November 8 2016 – The Dawn of Demonetization – A day that Indian economy will for long remember, a day that changed a lot of things in the lives of common Indians, a day that will be known for a historic decision taken by our Prime Minister Narendra Modi. Year 2016 was highly eventful and it couldn’t have ended in a more dramatic way. On November 8th, PM Modi announced the 50-day long decision of demonetizing the 500 and 1000 rupee notes in an attempt to curb black money, fake notes and to achieve other ancillary objectives.
While some are under the belief that it is a very bold and planned move, the others believe that the move was quite foolish and highly unsuccessful. 100s of debates have been held over this move already and various pros and cons of demonetization have come into picture. Irrespective of it being a success or a failure, demonetization will definitely leave a huge mark on the Indian economy and affect the Indian markets for the coming years. Therefore, it is highly important to analyze the move in all aspects. Here is a complete analysis of demonetization which shall help you figure out the impact of the move on India as a whole.
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First of all, let us have a look at the objectives of demonetization as aimed by the government.
- Curbing Black Money – about 5 Lakh Crore of Money out of 15.4 Lakh Crore Demonetized was expected to be curbed through this move.
- A check on terrorist. The idea was to leave the terrorists cashless and try to curb the terror attacks.
- A check on Naxalites.
- To get make the stacked money rotate in the market.
- Achieve lower rates of interest and thus, higher growth rate.
- Few other ancillary and incidental objectives.
Next, let us have a look at what demonetization actually achieved:
- About 90% (14 Lakh Crores) Worth of old currency was deposited into the banks upto 28th However, no official news had come out from the RBI regarding the same. If this is considered to be true, the government will directly earn a net profit of roughly 1.4 Lakh Crores (15.4 Lakh Crores – 14 Lakh Crores), which is indeed a massive figure! (source: http://www.forbes.com/sites/timworstall/2016/12/28/90-of-scrapped-notes-in-banking-system-india-gets-the-tax-not-the-dividend/#ac798732aca8)
- Apart from the profit made above, the government now also has a track of money deposited by each individual into their respective bank accounts and thus, there can be substantial increase in the tax revenues earned by the government in the coming financial year as the people are expected to reveal an increased income to match their deposited amounts.
- Any amount spent by the government has a greater impact on the economy (as per the multiplier theory). Thus, this 1.4 Lakh Crores earned by the government, if used well, can have a far greater impact on the economy as a whole than it would had if it was spent by ordinary people. The fruits of this deferred impact will be directly proportional to the excellence with which the amount is used.
- 14 Lakh Crore Rupees have been deposited into the bank. It means, 14 Lakh Crore Rupees can be used at the discretion of banks to provide loans and credit facilities to business houses at cheaper rates. It implies that due to these loans available at cheaper rates, the development and growth of such sectors where in the money is invested can boost up rapidly. Again, asset creation and revenue generation is the key advantage over here.
- The Income Tax Department is suspicious over 4 Lakh Crores of money deposited by Lakh people. If the money is proven to be unaccounted, it will be a huge source of revenue for the government and a huge blow to the black money hoarders.
- Hundreds of Naxalites surrendered post demonetization as they were left with no money to buy weapons, food and other necessities. A record highest number of naxalites surrendered in November post demonetization.
- Terrorist activities in Jammu & Kashmir reduced by over 60% and hawala operations have taken a huge hit. (Source: http://timesofindia.indiatimes.com/india/note-ban-jk-sees-60-dip-in-terrorism-related-violence-hawala-operations-down-50/articleshow/56385244.cms?utm_source=facebook.com&utm_medium=referral&utm_campaign=TOI)
- Over 3000 Crores in cash has been recovered by the IT department in raids carried out by it across the country. (Source: http://www.firstpost.com/india/i-t-raids-uncovered-rs-3185-crore-of-undisclosed-income-since-demonetisation-3166188.html)
- Several people have tried to escape the demonetization effect by depositing their cash in accounts of the others. Therefore, experts claim that several people will be possibly caught by the IT department when they try to recover the amount from the depositors.
- Large number of people paid taxes, repaid loan, cleared arrears of electricity and telephone bills post demonetization which resulted in a massive inflow of funds to the government entities.
- All the non-moving cash stacked in houses can now come out in the market, thus leading to higher supply of money which in turn is expected to increase the demand and supply of commodities.
- Demonetization has given a massive boost to the idea of cashless economy. More number of people have started making cashless transactions post demonetization, which shows that a less-cash economy is pretty much possible.
Now, let us understand the ill-effects of Demonetization on the country:
- Demonetization has said to result in loss of lives of over a 100 people. While every life lost is precious and cannot be compared, one can say that more number of lives were saved due to the naxalite’s surrender and stoppage of terrorism activities in various parts of the country. Also, many deaths were unreasonably linked to demonetization.
- Most of the money has been deposited back into the banks which is a failure of the policy on it’ own. Even though the Income Tax can still crack down on the black money deposited, as of now, we can say that the primary objective has not been achieved upto satisfactory levels.
- Several cases of corruption came into light. Most of the cases of corruption might have gone unnoticed and it is believed that most of the big targets that were to be targeted might have exchanged the money by finding other means. Many people exchanged their old cash for new currency without any difficulties through third party traders.
- It is assumed that black money horded in cash is pretty low. Most of the black money has been converted into property, jewellery and other means. Therefore. Targeting only cash won’t suffice the main objective of fighting black money in any way. However, the PM has assured that he will be going after benami property next.
- Only black money stored in cash in India was targeted. Swiss bank accounts still remain untouched. Properties held in India and abroad purchased with the help of black money remained untouched.
- The foreign as well as Indian Investors lacked faith in the Indian Market after demonetization. The Indian Stock markets saw a free fall after the historic decision. However, the markets have now started climbing again, indicating the increase in inflow of funds post demonetization.
- Demonetization has largely affected the small scale industries which work on cash basis. The loss cannot be measured in numbers as the duration of this effect is unknown. Even 1 month post demonetization, businesses are still not stable.
- There is a huge cash crunch in the country due to limit on cash withdrawals. This shortage of cash has deeply impacted all the cash based businesses. The middle class businessmen are the most affected people. The notes of equal value have still not been printed.
- The rules regarding deposits were changed over 50 times which led to a lot of confusion, panic and chaos. The government is accused of not having implemented the policy in the right manner.
- Not all Indians have a bank account and not all Indians have access to a bank easily. This let to lot of sufferings to those who stay away from the bank, especially in villages. People had to take leaves to deposit cash which impacted the daily wage workers a lot.
- Loss of man hours due to demonetization was immense since a lot of working days were skipped by many to deposit cash.
- The NRIs who had cash in Indian Rupees had to rush back to the country to get the cash deposited. It was a tough time for them to fly all the way to India just to exchange few currency notes. Just Write Things had a chance to meet a Canadian NRI who said. ‘Every Indian in Canada was just shocked with the decision. It has created a chaos and difficulties for people over there.’
- Most importantly, the difficulties faced by people cannot be valued in monetary terms. Some lost their loved ones, some lost their precious hours, some lost their precious money while many others had to live without food and shelter for few days due to this crisis. Such things cannot be measured in any manner and analyzing this con of demonetization is impossible.
Having listed both pros and cons of demonetization, as per my opinion, demonetization was a much needed step. Even though it had several drawbacks, I believe that the assets created by demonetization will over weigh the liabilities. In the end, it is time that will decide the impact of demonetization on the Indian Economy. All we can do for now is probably just wait and watch.