Demonetisation:
On November 8, 2016, the government demonetised two largest denomination notes, ₹ 500 and ₹ 1,000 with immediate effect and thus, they ceased to be legal tender. At one fell stroke, 86 per cent of the cash in circulation (amounting to ₹ 15.44 lakh crore) was thereby rendered invalid. These notes were to be deposited in the banks by December 30, 2016, while restrictions were placed on cash withdrawals.
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Positive Impact: Benefits from Demonetization 2016 in India
In 2016, India witnessed a historic move that sent shockwaves through the nation – demonetization. The government, led by Prime Minister Narendra Modi, took a bold step to eradicate black money, counterfeit currency, and corruption by rendering INR 500 and INR 1,000 notes invalid. While the move sparked intense debates and mixed reactions, it’s essential to explore the potential benefits that emerged from this bold decision.
Digital Transformation:
Demonetization acted as a catalyst for the rapid digitization of the Indian economy. With physical currency in short supply, people turned to digital payment methods. This surge in digital transactions paved the way for a more transparent and accountable financial ecosystem. Mobile wallets, UPI, and online banking became commonplace, offering convenience and reducing the reliance on cash.
Formalization of the Economy:
One of the primary goals of demonetization was to bring unaccounted wealth into the formal economy. As a result, numerous individuals and businesses were compelled to declare their assets, leading to increased tax compliance. The move marked a significant stride towards creating a more transparent and organized financial structure.
Impact on Real Estate:
The real estate sector, known for its involvement in unaccounted transactions, experienced a shakeup. Property prices, which were often inflated due to undisclosed cash transactions, started to stabilize. This shift made housing more affordable for genuine buyers and investors, contributing to a healthier real estate market.
Curbing Corruption:
By invalidating high-denomination currency notes, demonetization struck a blow to corruption. The anonymity associated with large cash transactions diminished, making it more challenging for individuals to engage in corrupt practices. Government officials, businesses, and citizens began to face increased scrutiny, fostering an environment of accountability.
Boost to Banking Sector:
With the surge in digital transactions, the banking sector witnessed a substantial increase in deposits. This influx of funds allowed banks to offer more loans and credit facilities, stimulating economic growth. The move aligned with the government’s broader vision of financial inclusion, bringing more people into the formal banking system.
Encouraging a Cashless Society:
Demonetization played a pivotal role in promoting a cashless society. As people adapted to digital payment methods, the reliance on physical cash decreased. This transition not only streamlined transactions but also reduced the circulation of counterfeit currency, creating a more secure financial environment.
Increased Tax Base:
The formalization of the economy and enhanced tax compliance resulted in a broader tax base. More individuals and businesses entered the tax net, providing the government with additional revenue resources. This increase in tax collection contributed to funding essential public services and infrastructure projects.
In conclusion, while the immediate aftermath of demonetization brought challenges such as cash shortages and disruptions, the long-term benefits cannot be ignored. The move propelled India towards a more transparent, digital, and formalized economy. It fostered financial inclusion, curtailed corruption, and encouraged responsible financial practices. As the nation continues to evolve, the impact of demonetization remains a significant chapter in India’s economic history.
The Ripple Effect: Unpacking the Costs and Demerits of Demonetisation in India
In 2016, India witnessed a landmark move as the government implemented a bold step – demonetisation. The decision to invalidate 500 and 1,000 rupee notes aimed to curb corruption, black money, and counterfeit currency. However, as with any significant policy shift, demonetisation came with its share of costs and demerits that rippled through the economy.
One of the immediate impacts was the inconvenience faced by citizens. Long queues formed outside banks and ATMs as people scrambled to exchange their old notes for the new currency. The sudden cash crunch disrupted daily life, affecting businesses, farmers, and the common man alike. Small businesses, heavily dependent on cash transactions, bore the brunt of the liquidity crisis, with some even forced to shut down.
Moreover, the move hit the informal sector hard. Many workers in construction, agriculture, and small-scale industries, who predominantly deal in cash, faced job losses. The unorganized sector, lacking the infrastructure for digital transactions, struggled to adapt, resulting in a temporary but significant economic slowdown.
