Demonetization A Blessing in Disguise or the Economy’s Demise

On November 7th, 2016, India’s Prime Minister Mr. Narendra Modi announced the invalidation of the Rs.500 and Rs.1000 notes with the aim of reducing corruption, ‘’black money’’ (Sharma)- money which has been earnt but no taxes have been paid for it (and then gets circulated in a parallel ‘shadow’ economy, commonly known as the black market)- and to make India a more digitalized economy. Modi “Intended to take money derived from tax evasion out of circulation” (Sharma). The government hoped that Indian households will now stop storing cash in their houses, but instead put their money into other instruments, such as invest in the stock market, which will in turn “spur the economic growth of the country” (Sharma) as there will be more capital in circulation for banks to lend and companies to deploy.

Modi’s decision had a “two-fold impact” (Singhal). First, it created an aggregate demand shock “by reducing the supply of money and secondly”, it created an aggregate supply shock in the economy, “By constraining availability of cash as a critical input for specified economic activities, such as purchase of inputs in the agriculture sector.

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Growth slowed down to a four-year low of 6.7%.” (Singhal). It was determined (post-demonetization) that Indians were now storing even more of their household savings in cash (which is exactly the opposite of the intended impact). “Their net savings going to banks are almost 50 percent lower than the five-year average before demonetization.” (Sharma). Hence the negative impacts of demonetization were felt on all levels of the economy, especially in the majorly cash dependent sectors like agriculture and organized, as well as unorganized, retail (Singhal).

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Considering the fact that demonetization was a movement that impacted every single citizen of India, quite a few people had views regarding demonetization helping our nation out or it ruining our economy. Reserve Bank of India’s (RBI) former governor recently commented during his speech at Harvard Kennedy School in Cambridge that ‘I didn’t ever say that I wasn’t consulted [on demonetization]. In fact, I have made it quite clear that we [the RBI] were consulted and we didn’t think that was a good idea’. He also mentioned that he told the government that this move was not well planned or well organized and would only end up causing chaos in India (Rajan). When the president of the Indian National Congress political party (rival of the current ruling political party- BJP), Rahul Gandhi, was questioned about this movement after the RBI released a report with data over the impact of demonetization (in March,2018), he exclaimed “Notebandi [demonetization] is nothing less than a huge scam. What Modi ji did was he took out money from your [the population’s] pocket and gave it to his crony capitalist friends.” (Gandhi).

On the contrary, the World Bank CEO- Kristalina Ivanova Georgieva-Kinova- said, “While demonetization has, in the short term, created some impact on businesses dependent on cash, in the long term the impact will be positive… The reforms India is targeting are profound.” Based on this, it can be said that, in the short run, demonetization has had more negative impacts compared to positive effects. However, there is a prediction of a positive impact in the long run. While the movement seems to have been destructive so far, it could possibly help the Indian economy do better and have less black money in the parallel economy. India’s current Finance Minister, Mr. Arun Jaitley, was a supporter of the movement. According to him, ‘The banks which were struggling because of the NPA [non-performing assets or ‘bad loans’] problem, will now have a lot more money to lend for agriculture, infrastructure, and social sector, as also for trade and industry.’ He said the possibility of banks having “low-cost funds” (Jaitley) now available to lend would lead to lowering of interest rates. ‘Additionally, when more and more transactions will come into the banking network in the long run, you will find direct and indirect improvement. And, therefore, over a medium- and long-term, there will be a positive impact on the economy,’ he said. ‘I think it would be proven for any economy to really look beyond the immediate impact when the demonetization process is on and look at India post-remonetization,’ he observed.

A major contributor to India’s GDP (Gross Domestic Product) and overall economy is multinational corporations that are set up there- such as Coca-Cola, Colgate, etc.- which also seemed to be negatively impacted. Demand for consumer goods fell by a third in the two months following demonetization. “The loss of purchasing power resulted in the consumer companies reporting a decline of 1-9% of sales” (Malviya) in the financial quarter after demonetization took place (the December quarter) as around 98% of consumer transactions were carried out with cash before demonetization (Malviya). According to Nielsen-a global information, data and measurement company- the “2.5-lakh-crore market for fast-moving consumer goods could take a hit of about 1.5% of net sales, which works out to 3,840 crore.” (Malviya). It was drastic changes like these that then caused the Indian economy to fall after demonetization.

The main problem with demonetization seems to be that the government failed to achieve the two main objectives that demonetization was carried out for- catching (and eradicating) black money and weeding out fake notes. The fact that the new currency notes were not all that counterfeit-proof is apparent from the RBI report released at the end of the financial year, which talks of the amount of new, fake currency seized already. The same goes for black money – yes some was “probably caught and some probably came back to the government through higher tax paid on deposits” (Datta), but the amount was nowhere near the “windfall gains” (Datta) that the government hoped for (Datta). People are still keeping their savings in the form of cash in their own households and though, the number of digital transactions has increased, it is not high enough to have needed a drastic measure like demonetization, which in turn slowed down the economy.

