Demonetization of Indian Currency – A Success or Failure?

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Dec 242016
 

On Nov. 8 th 2016, the Indian prime minister had announced demonetization of Rs.500 and Rs.1000 notes that constitute 86% of the Indian currency. The move, though hailed as a bold step to root out black money, was later criticized by the media. The opposition parties have been criticizing the move from day one. The points that contributed to the perception that the move was not good are:

  1. All the money that was demonetized has reached banks, leaving no room for the government to own any money that had not been deposited to banks. Earlier, it was expected at least 3-4 lakh crores of rupees would not be finding its way to banks, thus providing a fillip to use unaccounted money for welfare schemes.
  2. The problems associated with refurbishing the economy with new currency are innumerable. There were long queues outside ATMs for money withdrawals even after¬† 45 days of demonetization. This has led to slower growth as people don’t have money to spend though it was possible to pay any amount of money using cashless payments such as credit card, cheque, wire transfer, etc.
  3. Several small businesses, such as restaurants, petty shops had tough time during this period as some businesses collapsed or resorted to staff retrenchments. Pensioners were not able to draw monthly pensions, etc.
  4. The government spent huge money in way of printing new currency, waiving of road toll fees (due to lack of change and long queues), and fee waiver on electronic form of payments.

However, the benefits may be noted as below:

  1. All the money (500 and 1000 notes) has been deposited in the banks, providing a fillip of Rupees 14 lakh crores to banks. Only about INR 5 lakh crores has been disbursed as on 22nd Dec 2016. Even if another 5 lakh crore is withdrawn for making the economy cash sufficient, it leaves another 4 lakh crore with the banks. There is a possibility of reducing the interest rates which, in turn increase investments and industry.
  2. By going through the money trail, the govt agencies, post demonetization, are able to identify several tax evaders and initiate steps in accounting the black money.
  3. The gold imports have been reduced to record lows, as the govt is keen on identifying people holding inordinate amounts of gold.
  4. The Indian government is trying to go through the bank accounts of the depositors to find tax evasion, and impose taxes and penalty, which may be substantial.

The general opinion is that the government could have done the same with less inconvenience to the public. One needs to wait another 2-3 months to see full impact of demonetization.