While the government’s intention was to unearth black money, critics argue that the wealthy found ways to convert their illicit wealth into other forms, such as gold or real estate. The demonetisation move, instead of curbing corruption, might have pushed it further underground, making it harder to trace.
Another major cost was the strain on the banking system. The sudden surge in deposits overwhelmed banks, leading to operational challenges. Moreover, the cost of recalibrating ATMs and replacing old currency added to the financial burden.
The Impact on the agriculture sector was notable. With the majority of transactions in rural areas being cash-based, farmers faced difficulties in purchasing seeds, fertilizers, and paying laborers. The immediate aftermath saw a decline in agricultural activities, affecting the livelihoods of many.
Additionally, the digital divide in India became more apparent during demonetisation. While urban areas adapted quickly to digital transactions, rural regions struggled due to a lack of infrastructure and awareness. This highlighted the need for a more inclusive approach to financial reforms.
On the global front, demonetisation temporarily slowed India’s economic growth. Investors became cautious, and the business environment faced uncertainty. The disruption in trade and business activities impacted the nation’s image as an investment destination.
In conclusion, demonetisation in India, while aiming for long-term benefits, came with its fair share of costs and demerits.
The inconvenience faced by citizens, the blow to the informal sector, and the strain on the banking system are all factors that need careful consideration. While the intent to combat corruption and black money was commendable, the approach’s execution and immediate fallout raise questions about the effectiveness of such drastic measures. Moving forward, it is essential to learn from these experiences, adopting a more balanced and inclusive approach to financial reforms for sustainable growth.
Inconvenience and economic disruption:
Cash is the lifeblood of the Indian economy where an overwhelming proportion of economic transactions (more than 95 per cent) are in cash. With as much as 86 per cent of this gone, there was widespread inconvenience to the public and substantial economic disruption. Billions of man-hours were wasted in queues waiting for cash, millions of persons lost jobs and incomes particularly in the informal sector and tragically many deaths were also reported.
Limited scope for digitisation:
Deepak Nayyar has pointed to the fact that in India, just 53 per cent of adults have bank accounts, but two-fifths of these accounts are dormant. And only 15 per cent of existing bank accounts are used to make or receive payments. Bank penetration would have been far less but for the 250 million accounts that were opened under the Pradhan Mantri Jan Dhan Yojana (PMJDY) during 2014-16, of which 60 million accounts have zero balances even now.
Not much impact on black wealth:
Much of the public enthusiasm about demonetisation came from the expectation that those with hoards of cash would not be able to exchange it in banks for new notes, and would therefore lose their ill-gotten money. This group includes businessmen, or politicians, or bribe-taking bureaucrats. However, this has not materialised as this group of black money hoarders employed various means to convert their black money into white sometimes in connivance with bank officials and sometimes by offering hefty commissions of 30 to 40 per cent to ‘ intermediaries ‘ to exchange their currency. As a result of these tactics adopted by the black money hoarders, the demonetisation exercise did not succeed.
Demonetisation is not likely to tackle the problem of terrorism:
It was argued at the time of Demonetisation that the scheme would nullify the counterfeit currency which is thought to be used to finance terrorist activity. It must be understood that terrorist activity is not just financed with Indian currency, it can be and is fuelled by dollars, gold, diamonds, drugs and so on. Terrorism is a continuing problem, not a one-off thing.
Not much effect on black economy:
According to Arun Kumar, the black money the government was targeting is only about 1 per cent of the black wealth held in the country and only 3.5 per cent of the income generated in 2016.
Cost of Demonetisation and pressure on RBI:
Printing of new notes to remonetise the economy cost the Reserve Bank ₹ 7,965 crore, more than double the amount it had spent on printing in the previous year. Moreover, the surge of cash that entered the banking system on account of Demonetisation entailed banks having large deposits with the Reserve Bank. This meant that the RBI had to pay more to these banks as interest payments.
