Libertatem Magazine

One Year of Demonetization

Contents of this Page

On November 8, 2016, the Prime Minister of India, Shri Narendra Modi announced that all the 500 and 1000 rupees notes would cease to be a legal tender. According to the reports, it was applied to the 86% of the currency in circulation. During that time, up to 95% of the transactions were made in cash and the demonetization resulted in hardship for the traders who had no other means to accept payment except cash. Over that, 85% of the labourers were paid in cash and nearly half of the population did not have any bank accounts. The objectives were to curb terrorism, to eliminate fake Indian currency from the market etc. Apart from the said objectives, the main aim was to promote digital economy increasing the transparency in the money transactions.

The effects of Demonetization

As a result of the above, the tax base widened in the form of an increase in the number of income tax returns by 25% in the year 2016-17. The main advantage was that the tax evasion comparatively lessened due to more people coming under the tax radar. It became easier to analyse the willingness of the people to comply with the tax laws. The mobile payment users increased enormously since the reports showed a surge of 105% subscribers in the Paytm app. The Government also introduced BHIM app for the easy transfer of money. Around 50 lakhs labourers opened bank accounts and 1.03 crores employees got themselves registered with the Employment State Insurance Scheme. The terror activities in the Naxal-related areas got down by 45%. Some economists opined that initially, there will be less growth, loss of jobs etc. but stated that the drive is a long-term goal. Arun Jaitley, the finance minister said that the move had met its objective of reducing cash in the economy, ending anonymity of cash, bringing in more individuals in the tax net and dealing a body blow to black money. Therefore it was termed as anti-black money day by the NDA Government.

The aftermath

India is still a cash-based economy. The agricultural sector in the rural areas has been hit most by the demonetization drive. The debts started mounting and the prices of the goods started collapsing. The rates of the vegetables like potatoes and tomatoes etc. were nearly half the price as compared to what had been in the previous years. The results could be derived from the reports of farmers committing suicides in the states like Maharashtra, Gujarat etc. According to the reports, there was loss of nearly 1.5 million jobs in the first four months of this year. The growth in the economy was also less than the previous year i.e. 5.7% in the first quarter of 2017-18 vis-à-vis 7.1% in the same quarter of 2016-17. The expectation was the disclosure of the black money by the people. The demonetization drive removed out $240 billion USD worth of the notes but the banks received around $220 billion USD. This meant that either there was no black money in the economy or the people must have found a newer legitimate way to evade tax. At a later juncture, the Government introduced 2000 rupees notes after the drive. But there are already reports of fake 2000 rupees notes and 10 rupees coins. The cost of printing of the new currency was also the double of that of the last year.There is 21% rise in the imports from China in this one year. In the first one month of the demonetization drive, there were around 720,000 deaths, as reported by Forbes on December 8, 2016. There was news report of the labourers leaving Delhi due to the deficit in receipt of wages. In the early part of the year, the people went for the digital economy but at a later juncture decreased according to the reports. There was a loss of nearly 1.5 million jobs in the organized sector. With respect to the unorganized sector, the same decline was found.

The former Prime Minister Shri Manmohan Singh opined November 8 as the black day in the history of India; terming the demonetization as an organised loot by the ruling Government. He also said that there is no other democratic country in the world which has taken such a gross step. The economic, social, reputational and institutional impact is enough to show the results. The GDP has slowed down after the drive and it can be witnessed through the adverse impact of demonetization on the weaker sections of the society. The drive also attacked the credibility of the Reserve of India. But undoubtedly, this drive did leave a mark in the World Bank, IMF and European Commission.

According to the author, it is very difficult to infer from the effect of demonetization drive over the Indian economy. Our country consists of different sectors of the economy. The impact of demonetization effected all the sectors. This step was not a sudden in any manner. The ruling Government warned in various ways before announcing the above drive. It would be better for us to be patient and give time to the NDA Government to achieve its objects.

About the Author