November 8th marks the 1st year anniversary of the announcement of Demonetisation.
What were the objectives?
86% of the currency in circulation was withdrawn in one fell stroke.
This was done to achieve -
a lower cash-to-GDP ratio
subsequent reduction of black money
cutting fake currencies
curbing terror fundings
pushing digital transactions
increasing the tax net.
What are the positive effects?
DeMo has rung in a climate of tax compliance, even if through coercive means.
Deposits worth nearly Rs.3 lakh crore are under the scanner.
According to the Finance Minister, an additional 9 million people have come under the tax net.
Over 200,000 shell companies have been deregistered.
Real estate shenanigans have been reined in.
What are the negative effects?
Growth - Growth has been slowed down since DeMo.
GDP growth in Q1 of 2017-18 was at 5.7%, against 7.9% in 2016.
Rural sector was affected the most with 2.3% growth in Q1 2017-18, against despite record foodgrain output in 2016-17.
Earlier a rapid recovery from the slowdown was predicted. But the narrative has now been changed into ‘short-term pain for long-term gain’.
Price - Prices have crashed in major markets for kharif crops such as maize, green gram, groundnut, soyabean and sunflower despite their output being either flat or marginally lower than last year.
It is primarily because of the disruptive impact of the withdrawal of cash on supply chains and inventories. Click here to know more about Impact of DeMo on Prices
Unemployment - The rate of loss of jobs registered in the trade sector and industries was “almost” 55% in the two months after the note ban.
The job loss is significant in the middle-age group (40 to 50), among people with limited options.
Job creation was zero in November-December 2016.
It improved to a growth rate of 10%-15% in January-March 2017, and to 20%-25% in April and June, but again, between July and October, fell to 5%-10%.
Return of cash - Though cashless transactions prevailed initially, cash has returned.
The major reasons for this are connectivity issues with POS, the transaction charge and security concerns.
Logical flaw - To say that a 12% cash-to-GDP ratio for India is too high, when compared with other countries, is incorrect.
This comparison is not valid as India has a large informal sector.
So its cash needs are also higher.
A lower cash-to-GDP ratio could mean that the informal sector has shrunk due to demonetisation thereby needing lower cash.
This indicates rise in unemployment.
Ignoring Other Factors – Government projects that it achieved a lower cash-to-GDP ratio of 9% after demonetisation, from over 12% earlier.
This might be due to a combination of factors apart from a shift towards digital transactions.
It might be due to lower currency supply, shrinkage in cash-dependent enterprises due to the note ban, and shortage of cash in pockets of the economy.
Terror Funding - Since demonetisation, the number of infiltration attempts in the Valley has reached a high,.
The number of civilians killed has trebled.
In the theatres of Left Wing Extremism, more security personnel have been killed in Naxal attacks but in fewer incidents, which have dropped 21%.
What should have been done?
Cash plays a significant role even in developed economies such as Japan.
So the criminalisation of the entire cash economy seems unfair.
Hence the debate on DeMo is about ends and means.
The same outcomes could have been achieved with less pain.
DeMo could have been implemented in a gentler way — with ‘nudging’ rather than bureaucratic diktat.
