India’s Journey with Demonetisation
Demonetisation or disallowing of some denominations of currency from an economy has been a close friend of India since long back in 1946. But has this ever been really friendly to us is the real question yet to be answered. Going back to 1978, when large denomination currencies (₹ 1000 and above) were banned from usage, was that really necessary for the economy or was it more a political step than an economic one? As the currencies prohibited accounted for only 10% of the total money circulation in the country. This could be one positive argument in favour of the 2016 action when ₹ 500 and ₹ 1000 notes accounted for 87% of the total cash.
But is this argument strong enough to support one of the major change in the economical history of India? Let’s find out with some factual data and then come to a possible conclusion for the same.
Almost all the sectors had a negative impact of the step taken, with Real Estate, Tourism, Luxury Items and Jewellery being on the top of the charts. Other sectors like the Entertainment and Media sector, Automobiles (majorly 2 wheelers), Retails, Labor etc. have all suffered to a good extent. But one silver lining among all these was the Banking sector. Being the backbone of this entire process, banks enjoyed the most during the initial few months of the process. On one hand, as the labour sector saw a decline in jobs by 1.5 million, the banking sector saw a rise in the number of bank accounts by ten times the same figure, i.e. 15 million new bank accounts were opened.
Another argument demonstrating the perplexed process was an article from the Hindu stating that approximately ₹ 8,000 crore have been spent in printing of new notes in the year 2016-17, more than double the amount in the previous year (₹ 3,421 crore). And going by the biggest reasoning put forward supporting the process, which was removal of black money from the market, recent reports from all the major financial papers show that about 99.3 % of the blocked currency has already been returned.
Among the positives, the major factor is the reduction of stone pelting in Kashmir. According to Intelligence agencies, around ₹ 1,000 crores are sent annually by Pakistan to the separatists to create chaos in Kashmir. Also, there has been a serious impact on the Maoist movement as black is the prime source of funding for both Maoists and terror financing. So the move could be stated as a big victory over such nuisances. Counterfeiting has also been reduced to a good extent after demonetization.
But are these victories sufficient to compensate for the liquidity crisis and other negatives arising in the country? Loss in well being is the most important point in the same as there was a cash crunch in the country for a major part of the half year post the process. There were huge queues outside the ATMs and the most suffered sector was the lower class which did not have enough knowledge about digital transactions and daily wage labours whose only source of income was a mere ₹ 300 to ₹ 600 based on the works they did. Set aside any savings or buying luxurious item, people were not even able to satisfy their basic needs for the first 3 months. As a result, consumption behavior of the people changed, thereby reducing the GDP of the country. Initially, there was a large amount of money deposited in the banks but that was a short-term win as most of the money deposited was just to convert the old currency into new ones, rather than as a saving purpose.
Comparing with the 1978 move, which could not be a success due to low share of banned notes in the then economy, less efficient groundwork or low support from the RBI at that time, 2016 could be termed as a slightly better move as there was complete secrecy maintained and things were planned well, but the execution could have been much better. Overall, in the long term, the move could be termed as a success as well as it has created a sense of fear in the black money holders and also created a panic attack to the illegal businesses going on. Also, with opening of new bank accounts, more people are now being connected to the government, but all these positives can be only achieved if such strong move is backed by a equally well managed and executed plan A and a very efficient plan B in case of certain unknown situations.