Demonetization (notebandi) is a buzz word following us everywhere around these days. So let us first understand what it actually means?
In layman's language, demonetization means the act of stripping a currency unit of its status as legal tender nationwide. The RBI (Reserve Bank of India) vide a notification dated 08th November 2016 has withdrawn the legal tender character of the existing bank notes in denominations of Rs.500 and Rs.1000 issued by the Reserve bank of India. The Said decision was also addressed to general public via a press conference held by Our Honorable Prime Minister Mr. Narendra Modi late in the evening on 8th November 2016. The last date fixed as of now for Depositing withdrawn Currency notes with Banks is 31st Dec 2016 thereafter deposits could be made with RBI along with declarations till 31st march 2017.This move will lead to scrapping of 86% of bank notes by values, at least 86% of total value of currency which was issued by Reserve bank of India (RBI).
It will be worthwhile to note that it's not the first time that such aggressive strategy has been adopted to curb black money, actually it's third time that government has resorted to demonetization. High-value currency notes were first demonetized in January 1946 and then again in January 1978. however this time the impact of such decision on Indian economy is greater and widespread than ever before.
The government of India has claimed many benefits for the economy of nation on account of introduction of demonetization policy such as
- Cessation of parallel economy,
- Eradication of counterfeits,
- Curbing of terror financing,
- Increase in GDP growth in long run,
- Curbing corruption,
- Widening of tax base
- Move towards cashless economy and many others
In order to boost implementation of demonetization scheme and Move towards cashless economy, Finance minister Mr. Arun Jaitley has recently announced various rebates and incentives for payment made using non-cash modes of payment for various goods and services.
It is apparent that the move of demonetization will generate huge amounts of revenue through incidence of income tax at higher rates on unaccounted income and through indirect taxes as the economy gradually shifts towards cashless economy leading to accounting and recording of various transaction transacted through usual banking channels making is harder to avoid various indirect taxes by concealing such transactions. Which in turn can be utilized by the government inter alia for betterment of society, educational programmes, Infrastructure development activities leading to a multiplier effect on the economy.
However the stock market and various section of nation and economist are skeptical of the claims made which is reflected by Drop in GDP growth forecast from 7.4% to 6.9% by Fitch rating, Sensex fell by 6% a day after 8th November although how much of this was due to news of president-elect Donald Trump is not yet known. In the month of November alone foreign investors sold nearly $3 billion worth of Indian stock, Expectation for broader NSE index were similarly downgraded. further many business have recorded drop in sales for Q3 following demonetization due to reduced purchasing power in hands of common man as a consequence of cash crunch.
Former World Bank Chief Economist, Kaushik Basu, said that the 'damage' is likely to be much greater than any possible benefits
The lack of clear Goals of the DEMONetization policy has also led to various speculation stating it as just a gimmick and a move to get back on opposition party while systematically Converting the black money of Associates of ruling party to Untainted money.
According to RBI, a total of 11.5 lakh crores have been deposited of total 14.95 lakh crores of withdrawn high denomination bank notes which amounts to nearly 77% of total withdrawn currency in circulation. On this note Finance Minister Mr. Arun Jaitley has Emphasized that mere depositing of cash into bank accounts won’t convert “Black” into “White” and shall be subject to Tax provision for determination of tax liability as per income tax act 1961.
Although as per RBI, nearly 4.28 lakh crores were issued by the bank either over the counter or through ATMs in the period of nearly a month post demonetisation which amounts to about 37% of total cash deposit made which is due to various restrictions imposed on Withdrawals from Branch and ATM’s, which again is a cause of concern among general public as they fear that they will not be able to withdraw their Deposits.
Furthermore, A total of nearly 9.63 crore has been returned to banking system which amounts to 3.4% of total deposit received nearly 20 days after the demonetization decision was announced.
Also, Long Queue were stretched out in front of almost all bank branches and ATM’s for exchange of old notes and withdrawal of new currency notes leading to widespread inconvenience and hassle among citizens. The situation is further aggravated by the fact informal sector accounts for more than 40 percent of India’s GDP and provides employment to close to 80 percent of the labour force.
So in the short term it might seem Demonetization has been more trouble than the benefits it offers. However the benefits of same in long run by increasing tax base, reduction in inflation rates, financial inclusion of agrarian sector of society, saving being channelized in banking stream which may lead to further reduction in Lending rates is undeniable.
A critical examination and evaluation of all the claims made by government thus far does seem to stand the test of logical conclusions that are derived from demonetization of high-value currency notes. However, the impact is not immediate in the daily lives of citizens and economy of the nation's leading to much doubt and skepticism among general public and analysts alike. The key point which is to be understood is that strategic decisions yield results gradually over time which many failed to understood regarding demonetization. There may be economic slowdown and inconvenience in the beginning but it’s only a temporary side effect of a bitter medicine which seems hard to swallow by many. The decision will pave the way for future growth and development of the nation.
In a nutshell, at the expense of sounding cliche the saying “no pain no gain” stands very much applied to the present move of demonetization.