 'Brothers and sisters, to break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight i.e. 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards'.

Without a doubt, this is one of the biggest and the boldest moves taken by the Government, rendering almost 86% of the total cash currency in circulation invalid.

Though, the initial days witnessed long queues in front of the banks leading to a lot of inconvenience to people and an immediate decline in the economy, the Word Bank in April 2018, said that, the Indian Economy has recovered from the temporary disruption due to demonetisation and that India's growth will increase soon as the economy has recovered from demonetisation, IMF has appreciated the monumental reforms that have taken place in India.

Before discussing the impact it is imperative to understand that the primary objective of this note ban has been checking black money, terror financing, promoting digital transaction and weeding out fake currency notes.

Soon after the announcement, there has been an adverse impact on the economy entailing:

  • Lengthy queues and inconvenience to people, also resulting in a about hundred deaths as per Forbes, although there has not been any 'official report' on such number. Further, more than 15 lakh jobs were lost in between January and April 2017 due to demonetisation. Our former Prime Minister, Dr. Manmohan Singh criticized the move by saying that implementation has been a monumental management failure and there should have been a constructive scheme in place, calling the entire decision 'organized loot'.
  • The fall of BSE Sensex and NIFTY 50 stock indices over 6% the very next day.
  • Drastic decline in the GDP rate of about 2 per cent in the quarter following the note ban. As per the economists, the major reason cited for such decline is the failure on the part of the government to replace the currency efficiently leading to a reduction in the transactions and consequently, leading to a decline in the GDP.
  • The RBI has admitted that 99.3% of all demonetised notes came back to the banking system basis which somewhere between 3lakh to 4 lakh crore of black money was back into the system, which was earlier hidden. As per Raghuram K Rjan, former RBI Governer this has led to a massive increase in the interest cost to be borne by the Government which comes to approximately Rs. 18,000 crore to Rs. 24,000 crores on an annualized basis which is not an insignificant number considering RBI surplus has come down by 30,000 crore plus.
  • Huge costs of recalibrating the ATMs in line with the new currency and printing the new notes. According to the data released by RBI, the cost of printing notes doubled to Rs 7,965 crore in FY'17 from Rs 3,421 crore in FY'16 on account of new currency printing post noteban. The Congress leader and former Finance Minister, P. Chidambaram attacked the Government and tweeted 'RBI 'gained' Rs 16000 crore, but 'lost' Rs 21000 crore in printing new notes! The economists deserve Nobel Prize.'
  • A blow to Small and Medium Enterprises. As per, One of India's most renowned experts on black economy, Professor Arun Kumar, 'many such businesses shut down because there was no cash to pay the workers. About 1,000 units in Jamshedpur that operated as a small scale ancillary unit to big industries were closed.'
  • Immediate cash crunch in the real estate projects especially those under construction wherein cash is required for operational activities. This has resulted in poor cash flow leading to a poor demand in the initial period subsequent to demonetization.

Moving onto a brighter side, demonetization has been widely appreciated despite all the negative impact that it created. Richard Thaler, Nobel Prize winner for Economics, applauded the same saying that, it is a policy that he has long supported and is a first step towards cashless economy and is a good start on reducing corruption.

  • Kristalina Georgieva, World Bank's CEO praised the decision and claimed that it have a profound and positive impact on its economy. 'Demonetisation may have caused some hardship to people living in the cash dominated economy but in the long run the move will help foster a clean and digitised economy,' says Kristalina.
  • The cash economy tremendously aids evasion of both direct and indirect taxes and demonitasion has directed India towards cashless economy. Two years after note ban, digital transactions show robust growth. In terms of numbers, the value of NEFT transactions had gone up fromRs. 988,000 crore in September 2016 (just two months before demonetisation) toRs. 14,182,000 crore in September 2017, and toRs. 18,015,000 crore in September 2018. The value of mobile banking transactions, too, shot up fromRs. 2,700 crore in September 2015 toRs. 104,300 crore in 2016, and toRs. 186,200 crore in 2017. (Source: The Hindu).
  • Acceptance of digital infrastructure has grown since demonetisation with the number of Point of Sale (POS) terminals increasing by 24 percent. In 2017-18, after the adoption of UPI by private players like Google, Paytm and others, the total number of transactions skyrocketed. We now witness, how large number of kiosks and chaiwalas use e-wallets to accept payments.
  • Basis the Economic Survey 17-18, reported in January 2019, about 18 lakh (1.8 million) additional taxpayers have arisen due to demonetisation-cum-GST, representing 3 per cent of existing taxpayers.
  • The unaccounted cash could be deposited in the Pradhan Mantri Garib Kalyan Yojana after paying 50% tax. The money will remain deposited for 4 years with the bank without incurring any interest. However, after 4 years the amount will be returned. This amount can be utilized for social welfare schemes and making the life of low income groups better.
  • As per various media houses, 224,000 shell companies were deregistered post demonetisation without any protest by November, 2017 i.e. within an year of demonetization which is a silent but effective crackdown on 'Black Money'.
  • As per different sources, the government has been able to recover black money of Rs 69,350 crore under the Income Declaration Scheme and Black Money and Imposition of Tax Act. Another Rs 5,000 crore was recovered under the Pradhan Mantri Garib Kalyan Yojana (PMGKY). The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act were enacted in 2015 providing a one-time window for declaring undisclosed foreign assets. Around 650 people declared money worth Rs 4,100 crore deposited in foreign banks.
  • The real estate sector did get hit by the currency ban however, as per real estate experts, more money in the banking sector not only leads to a lower rate of interest rates and EMIs on home loans but, an increase in transparency and India's rating globally causing an increase in Foreign Direct Investment in the longer run.

Any change encompasses various impacts which triggers both the negative and the positive side and demonetization was not just a change but a reform- one of the greatest and the boldest in the Indian history! Of course there are certain points that highlight the demerits nevertheless, this step has been widely appreciated by not just a common man of the nation but, also by institutions and people globally.


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