DEMONETIZATION

“All cost And little benefit”

INTRODUCTION:

On the evening of 8th November 2016, Prime Minister Narendra

Modi made an unprecedented speech on national television which
opened the floodgates of Facebook memes and WhatsApp jokes
before making way for more serious discussions.

All currency notes of denominations Rs. 500 and Rs. 1000 were to
lose legal sanction from midnight. While currency notes of Rs. 500
are now to be re-issued, Rs. 1000 currency notes will be
completely done away with. Additionally, technologically
advanced currency notes of denomination Rs. 500 and Rs. 2000
will be introduced in limited numbers from November 10.
However, all notes in lower denomination will remain unaffected.

The objective is to curb black money, corruption and terrorism.

In his 40-minute address, Modi said that notes of Rs. 500 and Rs.
1000 would merely be “just worthless pieces of paper”. Modi
talked about how India has become the “bright spot” in the global
economy and the government’s dedication to fight against poverty
and initiatives towards participation of the poor in the benefits of
economic progress.

The Reserve Bank of India, later in its press conference, said that
India remains a cash based economy hence the circulation of Fake
Indian Currency Notes continues to be a menace. In order to
contain the rising incidence of fake notes and black money, the
scheme to withdraw these currency notes has been introduced.

Personal Finance:

Piggybanks have been transformed to savings accounts

as people turn towards increasing bank balances instead
of stashing emergency cash in different corners of the
house. People finally began to trust the digital payment
systems; because that was the only option they were left
with. Demonetization proved that Indians can strive and
adapt to any changes and made people financially aware
about the different spending options. The government’s
efforts to revamp the currency system provided people
with a boost to use the cash that was lying around and
invest it in a more productive way. The more native and
conservative people also opened up towards the era of
plastic cash and made several Indians tech friendly.

Black Money:

One of the most important points that pushed people to

support demonetization was its associating with bringing
an end to the black money problem in India. However,
almost 99% of the money was deposited back to RBI. The
statistics revealed that either the hoarders found a way to
legitimize their black money or did not hold them in the
form of cash. But this was known by many before the RBI
reports as well. Black money hoarders do not hold the
money in cash according to several finance experts and
when this point was highlighted time and again, other
important effects of demonetization were publicized by
the government, like the role of demonetization on
curbing terrorism.
Terror Funding:
The second reason to support demonetization was its role
in curbing terrorism by increasing the obstacles in terror
funding. Terrorist organization were known to use fake
Indian currency notes for funding their projects and the
government believed that this could be contained with the
help of demonetization. The Income Tax department
seized Rs. 474.37 crore in new and old currency from
November 9, 2016 to January 4, 2017 (the
demonetization. The Income Tax department seized Rs.
474.37 crore in new and old currency from November 9,
2016 to January 4, 2017 (the demonetization period).
However, there are no reports if the money seized had
any association with terror funding. In spite of these
numbers, there is no doubting that the cash reserves of
several terror groups were severely hit in the early days
of demonetization.

Tax Payments:
Pushing Indians to deposit and account the cash lying in
their house also meant a rise in the tax payments for the
country. According to government reports the income tax
payers saw a record increase in the post demonetization
era. 9.1 million New taxpayers were added to the slab
which was an 80% rise over the typical yearly rise. This
increase in the number of taxpaying citizens in the
country has been credited to demonetization. This
increase in the number of taxpaying citizens in the
country has been credited to demonetization. This
increase was also resonated in IT returns filing and
advance tax payment.

GDP:
The ban on old notes is being cited as one of the key
contributors to the economic slowdown. With the gross
domestic product (GDP) for the April-June quarter
slipping to 5.7%, the reality of the economic slowdown
could not be ignored. The World Bank has reduced the
India GDP growth forecast to 7% for 2017-18 owing to
demonetization and GST (Goods and Service tax). The
slowdown is being cited as a delayed consequence of
demonetization by the World Bank and while there are
various other reasons at play, the steep decline has been
credited to be an effect of demonetization.
CONCLUSION:
Now that the RBI has admitted that 99.3% of all
demonetised notes came back to the banking system (not
counting what remains in Nepal and Bhutan), it is fairly
clear that demonetisation was a flop. In economic terms.
But it was a huge success in political terms for the prime
minister personally and for his party in the Uttar Pradesh
assembly elections. And that must be understood as
having been the real goal of the demonetisation exercise,
all along.

The latest annual report of the RBI, for 2017-18, has two
additional statistics that damn demonetisation. One,
household savings held in the form of currency shot up,
from an average of 1.12% of Gross National Disposable
Income (GNDI) in the pre-Demo five years to 2.8% of GNDI
in 2017-18. In other words, savings in the form of currency
multiplied 2.5 times, not quite the less-cash result the
government had hoped for. Worse is the increase in
financial liabilities. In the five years prior to
demonetisation, household financial liability averaged
3.06% of GNDI. This went up sharply to 4% of GNDI in
2017-18. Liabilities went up by 83% from Rs 3,70,964
crore in 2016-17 to Rs 6,79,349 crore in 2017-18.

Small enterprises were the worst hit, and some of them

presumably never recovered. It stands to reason that they
would have had to borrow to tide over hard times. That
would explain the rise in liabilities. The poor and the less
well-off would have borne the brunt of it.
If demonetisation is seen to not have achieved the goal of
slaying the black money demon, even while raising the
debt burden of the poor and the middle classes, it would
impact the ruling party’s popularity negatively. Hence the
chorus in support of demonetisation, never mind what the
RBI annual report shows.