Impact of Demonetisation on Indian Economy After 2 Years

It was two years back on 8th of November,2016 that the ruling Modi Government had surprisingly announced the legal tender of Rs.500 and Rs.1000 respectively to be no longer deemed legal. This had actually left the citizens and the authorities questioned and exclaimed, both at a time. Immediate chaos ensued in the cash dependent economy when Prime Minister Modi stated that all the holders were to exchange their currency for new issued currency of Rs.500 and Rs.2000, and that the old ones were worthless. The currency brushed out formed the biggest denomination in the country’s economic system and that accounted for the total of 86% of the circulating cash. The government’s restriction on daily withdrawal amounts added to the misery of the resident’s grapple to get their share exchanged from the banks.

What terms demonetisation? Breaking down of currency..? Although meticulous, there is more to add in fact. It is the act of stripping a currency unit of it’s status as a legal tender. It usually occurs when there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.

A dramatic instance of demonetisation ever was when the Coinage Act of 1873 demonetized silver as the legal tender of the United States, in favour of fully adopting the gold standard. Several coins, including two-cent piece, three-cent piece were discontinued. The withdrawal of silver from the economy resulted into a five-year economic depression throughout the country demanding remonetisation of the silver as legal tender in 1878.

In India, demonetization has had a drastic constructive and pessimistic impact on the economy. The objective behind this move was to curb black money, promote cashless economy, stop funds flow to unlawful activities such as terrorism and growth of illegal markets, fight tax evasion and move towards a corruption-free and Digital India.

On November 8th November 2018, we complete 2 years since demonetization was declared. Where do India and its citizens stand now? Has demonetization really helped and how?

Fake Currencies : Fake Indian Currency Notes (FICN) business in India has always been a big, bad business. Demonetization put an immediate shocking stop to the production of counterfeit notes. Between 2011-2016, supply of notes of all denominations had increased by 40%. However, the supply of only ₹500 and ₹1,000 banknotes increased by 76% and 109% respectively. This trend showed us that 500 and 1000 denomination currency notes were supplied more than the demand. In the Madla district of West Bengal, infamously called India’s counterfeit capital, district police seized ₹1.14 crore in FICN in 2016. In the same area, The Border Security Force seized FICN of ₹1.35 crore and ₹2.5 crore in 2016 and 2015 respectively.

Terrorism and radical groups : This decision by Modi severely hit the Naxalites and Maoists. The then Defence Minister – Manohar Parrikar – also said that stone-pelting incidents in the valley saw a drop. The relation between terrorism and counterfeit currency cannot be challenged. David Headly – terrorist of the 26/11 Mumbai attacks – had declared that ISI had provided him with counterfeit Indian currency. Similarly, bomb expert Syed Abdul Karim Tunda – who headed almost 40 bombings in India – had said upon arrest in 2013, that he had taken delivery of many consignments of CFIN from an ISI officer.

Digitalised economy : Many Indians as a result of demonetisation, switched to alterantive payment methods, a big deal in a country of 1.2 billion with only 25.9 million credit cards and 697 million ATM cards as of July 2016. The biggest gainers were mobile wallet companies that offer ease of transactions through a large network of partners. Paytm witnessed sevenfold increase in the transactions to a five million a day. App downloads for Paytm increased by 300%. Prepaid cash cards were another option that customers found useful, and that meant good news for companies like ItzCash, Ola Money, FreeCharge, Flipkart Wallet.

Black Markets : Counterfeit currencies and money that is smartly unaccounted starts building a parallel or shadow economy, which then funds more parallel economies ahead. A very common term associated with shadow economy is Hawala. Post demonetization, Hawala operations suffered major setbacks in Mumbai, Kerala, and Jammu and Kashmir. Central Board of Direct Taxes (CBDT) detected an undisclosed income of around ₹93.34 billion in the course of approximately 2,400 searches, seizures, and surveys carried out in the consequent four months.

Economic Growth : Economic Survey after careful review of Demonetization which was announced one and a half year back, has found that the cash-to-GDP ratio has stabilized. According to the survey, India’s GDP is set to grow at 7 to 7.5 percent in 2018-19. This is an increase from its prediction of 6.75 percent growth this fiscal year. It tends to claim that the demonetisation effects have now drowned and that the income tax collections have touched new high.

Demonetisation policy of the Government is considered to be the greatest financial reforms that aimed to curb the corruption. All the people who are not involved in malpractices welcomed the demonetization as the right move. Although demonetization made the situation chaotic due to the poor planning on the implementation part, farmers getting affected in an agriculture based economy, real estate sector being affected, it has driven the country towards a cashless society. Lakhs of the people even in remote rural areas have started resorting to use the cashless transactions. The move has promoted banking activities. Now even the small transactions have started going through banking channels and the small savings have turned into a huge national asset.

The Finance Minister Arun Jaitley on November 7, 2017 came out with a spirited defence of demonetisation announcement on November 8, 2016 calling it a “watershed moment for the Indian economy”. According to him the demonetization has not only changed the agenda but also made corruption difficult. Thus, in his opinion, it was not only a “morally and ethically correct” step but also “politically correct”.

However today, inspite of disgrace by the public on second anniversary of demonetisation, witnessing no practical changes and developments, PM Modi is set to believe into his undertaking saying that those who cry foul of the decision, is because they faced the heat and that the Government’s fight against corruption won’t culminate.

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