Demonetisation – a quick recap

demonetise

                “The 500 and 1000 Rs notes hoarded by the anti-national and anti-social elements will become just worthless pieces of paper, The rights and interests of the hard working, honest people will be fully protected”, was the words Modi announced on the evening of November 8,2016, right before he made the historic act of demonetisation that threw the nation into complete disarray and confusion. His surgical strike quickly changed its tone to digitalization and as excuses and explanations mounted up and debates raged on, it finally ended in being in termed as an epic failure.

                The glorious words that chocolate wrapped the bitter pill made the laymen believe in the prophecies. Even while queuing up in front of banks and atms to secure the new currency, to meet their daily needs, they silently hoped that all this ordeal would bring an end to the law-breakers and give value to the hard earned money of the common people. 2 years down, the RBI annual report clearly states 99.3% of the demonetised currency returned to the banking system. What went wrong in the surgical strike?

                   It is no surprise that demonatisation failed, however the tragedy is, this result was entirely foreseeable. The entirety of this futile exercise was based on voodoo economics backed by a poor understanding of the Indian economic system. The primary assumption that the black money is stored as hard cash itself was flawed. Moreover no explanation was given as to define what is black money.

                    The demonatisation debacle treated the entire undocumented money as black money. But it failed to see that in a country where the majority of the workforce still remains in the informal sector, most of their earnings fell into this category. The policy was developed to treat illegally horded black money and a daily wage earner’s saved up reserve money in the same light of doubt.

                    Demonatisation disrupted the Indian economy and directly afflicted the backbone of our financial systems. More than 1.5 million jobs were lost in the first 4months of 2017. Most of the cash dependent business had to shut down indefinitely throwing out huge numbers of daily wage earners, migrant laborers and especially farmers and cultivators scurrying for money.

                 RBI data shows the bank credit growth fell to 5.1% just within a month, lowest it has touched in the past 60 years. India’s GDP growth slumped to 5.7%, a 3 year low. Demonatisation and GST had a major effect on micro and small businesses, report stating they are still reeling under the effects. The loan default margin of such firms has doubled over the last 2 years. Even the digitalization propaganda has fallen short of its promises, as the reports show, after an initial spike in the digital payment method, it has again fallen down with people switching back to cash.

                 The cash dependent informal sector contributes to more than 40% of our GDP and employs 80% of the work force. Demonetisation was indeed a complete blow to the informal sector, disrupting their jobs, putting their hard earned money in doubt and costing their livelihood. They suffered the biggest policy induced recessionary shock in the post-independence India.

                  According to the RBI report, currency in circulation is growing after the initial dip and is actually higher than the months prior to demonatisation. The cash to GDP ratio has marginally decreased. However no significant increase in the amount of fake currency detected. The number of fake currencies detected in the year 2017-2018 is almost consistent with the figures from the previous years.

                  As the initial laid out goals of demonetisation seemed to falter, the govt quickly changed its tagline to fighting terrorism and then to formalization of the economy and digitalization. The increase in the tax collected is now being crowned as the grand purpose of the move. Jaitley proudly announces that income tax returns have increased from 19% to 25%. On a clear analysis, we can surely see that higher tax returns is an associated advantage of demonetisation and can never be touted as its goal. If tax returns was the primary goal, then there could have been more efficient polices made, without having to put the already compliant taxpayers at the mercy of demonatisation. Tax payments could have improved if the government had stuck to its already implemented amnesty scheme, without going for a blanket ban on the currency in circulation.

                   2 years down the road, the government is yet to give a sure note on the reason and the effect of this historic move. It has clearly not produced any tangible effect on black money, nor in digitalization of the economy. With a major part of black money still being safely secured in foreign banks , the government now remains mute on this burning question. Demonetisation threw the country into a deep seated economic crisis and the effects continue to be felt. India is bound to reel under its pressure for more years if the economic policies are not corrected and brought back to track.

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3 Comments Add yours

  1. Kutty says:

    Something like what could have been done mention cheyyan patuo🙂🙂

    Like

    1. altermantra says:

      Black money is generated in several means. Several steps need to be taken to reduce its flow. black money is also generated through legitimate transactions. the first step should have been to regulate all the paper work, put proper checks on under valuation of services and property on official documents, proper implementation of gst itself could have produced better results. Black money is being stashed away in foreign banks and tax heavens to avoid scrutiny by law. strict laws should be worked out and implemented to bring such transactions under the law. The steps that can e taken to tackle this problem changes with country , economic and social structures. all such factors should be studied in detail and then measures should be taken that is suitable for the specific scenario. A blanket ban on the currency in circulation puts the ordinary people in more trouble than the law breakers.

      Like

  2. Anonymous says:

    Well said boy !!

    Liked by 1 person

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