It was an unprecedented and surprising move by our Prime Minister on November 8th, when he declared that at the stroke of midnight Rs. 500 and Rs 1000 will not be legal tender. From that day, the impact of demonetization is still unfolding and impacting the every single life of the 125 billion population of the country. It was unprecedented because the whole demonetized currency amounted to 85-86 % currency in circulation in cash dependent economy.
let us first discuss the suddenness of the move taken by the government of India.
Was it a planned and well thought out move? The way it is unfolding and the consequences and subsequent measures taken by the government creates doubt about the well thought out planning.
Was it a measure in continuation of INCOME DECLARATION SCHEME 2016 to catch black money and corruption in the country?
Was it a political move considering so many elections coming in few months? Most importantly, the election is coming in the largest state of India in Uttar Pradesh.
What I can understand through all the events unfolding is that it was guided by all the above-discussed motives. Having said this, we can say that It was certainly pushed towards a proactive change as was witnessed in the Modi government’s various initiatives. Modi was elected by unprecedented support by the people of the country to do something concrete and bring about productive change in the society. I think that by doing this he just want to stand up to the expectation of the people.
However, now we should discuss the positive and negative as well as long and short term advantages of this move.
Positive Impacts/ Long–term impacts:
- It will create problems for the generation of fake and counterfeit currency.
- It will be a major blow to the criminal activities which are funded by counterfeit currency.
- It will block the generation of black money and corruption money.
- The inflation rate will come down because earlier too much money was chasing too few goods.
- The prices in real estate sector will come down drastically and as per the news reports, things are settling down in a right direction.People will be able to afford houses which were earlier unaffordable due to sky rocketed prices and the dominance of unaccounted money in real estate.
- It has created a big push to move towards cashless or less cash economy which will reduce the logistics expenses dealing with large amount of cash.
- It will bring a large chunk of people in the banking net and thereby in the taxing net of the country, which will increase our tax–GDP ratio as well as will certainly increase the financial inclusion. In this context, people can also avail other banking and financial services like loans, insurances, mutual funds etc.
Negative Impacts/ Short–term impacts:
- It has created lot of confusion and disturbances in the normal life of the people and specially the poor and illiterate.
- People have got frenzied about making a queue and going to the banks for depositing the old currency notes.
- Misuse of JAN DHAN accounts to deposit the unaccounted cash.
- Use of Hawala traders for converting the black money into white money.
- Lot of irregularities in the banking sector has come out at the surface.
- The economic activity in the country has got a hit and it is expected by the expert economists that our current GDP growth will decline. Manufacturing has contracted in December as per the PMI index.
- It has created lot of issues in the rural areas and specially for farmers.For instance, they were not able to buy seeds, fertilisers etc for sowing rabi crops.
- Shifting towards digital banking can also be problematic if there are not enough measures taken to check cyber crime and cyber security.
Political Impacts: Positives and Negatives:
- It can turn out be a disaster for the government of India if it is not managed properly and basically for the party in power when number of crucial elections are coming in the few months.
- The whole winter session has been washed out due to the pandemonium in the parliament because of the opposition against the move of “note bandi”.
- One of the most important taxation reforms GST which was supposed to be implemented from April 1,2017 is becoming doubtful.
- The credibility of the government will be in doubt if the government will not take opposition in confidence for the betterment of the people of the country.
- If government manages this transformation properly and successfully, the country as a whole will be benefitted.
I am being hopeful and positive about everything what the government is doing. But it is said that ” policy 1% and implementation accounts for 99%”. And we know for sure that how inefficient, slothful and corrupt bureaucracy we have in our country. A lot will depend on how things are implemented. India being a change-resisting society as was said by Gunnar Myrdal in his book ASIAN DRAMA, we have a long way to go to adopt the cashless transactions and bringing the lot more people in the tax net.
Important insights from the chapter of Demonetisation from the recent Economic Survey :
Demonetisation has been a radical, unprecedented step with short term costs and long term benefits. The aim of the action was fourfold: To curb corruption; countrtfeiting; the use of high notes for terrorist activities; and especially the accumulation of “black money“, generated by income that has not been declared to the tax authorities.It followed a series of earlier efforts to curb such illicit activities:
* Formation of Special Investigation Team (SIT)
* Black Money and Imposition of Tax Act 2015
* Benami Transactions Act 2016
* Information exchange agreement with Switzerland
* Changes in the tax treaties with Mauritius, Cyprus and Singapore
* Income Disclosure Scheme 2016
Demonetisation was aimed at signalling a regime change, emphasising the government’s determination to penalise illicit activities and the associated wealth.
India’s demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic political conditions.
Policy Wise 