Macroeconomic Impact of Demonetisation in India
In 2016, India witnessed a bold move that aimed to reshape its economic landscape – demonetisation. Overnight, high-denomination currency notes were invalidated, causing ripples across the nation. As the dust settled, the macroeconomic impact of demonetisation became a subject of intense scrutiny and debate.
One of the primary objectives of demonetisation was to curb black money and corruption. By rendering high-value currency notes obsolete, the government sought to unearth hidden wealth and promote a more transparent financial ecosystem. While the move was met with mixed reactions, it did contribute to a noticeable increase in the number of taxpayers.
However, the immediate aftermath of demonetisation was marked by chaos. Long queues outside banks and ATMs became the norm as citizens grappled with the sudden cash crunch. Small businesses, heavily reliant on cash transactions, faced disruptions, leading to a temporary economic slowdown. Critics argued that the short-term pain outweighed the long-term gains.
On the flip side, demonetisation paved the way for a digital revolution. The push towards a cashless economy gained momentum as digital transactions soared. Mobile wallets, online banking, and digital payment platforms witnessed a surge in popularity, transforming the way Indians transacted. This shift towards digital payments not only enhanced transparency but also laid the foundation for a more inclusive financial system.
The real estate sector, historically notorious for black money transactions, experienced a downturn in the wake of demonetisation. Property prices corrected, making housing more affordable for aspiring homebuyers. Simultaneously, the formalization of the real estate sector brought about greater accountability and transparency, aligning it with global standards.
Another noteworthy impact was on inflation. With a substantial amount of high-denomination currency notes rendered useless, the velocity of money slowed down temporarily. This, coupled with various measures taken by the government, contributed to a decline in inflation rates. While this provided relief to consumers, the effects were transient, and inflation eventually normalized.
Job losses in the informal sector were a concern post-demonetisation. Small businesses, particularly those reliant on cash transactions, faced challenges, leading to layoffs. However, proponents argue that the formalization of the economy would create a more stable job market in the long run, with increased opportunities in the organized sector.
Impact on growth and inflation:
According to data released by CSO, the April -June quarter of the year 2017 saw GDP growth fall to 5.7 per cent, lower than the 6.1 per cent estimated for January -March 2017, the quarter just after Demonetisation. The April-June quarter of the previous year 2016 had registered a growth of 7.9 per cent. According to Economic Survey 2016-17 , this decline in GDP growth rates “predated Demonetisation but intensified in the post-demonetisation period “.
Financial sector:
Demonetisation had impact on the balance sheet of banks, liquidity conditions and transmission of monetary policy, non-banking financial intermediaries, and Jan Dhan accounts. As far as the effect on balance sheet of banks is concerned, decline in currency in circulation on account of demonetisation led to surge in bank deposits. Between October 28, 2016 and January 6, 2017, total currency in circulation declined by about 8,800 billion.
External sector:
About 36 million micro, small and medium enterprises (MSMEs) contribute around 40 per cent of India’s exports and provide employment to over 80 million persons. Reflecting these factors, export shipments of gems and jewellery, readymade garments, meat and dairy products, and handicrafts and carpets either declined or recorded a lower growth in November 2016 as compared with October 2016.
Financial markets:
Demonetisation impacted various segments of the financial markets in varying degrees. However, in most segments, the impact was transient. Surplus liquidity conditions post -demonetisation imparted an easing bias to G-sec yields. Overnight call money market rates remained within the corridor but traded with a distinct softening bias.
Digital modes of payments:
An upshot of demonetisation was that the digital modes of payments picked up sharply. The Government of India and the Reserve Bank initiated a series of measures, some of which were temporary, to promote movement from cash to non-cash modes of transactions.
In conclusion, the macroeconomic impact of demonetisation in India is a complex tapestry of short-term disruptions and long-term transformations. While the immediate aftermath witnessed challenges and criticisms, the move catalyzed significant changes in the economic landscape. The push towards a digital economy, increased tax compliance, and the formalization of sectors traditionally marred by black money are indicative of a broader vision for a transparent and accountable financial system. As India continues its journey towards economic growth, the lessons learned from demonetisation will undoubtedly shape future policy decisions.