Demonetization - Master Stroke or Mistake?
Just about today morning, I was scrolling through Twitter, rather absent-mindedly, thinking what subject shall I write on, in today's blog. Suddenly I stumbled upon today's trending hashtag in India.
Long and tedious queues around ATMs, totally jammed banks, distressed and confused faces. Friends, we are talking about the condition of Indians in the next few weeks after 8th Nov, 2016; on the night of which, when clock read 8:15 pm, PM Modi announced devaluation of the present 500 and 1000 currency notes.
It was the time when not only in India, but in the whole world, the news agencies got their coverage topic effortlessly, showing the pitiful condition of Indians, whether be it of North India or South, East or West - all lined up to exchange their notes.
Friends, I always wanted to cover demonetization in our blogs. I wished to research on all the positive and negative impacts of demonetization and determine the net up or down graph of this tough decision. Hence, today we dive into this complex matter of demonetization, which is directly related to India's economy and its framework.
Before discussing the merits and demerits of demonetization, let us first understand the term and its past history in India.
What is Demonetization?
In simple words, demonetisation is the process by which the demonetised notes cease to be accepted as legal currency for any kind of transaction. Specific currency units are devalued.
It is also interesting to note that Modi government was not first to do demonetization in India. There is a long history of demonetization in India.
Back in 1946, the British India Government had demonetized 1,000 Rs currency notes for the first time in India.
Around that time, even 5,000 Rs notes, 10,000 Rs notes were in circulation. Once they were demonetized, but reintroduced in 1954, only to be stopped again in 1978 by Morarji Desai government.
Finally, those orange-coloured 1000 Rs notes which we used before Nov 2016, were first introduced in the year 2000.
And as we all know, on 8th Nov, 2016; PM Modi announced that 500 Rs and 1000 Rs notes will no more be a legal tender of transactions, and will devalue with immediate effect!
Boldly declaring such an unexpected decision, even after banking hours at 8 pm, the news broke out as an element of surprise for India.
But it is totally natural for us to wonder - What exactly was different in the past demonetizations like at the time of Morarji Desai and this one of 2016?
The thing is, during Morarji Desai's government, most Indians were out of the banking system and barely had those high denomination notes like 10,000 Rs etc. The cash to be recollected at that time was hardly 15-20%.
But by 2016, things were different. Indian Economy had matured and those 500 Rs and 1,000 Rs notes were in high circulation. This time, around 86% of cash in circulation was to be recollected. Possibly this was one of the toughest aspects of this whole process.
The government had given time period of 2 months to the public to deposit the money. Amount upto 10 lakh from each individual account could be deposited without declaring its sources. Those who did not have bank accounts, had the option to exchange their money via someone else's account, with their written consent.
Objective of this move.
Such high stakes, politically too risky and tough to implement - Why at all was demonetization put into effect? What exactly did government expect from this move?
The primary stated aim to implement demonetization was to curb black money and stop the circulation of counterfeit/fake notes. Even in his speech on that night, Modi again and again emphasised on his aim.
In 2014, NDA Govt. had come to power mainly on the basis of their promise to end corruption in public sector.
Modi government's idea, in a nutshell, was this-
Black money directly funds the following tyrannies :-
1. Organised Crime
2. Terrorism
3. Human Trafficking
4. Corruption.
5. Drugs Menace.
Govt's intention behind demonetization was to break this very backbone that hinders our growth.
It was also expected that due to bank scrutiny during money exchange, all counterfeit money would get eliminated.
Believe me or not, it was also hoped that lesser amount of cash circulation for a time period would cause lesser demands for goods and services, thereby lower prices countering inflation!
Now you may ask, how exactly would the black money problem be solved? Straightforward enough, all currency was to be deposited through bank's formal systems, and hence cash formalisation too was expected. In short, all cash would be properly accounted, properly recorded - killing black money.
But it is obvious that there is no direct solution for corruption and black money.
Indeed it is also true that the actions done, even with the most noblest intentions, might not turn out always smooth, and may be challenging - and sometimes even backlash, worsening the situation.
All in all, we saw how Government's thought process was to come out as Robinhood. Like a messiah for the poor and backward classes, it wanted to suck in all black money, reduce economic disparity and redistribute money - fairly and justly.
Hence, let's see how much this move has been able to achieve its utility and expected aims.
Kya Paaya, Kya Khoya?
Just within 2 years of demonetization, 99.3% of all money was formalised in the banks. The government had expected that around 20% of the money would not get collected.
But according to a 2018 RBI report, around ₹15.30 lakh crore out of ₹15.41 lakh crore was collected and formalised. So people ask, where exactly was black money caught? We assume that the holders of black money nonetheless found ways to white wash their money.
On the contrary, we all know who faced the horrors and shockwaves of this move.
The Agriculture Sector was hit hard by demonetization, as most of the transactions from seeds to pesticides and fertilisers are done in cash.
The GDP growth rate also fell from 7.5% in Sept 2016 to 5.7% in June, 2017.
An estimated of 10.5 lakh job losses too happened.
The unorganized sector was the most affected by demonetization, where things work only in cash.
The poorest sections of society, which had far far no linkage to black money, was hardly affected.
Experts believed that the very base assumption of demonetization was erroneous as the largest portion of black money is safely locked in accounts of Swiss banks! And hence it was bound to fail meeting its objective.
However, it is notable that the then Finance Minister Piyush Goyal informed that Rs 1.3 lakh crore worth black money was successfully devalued and killed.
Also, another positive side of demonetization proved to be successful formalisation of our economy.
Number of Income Tax Returns filed after demonetization increased from 43.3 million to 52.9 million.
But giving an idea of the level of spending caused for this, the channel Deskhbhakt's Akash Banerjee says, " Its like spending ₹100 to save ₹10."
Here I end my blog, trying my best to give deserved weightage to both the sides of this subject of demonetisation.
I hope this case study proved to be enlightening about many aspects about Indian economy anf policy implementation, apart from giving insights about Demonisation, 2016.
Thanks,
Daksh Parekh.
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