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Demonetisation - Impacts after an year

November 08, 2017
12 months

Why in news?

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  • 86% of the currency in circulation was withdrawn in one fell stroke.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.


Source: BusinessLine, Indian Express

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