It is almost a year (November 8, 2016) since the Government of India announced and ordered an end of Rs 500 and Rs 1000 banknotes as legal tender. Back then few people could understand in a moment what had passed and what was about to come – demonetization was almost unheard of by ordinary people. In few days as people realized that the money and wealth in these denominations will have to be converted as the notes were to be banned, there was chaos everywhere. More so because the guidelines and the process for converting the old notes issued by the government meant a lot of inconvenience to people. Today, even a layman knows what demonetization is. This is the visible change – a person even an illiterate for that matter who did not know what notebandi meant a year ago can today describe it with details. But ask any person whether demonetization did prove to be any good and the answers are ambiguous. That is the picture at micro level, but at macro level we all know that it has slowed down the economy, which is going to be a challenge for Modi-government in the remaining years of the term.
When demonetization was announced on national television by Prime Minister Modi, the government’s stated objective were – One, it is an effort to make India corruption free. Two, it is done to curb and control black money. Three, to manage escalating price rise. Four, to prevent funds flow to illegal activities. Five, to make people accountable for every rupee they possess and pay income tax return. Finally, they put it as an attempt to make a cashless society and provide a Digital India what was deemed as necessary.
In the prelude, government issued advertisements all over the country of Jan Dhan Yojana, in which government urged people to open bank accounts under the said scheme and asked them to deposit all the money in their Jan Dhan accounts and do their future transaction through banking methods only. Another step that the government initiated was a tax declaration of the income for which it gave October 31, 2016 as deadline. It was obvious through this method that the government would be able to wipe out a huge amount of undeclared income.
The demonetization policy as a financial reform in the country is still hazy as it is not clear whether the objectives of the policy were achieved or not. If we see the version of the ruling alliance, demonetization policy would help create corruption-free environment as it will be hard for those who believe in corruption and this move helped the government track the black money. Those individuals who have unaccounted cash are now required to show income and submit PAN for any valid financial transactions. The government can track their income and persuade people to pay income tax. This move will become automatically an obstacle to invest in unlawful activities. The ban on high value currency also helped dig out the sources of money laundering. This move was supposed to vanish the circulation of fake currency as most of the fake notes were thought to be in high value notes like Rs 500 and Rs 1000. But with RBI declaring that 99 percent of the banned notes had returned, it punctured many of the claims made by the government.
However, the move has spawned an interest among those people who had opened Jan Dhan accounts under Prime Minister’s Jan Dhan Yojana. It started a new culture where people think about depositing their cash under this scheme and this money can be spent through banking channels.
Some economists also support the decision of demonetization. Economist and former Indian representative to the IMF, Arvind Virmani said demonetisation is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations.
"The manner in which it was implemented is not surprising - such actions are always secret till announced, so that insiders do not take advantage of the information at the cost of the outsiders," he said.
Economist Surjit Bhalla said, “Demonetization is a ‘bold step’ and bigger than GST.”
This policy has helped motivate people to pay income tax returns. Now there is no chance to play hide and seek to declare their income and pay tax.
Individuals are required to submit PAN for any deposit of above Rs 50,000 in cash. This move helped the income tax department track individuals with high denominations currency.
These merits will tend toward making India a cashless society and supposedly fulfill the dream of making a digital India a reality.
Other side of this rationale seems dark, which we are learning on every day basis from experts on TV channels and simplified by the opposition parties who believe demonetization of the currency reduced the growth by 2 percent as it has deeply affected the business. Due to the cash crunch, the entire economy lost its path to survive. It has faded to sadness as many poor daily wage workers are left with no jobs. Their daily income has stopped because employers are unable to pay their daily wage. Meanwhile, development has come to a standstill while the government is confused and the remedy that can relieve the pain of those who have suffered.
It has given opposition a chance to come back. Throughout the year, they have been highlighting tribulations of demonetization. Former finance minister P Chidambaram said that the economy was ‘going down rapidly’ as the government was losing in all the three indicators of the economy – investment to GDP ratio, credit growth and numbers of jobs created.
Former Prime Minister of India, Manmohan Singh, an eminent economist who is also considered to be the architect of the reforms of early 1990s, said demonetization has not been successful in any civilized country, except some of the Latin American nations. And he said the economy is on a "downhill path" because of the "adventure" of demonetization undertaken last year which was not required at all, either technically or economically.
Nobel laureate and eminent economist Amartya Sen said, "The demonetization of currency was a despotic act as the government broke the promise of compensation that comes with a promissory note."
He said demonetisation goes against trust and undermines the trust of entire economy.
Now, the government has same challenges it had before – fake currency, corruption, money laundering and embezzlements.
The plan of digital India which was the primary motive could be set through different methods like the issue of plastic cards to all government employees, corporate employees and tax payers which can do transactions bank to bank and transact only Rs 1000 per day. It would make 50 percent of population accountable and the digital dream will come closer.
Government should come with a statement and accept the truth and ponder on the solution of the problem. Otherwise, they will be trapped in a vicious circle where ether is only insult. This policy may have a long-term benefit which we cannot see at this point of time because growth is sliding downwards. Once the growth starts declining it becomes difficult to regain it.
Government should not be obsessive about digital currency and it cannot be denied that cash is the preferred mode of transaction globally, accounting on average for 85 percent of them. In some of the developed countries, transactions in cash are less than 50 percent of total transactions. In India, this ratio is more than 90 percent. Easy availability, its certainty of acceptance is not dependent to any mode and function. The only drawback to cash transaction is the anonymity which can be handled with the help of banks.