Demonetisation is a condition where in the Central Bank of a country withdraws the previous currency notes of certain denomination as the official mode of payment. It occurs when there is a change in national currency. The current form of money is removed from circulation and new notes are introduced in the market.
History of Demonetisation in India
The first wave of demonetisation in India occurred back in the year 1946 on the notes of Rs 1000 and Rs 10,000 which was done to stop unaccounted money. Out of 143 crores of money being circulated in the market only 134 crores were collected by the government and rest 9 crores were not exchanged hence demonetized. The government didn’t receive much profit and it turned out to be more like a currency conversion drive.
The second wave of demonetisation was seen during the year 1978 when the government decided to recall the reintroduced notes of Rs. 1000, Rs. 5000 and Rs. 10,000 from the market since the country was going through a rough time.
The third wave of demonetisation was in 2016.
2016 DEMONETISATION:
On 8th November 2016, the Prime Minister of India, Narendra Modi announced the demonetisation of existing higher denomination currency that is Rs. 500 and Rs. 1000 within four hours of time. It was also declared that new Rs. 500 and Rs. 2000 notes will be issued soon.
Aim: The main agenda of this act was to cut down the shadow economy and diminish the use of illicit and counterfeit cash used to fund illegal activities and terrorism.
India wanted to curb corruption, promote cashless transactions, promote digitalisation and increase transparency in all the legal transactions occurring within the country.
Implementation: 50 days of time was given to people to exchange their demonetized notes for the new notes at banks i.e. until 30th December 2016. But new notes couldn’t be printed fast enough and caused millions of Indians cashless or standing in queues for hours each day to receive only small sums of money.
The imposition of daily limits on cash withdrawals from ATMs, weekly limits on withdrawals from bank accounts and checking the source of cash deposits in the banks helped the government to carry out the process. Demonetisation caused prolonged shortage of cash in the weeks that followed and also caused a large disruption in the economy.
PROS
Majority of Indians would deny that there were no benefits derived from demonetisation. Only, the problem for general public increased. But this is not the complete truth.
- Eradication of black money– It helped the government to track people who were having large sums of unaccounted cash. After demonetisation, they had only two options- either reduce it to zero or to deposit it in their bank accounts and pay taxes on them. It was the main motive and biggest advantage behind this step that it is going to affect the corrupt practices. The government claimed that large sums of black money were kept hidden by tax evaders and demonetisation has helped it uncover the huge amount of unaccounted cash. According to estimates made by RBI during the demonetisation drive, people had deposited more than rupees 3 lakh crores worth of black money in the bank accounts.
- Reduction in illegal activities– Huge sum of money especially in 500 and 1000 denominations were used in several illegal activities like terrorism, money laundering, Naxalites, gambling and also inflating the prices of major assets of the economy. But, after this step there was shortage of funds for these organisations to run. So, this reduced the illegal activities occurring within India or outside, that was occurring with help of Indian currency.
- Cashless economy– This step had made possible in transforming India into a cashless economy. The proportion of hard cash had reduced and with help of digital payment modes like- Paytm, credit cards, debit cards, etc made the transformation possible. It even increased the transparency in the financial sector.
- Reduction in government liability– For those people, who choose not to disclose the money, now that money was worthless. Thus, it reduced the governments liability to that extent. It reduced the risk and liability of handling liquid cash as compared to soft money and was much easier than hard cash. As every currency is government’s liability to pay and with fall in hard currency circulation, it reduced the liability.
- Closure of shell companies– After the ban, approximately 2.24 lakh companies were closed which did not do any work for 2 years. Also, 3 lakh directors were disqualified. The purpose of these firms was to evade taxes.
- Rise in tax revenue– When people started depositing their unaccounted cash into their accounts, they had to pay a significant amount of tax penalties on that money and even other taxes had increased considerably. Different taxes had increased the tax revenue of government. And, this revenue was used towards the betterment of the society.
CONS
- Fall in GDP– This action of the government has directly affected the growth of the cash driven economy of India. The GDP of India fell from 8.01% of 2015-16 to 7.11% of 2016-17. This was because of the less availability of cash. It effected the primary working of every industry like production and manufacturing, even the banking department as they could not lend loans to the citizens.
- Daily wagers– A large part of Indian economy includes people working on the daily wage purpose. They lost their jobs and couldn’t meet their daily expenses.
- Agriculture Industry– It has affected the agriculture industry as the farmers are not able to purchase fertilizers and seeds to harvest. Most of the Indian population is indulged in the agriculture sector. In the agriculture sector the transactions are on cash basis and due to demonetisation they faced a lot of problem.
- It impacted all sectors– All sectors came to a halt temporarily. Even the stock market, the investors and started withdrawing money from it, by selling the temporarily slump in the market. The real estate business had a massive loss as it mostly worked on black money.
Conclusion
As mentioned above, the primary aim of demonetisation was to a) weed out black money and b) introduce and promote the concept of digitalisation as a preventive measure against corruption.
The government had estimated that a sum of 3 lakh crore or 20% of demonetised banknotes would be removed from circulation in the market.
However, according to the 2018 report from the Reserve bank of India approximately 99.3% of the demonetised banknotes that is ₹15.30 lakh crore of the ₹15.41 lakh crore that had been demonetised, were deposited to the banking system. This implies that banknotes of worth ₹10,720 crore were not deposited.
Hence, analysists concluded that the government had failed to achieve the motive of eradicating black money from the market. However, it succeeded in promoting digital transactions and electronic payments. The shortage of cash led to a sudden increase in electronic payments, usage of m-wallets etc. By April 2018, it was observed that the number of digital transactions had doubled. Apps like Paytm, BHIM, GPay gained a lot of new users during this period.
Moreover, an increase in the tax revenue was also observed but studies show that there hasn’t been any substantial rise in the number of tax payers or direct tax collection due to demonetisation.
In addition to this, the GDP fell from 7.5 to 5.7 by June 2017 as it was extremely difficult for all sectors of the economy to recover from the losses and hardships that resulted from the flawed implementation process.
Due to the unavailability of cash, all the manufacturing and service industries experienced an unforeseeable halt which led to a decrease in the industrial output. The agricultural sector took a huge hit as it was heavily dependent on cash for purchase of seeds and other resources which inevitably led to an increase in the prices of crops. Henceforth, the workers employed in these sectors also suffered. According to a report from Centre for Monitoring Indian Economy, 406.5 million were employed in September-December 2016. Post demonetisation, the number fell to 405 million in January-April 2017.
To conclude, Demonetisation was a bold move, although sudden and could have been a revolutionary move to combat corruption if implemented properly. The long-term aim of the government was to curb corruption and promote cashless transactions.
However, reports say that it failed to remove black money from the market. As a result of unavailability of cash, it succeeded in promoting cashless transactions but only for a short period of time.
Due to the flawed implementation process, the major contributors of the economy took a huge hit which some of the sectors still haven’t recovered from. Hence, we can say that the cons outweigh the pros and demonetisation failed not only as a measure taken to eradicate illegal practices in India but also caused major inconvenience to the general public and different sectors of the economy.
It could have been a huge success if a practical plan that dealt with all possible consequences was made beforehand as it affected all aspects and participants of the economy and hence, a back-up plan for all contingencies was a must. Also, the involvement of bankers and government officials in corrupted acts during the implementation of demonetisation slowed down the movement. Hence, diligent participation could have boosted the process.
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