There are certainly many efficient ways in which the Indian government could have eradicated black money to successfully destroy the black market and help boost the economy. For example, stores, restaurants, and all other places where monetary transactions occur, could charge a fee to carry out transactions in cash. Many shops charge an additional processing and transaction fee when people use credit or debit cards which needs to change (Peri). Charging a fee for cash-based transactions will help push people to use their cards and take India another step forward in being more digitalized. There are still around 190 million Indians who don’t have bank accounts and rely solely on cash. Such a move could also push them to create an account. Being more digital will help increase the transparency of the Indian economy and make it a lot easier for the government to detect fraud.

WORKS CITED

  1. School, NUS Business. “India’s Demonetization Drive: A Necessary Jolt Towards A More Digital Economy?” Forbes, Forbes Magazine, 19 Sept. 2018, www.forbes.com/sites/nusbusinessschool/2018/09/01/indias-demonetization-drive-a-necessary-jolt-towards-a-more-digital-economy/#757d4d793dc3.
  2. Sharma, Mihir. “India’s Cash Ban Failed Even to Create a Bank Savings Culture.” Bloomberg.com, Bloomberg, 1 Sept. 2018, www.bloomberg.com/opinion/articles/2018-09-02/indian-demonetization-failed-even-to-create-a-savings-culture.
  3. Shankaran, Sanjiv. “Demonetization Was a Terrible Economic Move.” The Times of India, Business, 30 Aug. 2018, timesofindia.indiatimes.com/blogs/cash-flow/demonetization-was-a-terrible-economic-move/.
  4. Singhal, Rajrishi. “How Demonetization Impacted the Indian Economy.” Https://Www.livemint.com/, Livemint, 30 Aug. 2018, www.livemint.com/Politics/uCSwolE7ugfGfuv2O0wWbN/How-demonetisation-impacted-the-Indian-economy.html.
  5. “Viewpoint: Why Modi’s Currency Gamble Was ‘Epic Failure’.” BBC News, BBC, 30 Aug. 2017, www.bbc.com/news/world-asia-india-41100610.
  6. Pti. “Demonetization Was ‘Not a Good Idea’: Raghuram Rajan – Times of India.” The Times of India, Business, 12 Apr. 2018, timesofindia.indiatimes.com/business/india-business/demonetisation-was-not-a-good-idea-raghuram-rajan/articleshow/63731677.cms.
  7. Prabhu, Sunil, and Deepshikha Ghosh. “Notes Ban Nothing Less Than Huge Scam, Says Rahul Gandhi, Targeting PM.” NDTV.com, NDTV, 30 Aug. 2018, www.ndtv.com/india-news/rahul-gandhi-on-notes-ban-pm-modi-took-your-money-and-put-it-in-the-pocket-of-the-countrys-biggest-c-1908743.
  8. Venkatesh, Mahua, and Raj Kumar Ray. “Demonetization Will Have Positive Impact on Indian Economy, Says World Bank CEO.” Https://Www.hindustantimes.com/, Hindustan Times, 2 Mar. 2017, www.hindustantimes.com/business-news/modi-s-demonetisation-move-will-positively-impact-economy-world-bank-ceo/story-8Khb9U8UHOoEXoi75vyDfI.html.
  9. IANS. “Demonetisation to Have Positive Impact on Economy: Finance Minister Arun Jaitley.” India Today, India Today, 14 Dec. 2016, www.indiatoday.in/india/story/demonetisation-arun-jaitley-economy-gdp-banks-positive-impact-353811-2016-11-24.
  10. Malviya, Sagar. “Note Ban Has Had a Global Impact, on MNC Top Lines.” The Times Group, 13 Feb. 2017, epaperbeta.timesofindia.com/article.aspx?eid=31816&articlexml=note-ban-has-had-a-global-impact-on-13022017005013.
  11. Datta, Prosenjit. “Let’s Admit It! Demonetisation Was a Failure.” Business Today, Business Today, 31 Aug. 2018, www.businesstoday.in/opinion/prosaic-view/lets-admit-it-demonetisation-was-a-failure/story/281860.html.
  12. Peri, Mahesh. “Demonetisation: 10 Sustainable Steps to Cleanse India of Black Money.” The Indian Express, The Indian Express, 9 Dec. 2016, indianexpress.com/article/blogs/demonetisation-10-sustainable-steps-to-cleanse-india-of-black-money/.

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Demonetization A Blessing in Disguise or the Economy’s Demise. (2022, Jan 08). Retrieved from https://studymoose.com/demonetization-a-blessing-in-disguise-or-the-economy-s-demise-essay

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