It’s almost a couple of years after demonetization . There is always a opinion wind blowing either from the east or west. they were merits but on some place it would be demerits. Are they true or false lets dig up the actual breakout.
On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 bank notes of the Mahatma Gandhi Series. The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. The sudden nature of the announcement and the prolonged cash shortages in the weeks that followed created significant disruption throughout the economy, threatening economic output.
The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the Government of India on 28 December 2016 ceasing the liability of the government for the banned bank notes.
Demonetization technically is a liquidity shock; a sudden stop in terms of currency availability. It created a situation where lack of currencies jams consumption, investment, production, employment etc. The intensity of demonetization effects clearly depends upon the duration of the liquidity shocks. Following are the main impacts.
• Currency crunch in our economy
• Welfare loss for the currency using population.
• Consumption was adversely affected
Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓
• Loss of Growth momentum
• Increase in bank deposits and reduced interest rate
• Countering of black money
• Check on counterfeit currency Criticism against demonetisation
Critics say, the Demonetisation as a means of tackling the black economy, carried out on the incorrect premise that black money means cash. It was thought that if cash was squeezed out,
the black economy would be eliminated. But cash is only one component of black wealth: about 1% of it.
• Black money is a result of black income generation. This is produced by various means which are not affected by the one-shot squeezing out of cash.
• Any black cash squeezed out by demonetisation would then quickly get regenerated.
• So, there is little impact of demonetisation on the black economy, on either wealth or incomes.
Changed narrative from Black money to cashless economy
The original intent of demonetisation was to address the issue of black money. There is enough work that suggests that people with black money hold a very small proportion of it in cash. Most of it is usually invested in gold, or real estate, or in the stock market, or abroad, and the share of black cash is 6% of the total black economy.
• The primary pitch and narrative of the demonetisation drive by Prime Minister seems to have taken a major shift to cashless economy from the initial key highlights of war against black money, corruption and counterfeit currency.
• Now Government says that idle money has come into the system, the cash-to-GDP ratio will decline; the tax base will expand. But none of these required demonetisation and could have been implemented independently.
• The government now also said that demonetisation is only one of the many steps to tackle the black economy.
• The government’s argument that cash coming back to the banks will enable it to catch the generators of black income, and there will be formalisation of the economy, may not hold.
Then the goalposts started shifting when it became apparent that the main reason was not justified by what was happening. First it was cashless, then less cash economy, then formalisation of the economy. The final step was in saying this would give IT authorities the information to go after people who had deposited black money.
Who mostly have borne the brunt?
Large deposits by businesses do not automatically become black. The Income Tax department has to prove that the sums deposited resulted from generation of black income. According to the Finance Minister, big data analytics would track black money holders who have deposited cash in their bank accounts.
• The negative effect of demonetisation can be seen in terms of big losses to the unorganised sector, farmers and traders.
• The start-up world has seen a drop in investment activity
• The brunt of this move actually has been borne by those who never had any black money. The note shortage is slowly waning and the long-term economic and social effects are becoming evident.
Critics overlook the significant gains of demonetisation which have begun to accrue and will gather momentum
For India to achieve prosperity for all, three ingredients are essential: a transparent, effective government, flourishing of competitive free markets, and huge investment in the poor.
Corruption had made the government dysfunctional, crony capitalists flourished at the expensive of honest entrepreneurs, and rampant tax evasion that hindered state’s capacity to invest in uplifting the most vulnerable citizens. Note ban was announced to overcome these issues to some extent.
Short-term costs inevitable
There were always going to be costs in the short run — people would be short of currency, businesses would be disrupted, consumption would fall, and GDP growth would take a hit.
• The government announced the Pradhan Mantri Garib Kalyan Yojana where cash could be declared, deposited, and a hefty penalty paid. For those determined to deposit their illicit wealth without disclosure, the cash has not become white. It will be scrutinised by the tax authorities and penalties levied.
• The gains may accrue in the coming year once tax authorities have scrutinized through accounts with suspiciously large deposits.
• According to Finance Minister, between November 8 and December 31, 2016, deposits between ₹2 lakh and ₹80 lakh, and deposits of more than ₹80 lakh amount to some two-thirds of the value of the demonetised currency. The holders of these suspicious accounts will now be in the tax net for perpetuity.
