IMPACT OF DEMONETIZATION ON INDIAN ECONOMY
Historical reform in India – The demonetization of 500 Rs and 1000 Rs notes; the two highest currency denominations available in India will likely hit the economy hard in the short-term. The surprise move on Nov 8th 2016 is expected to grind the consumption activity in the Indian economy to a virtual halt.
Negative effects of demonetization of currency are only for short period as it is welcomed across the country . This step of government will be effective since this revolutionary move was appreciated even by the World Bank and many leaders across the world and Indian corporate big ways.
Situation cannot change unless Common Man finds an access to the new notes. Although Indians are currently facing difficulty in exchanging the banned Rs.500 and 1000 notes or withdrawing/depositing cash from the ATM/bank; the problems wont last long. As the country says goodbye to old 500 Rs and 1000 Rs notes with restrictions on exchanging money and taxation on high amounts of deposits; Indian economy is going through some serious churn.
Banks and RBI are taking every possible measure to help people by exchanging demonetized currencies. They are also making cash available in sufficient quantity in the ATM’s;so that people do not face problems in buying day-to-day utility things such as grocery,vegetables etc.
This action will make India regain the crown of “Sone ki Chidiya” very soon. But how is this going to affect the Common Man in the short-run as well as in the long-run?
Demonetization is the act of stripping a currency unit of its status as a legal tender. It occurs whenever there is a change of national currency. The current form/forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
The 500 and 1000 rupee notes were the largest denomination of money, which made up for 14 lakh crores in circulation. Still now our ‘common man’ (people) forms the larger society of India after 70 years of independence. As per me the common man is one who is loyal and pays all his taxes. For such a person, demonetization is just a shift from traditional cash based transactions to cashless transactions. He doesn’t has anything to worry. His lifestyle will automatically get adjusted to the cashless transactions mode.
For the other common man who is trying to evade taxes; life is going to be a bit tough as it will take a bit longer than the loyal common man.
Demonetization has a direct impact on sectors dealing with cash-vendors, auto rickshaw-wallahs, taxi drivers, daily wage earners and small traders. Under such circumstances, the effect (changing the goal post of demonetization every now and then) of demonetization on common man would continue till the common man is made literate economically, socially, mentally, emotionally, politically and behaviorally to accept the globally acceptable merits of demonetization.
The great virtues of mankind like ‘Tolerance’ and ‘Patience’ must be there till everything would get settled. The effect is, no pain-no gain. The performance by citizens of India has been better than average in terms of maintaining peace and order, respecting the new rules etc.
EFFECTS OF NOTE BAN ON THE COMMON MAN
i. CASH CRUNCH: The Indian system mainly functions on cash, and so, less cash means disruption in the flow. Even sectors like real-estate, which deals with illegal cash transactions, will go through a rough patch leading to fall in profits.
ii. INTEREST RATES: After the announcement of note ban, there have been huge cash deposits in banks. In fact, some of the leading public and private banks have reduced the interest rates on deposits. It will in turn lead to positive effect on the economy as the lending rate(interest rate on loan) will fall. This will boost credit and investment, to recover the slumping economy.
iii. INFLATION: Supply of money has fallen, which may lead to deflationary pressures(general price level becomes lower). With unaccounted money being wiped out, there will be lesser pressure on demand. Fall in inflation will help the common man, because goods will now become cheaper. If production falls more than the fall in the supply of money, then the demand for goods will overshoot the supply of goods, which in turn will lead to higher inflation. It all depends upon the effect on production and economic activities within the nation.
iv. THE TAX EFFECT: Deposits above Rs 2.5 lakh that have not been declared to the income tax department will be penalized and taxed 200 per cent. This can help bring black money into the white money fold, making it legal.
v. GROWTH: A parameter to measure growth in the economy, will take a hit. Research firms have already cut growth estimates by 0.5 per cent. Demonetization would forcibly bring in huge amount of money from the informal sector, which was unaccounted for. On the other hand, it is a added on benefit to the growth and therefore GDP would not face a negative impact.
“ Pehli baar aisa lag raha hai ki desh acche haaton mein hai” – “For the first time it seems like the country is in good hands.”
Coming from a person who did not have a bank account and will be severely affected by this situation, these words carried great value and showed the immense trust the man had in the government.
The true meaning of democracy and active citizenship is creeping out. For the first time we as a country are fighting the monster known as corruption that has grown to enormous proportions over the years, it is the beginning of a cultural change.
Review of Literature:
Demonetization : The Stumbling Block in Modi’s India ?
a) Demonetization declaration has made 86% of the currency come to halt, which was in circulation at the time.
b) The lack of transparency, forethought and planning that accompanied this policy is in many ways symptomatic of the Modi administration’s modus operandi and while it may be considered a master stroke by some, it doesn’t erase the problems of terror financing and undeclared wealth that it seeks to fix.
c) The rationale behind demonetization is simple: by withdrawing the legal tender on high denomination (Rs. 500 and Rs. 1000) notes, fake currency is put out of circulation and billions in “black money” is brought into the formal banking system.
d) The official date for deposit of old notes came to halt on 31st December 2016. Only a specific set of people can deposit old notes during the grace period of the next 6 months. ATM withdrawal limit has been increased to Rs. 4,500 per day per card from January 01, 2017. The weekly withdrawal limit from bank accounts is limited to the extent of Rs. 24,000 (without any lateral changes). Deposit with a bank in cash exceeding Rs. 50,000 in a single day, demands quoting of PAN – The limit set on the exchange of notes made it impossible for those with the illegal wealth to deposit their money by the year-end deadline without raising red flags.
e) This policy has security implications as well. India is eighth in the Global Terrorism Index’s list of countries most affected with the nexus of terror and black money.
f) Mr. Narendra Modi has said that cross-border terrorists often fund their operations using fake currency, therefore demonetization would negatively impact their illicit activities.