• However, not all of that money deposited is black. Perfectly white cash holdings were common. To able to distinguish the black from the non-black would be the responsibility of the IT authorities. They have to analyse the deposits and correlate them with the tax payment records, which is relatively easy to do.
Move to a less cash economy
The significant gain which has begun to accrue, and will gather momentum, is the move to a cashless economy.
• In the long run, a move away from the use of cash is the surest way of curbing the black economy.
• Less cash economy can happen with shift in payment patterns. There was certainly evidence that the number of electronic transactions went up. But after the money
supply started coming back, those dropped. Whether Indians have changed the way they make payments is questionable.
Other significant gains from demonetization
• Nobel laureate Kailash Satyarthiand others working to fight human trafficking said that the note ban had led to a huge fall in sex trafficking.
• The Demonetisation has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetisation is announced. It is said that the money these organisations have collected over the years have left with no value and it has caused them to reach to this decision.
• Mumbai Police reported a setback to Hawala operations. Hawala dealers in Kerala were also affected. The Jammu and Kashmir Police reported the effect of demonetisation on hawala transactions of separatists.
• Several e-commerce companies hailed the demonetisation decision as an impetus to an increase in digital payments, hoping that it would lead to a decline in COD returns which could cut down their costs.
• The demand for point of sales (POS) or card swipe machines increased. E-payment options like PayTM and Instamojo Payment Gateway, PayUMoney also saw a rise.
• The number of I-T returns filed for 2016-17 grew by 25 per cent and the advance tax collections during that period rose 41.8% over the 1-year period, as increased number of individuals filed their tax returns post demonetization
Why Demonetisation alone is not responsible for slow GDP growth?
Reading the signals from the growth numbers is proving a tricky affair — especially as answers have to be shifted from multiple, intertwined narratives: the political, the economic as well as the purely business. There are multiple villains to blame, though, the most immediate being the damper of demonetisation of November 2016 and the implementation of the goods and services tax (GST) in July this year. Following may also be the reasons for slow GDP growth.
• There has been a sign of distrust in financial investments.
• While GST pushed up gold buying, it pushed down manufacturing. Manufacturing companies sent out their old stocks to market, holding back on production. It brought down manufacturing sector growth from 5.3% in January-March to 1.2% in April- June.
• In the post-rabi-season quarter we expected strong agricultural growth but it was pulled down by the animal husbandry sector. In fact, animal husbandry, specifically buffalo meat exports, has been the leading contributor to growth among all the areas that are clubbed under agriculture.
• Uttar Pradesh, India’s largest meat processing state faced huge shutdowns from end- March. Livestock contributes a little over 4% to GDP and roughly a quarter of total agricultural GDP. Agri-sector growth dropped to 2.3% in April-June quarter against 2.5% in the same quarter of 2016.
• Robust government expenditure rose 27% in the April-June quarter, to 6.5 lakh crore. The not so good news: fiscal deficit touched 92% of its budget estimates by July. At the same time, some of the government’s revenue-generating plans have not being implemented. While disinvestment and spectrum sales have yet to make significant headway.
• Lack of PPP projects is clearly our biggest problem. Implementing the Kelkar Committee report and tackling the institutional bottlenecks that constrain PPP in India are the need of the hour. There is an institutional capacity issue. With an NPA overhang, corporates are wary and lack appetite to take risks.
• Savings from physical assets were being moved from gold and real estate to financial assets. Gold (valuable) imports go up sharply. Household savings moving away from physical assets, especially real estate may not be a good thing for the economy. The second largest job creator after agriculture is real estate and construction growth has already tapered.
Way Forward:
Government should focus on ensuring growth, job creation and investment. The urgent need is to get the private sector to start investing. One way to avoid winds of deflation is to kick- start private investments.
Reviving the investment cycle and tackling bad loans will be the key challenges to be tackled on a priority basis in the current fiscal.
Government has launched a multipronged attack on corruption and black money. Government discretion has been reduced particularly in the allocation of natural resources.
There is a concerted attempt to improve ease of doing business, and technology is being used to deliver public services without leakages.
It is far too early to write-off any of these efforts, and demonetisation. There is a future beyond the present.
Demonetization: What We Have Gained and What We Have Lost