Statement of Problem:
i. There has been no dearth of criticism leveled against the Modi government in the aftermath of demonetization. India is a primarily cash-based economy. The average Indian doesn’t have a credit card or Paypal and thus no access to digital money.
ii. More than half of the population doesn’t have a bank account, making the transition phase particularly difficult for the poorer sections and those in the informal sector whose small savings become worthless overnight
iii. Even for those with the means to convert their money legally, the banks simply don’t have enough of the new notes to meet the influx.
iv. The intended targets of this policy have plenty of loopholes to exploit. In the 24 hours following the initial announcement, gold prices in India shot up as people rushed to convert their undeclared money.
v. The claim that demonetization will curb terrorism is an empty one. Though black money funds persistent terrorism, India’s lackluster counter terrorism effort is also to be blamed. If the Modi government is serious about terrorism, it needs to do more than temporarily disrupting their funding activities.
Objective of study:
A. Surgical Strike on the parallel black economy:
India has a huge parallel black economy which the government can’t tax and which forms an island away from the main economy. It is a Herculean task to merge the two streams of white and black money and a great beginning has already taken place.
B. Make the corrupt lose their money:
We all have heard of so many scams in the past ranging from Bofors to the one lakh crore plus 2G. Well this is for the first time that the corrupt are losing money their money in large numbers. Huge sacks of money are being burnt, thrown or caught.
C. Get everyone to have a bank account:
The bank scheme for the poor under the UPA was a quiet affair but it really picked up under Modi’s Pradhan Mantri Jan Dhan Yojana. This is another push towards the direction
D. Get every citizen in India to be monitored online:
A cashless economy is not just convenient for citizens, but also for the government to monitor. The government wants each and every transaction in India to be online, so that it can be easily tracked and taxed.
E. Checking of counterfeit notes:
The new notes are much more difficult to counterfeit. It was none other than Babasaheb Ambedkar, the father of the India’s economy after Independence, who said that notes should be changed every 10 years.
F. Crackdown on terrorism and Naxalism:
It is an open secret that both terrorism and Naxalism run on counterfeit notes coupled with black money. They have been severely hit as their funds have dried up.
G. Change the mindset of everyone:
More and more people would choose to come onto the white money stream to play it safe.
H. Keep everyone on their toes:
However certain impacts of demonetization are very expensive and may lead to privacy issues and misuse; hence seems unlikely, but never the future can be predicted.
I. Boost the Economy:
For one, a good amount of black money will make its way into the white economy and that will only boost the latter.
J. Crack down on black political campaigning:
Black money election funding will be severely hit in the States and parties will be forced to raise white money and use their white money reserves. This will be a good beginning and all Modi has to do is introduce a Bill to regulate campaign spending after that.
Demonetization: The Longer Term
Beyond India’s near-term dislocations are possibilities for a wider and fairer tax net, financial inclusion and economic growth. It was undertaken primarily to curb black money and corruption in the Indian economy, a sweeping move with numerous intended and unintended impacts. A few positives are growth in cashless transactions, curtailment of counterfeit notes & terrorism financing & creating a blip in the minds of tax evaders. The negatives include the inconvenience to the public and short term slow-down in many sectors, especially those that are heavily dependent on cash, a large portion of which are believed to be black money, like real estate & jewellery, loss of jobs etc.
Interviews & Observation acted as the best methodologies of data collection with regards to Impact of Demonetization. As Demonetization is the recent tendency adopted, both pros and cons are seen every now & then in each & every nook & corner across the country. Practical implication on common people which acted as a curse for shorter period(since it was a surprise measure accompanied with long-term implication) with certain problems associated with it will no longer remain as a curse; though future trends and tendencies are uncertain common people are of the opinion that it turns out to be a boon based on weighted assurance given by Indian Prime Minister Narendra Modiji.
Analysis & Findings:
Consumer Sentiment with regards to Demonetization is depicted below:
Majority of the public are of the opinion that Modi government’s efforts against corruption are very good (about 92% of the public opinion supporting the efforts made to fight corruption stringently) & 90% of the people share their views that moves undertaken to tackle black money is exorbitantly brilliant ideology.
Demonetization is not the end, but beginning of a long, deep & constant battle against black money & corruption. It will benefit the poor & the common man. The poor & the lower & middle classes have suffered the most due to black money, counterfeit currency & corruption.
The battle against black money is expected to be extended beyond cash, to properties, jewelry & gold, foreign currency in due course.
A sizable parallel economy accentuates income inequality & is a deterrent for honest taxpayers. Hence there can be no question about the intent to curb it.
Books For Reference:
I. Demonetization – an indispensable correction to an unstable and damaging economy – Siddharth Nahta
II. Taxation of deposits of Demonetized 500 Rs & 1000 Rs Notes
III. Journals & newspaper articles till date