Demonetization: Will It Shake Up Or Shape The Economy ?

Momocha Lousamba *

People waiting at Bank in Imphal on November 10 2016 :: Pix - Shankar Khangembam

With a hope to solve the problem of illegal tax evasion and corruption, our PM, Narendra Modi, took the risk of demonetizing the old 500 and 1000 rupees notes of the Indian currency. As of now, the scheme seems like a good initiative on one hand and disturbing the normal life of the common people on the other hand. The spontaneous move by the PM makes the people unrest since the midnight of 8thNov, 2016. People have started standing in long queues in front of ATM’s and banks.

The spontaneous move has three main objectives:
a) to tackle counterfeiting of Indian bank notes
b) to curb funding of terrorism
c) to nullify black money hoarded in cash (unaccounted money).

Well, the first one is mandatory and the RBI does it from time to time. Union Defense Minister Manohar Parikar said that demonetization is like a surgical strike on black money, terrorism funding and corruption.

Since, the terrorists collect their funds through illegal sources, they keep their funds in the form of Rs. 500 notes and Rs. 1000 notes. Therefore, their money would be devalued; it would become a huge blow to them.

The core objective of demonetization would be to nullify the black money hoarded in cash. Now, the notes kept under the mattress would come out and those who earn from illegal sources would be arrested. Even if the people suffer for some time, the economic growth of the country is expected to rise in the near future. Therefore, Demonetization seems like a long-term plan for the Indian economy.

We, the Indian, do most of our transactions through currency notes. To meet this, the government suggests digital transaction, which indicates that card transaction will slowly replace cash transaction. Above all, we expect to see more transparency in the corrupt real estate industry, which would in turn attract more foreign and domestic investor.

The demonetization process of 1978, during the tenure of PM Morarji Desai, was a total failure. Therefore, we must learn from the past and find out the flaws. Demonetization is the kind of process, which must be done quickly with the least inconvenience to the people. Approximately 85% of Indian currency notes are in the form of old 500 and 1000 rupees notes.

It is, for sure, hard to replace this huge percent by smaller denomination of currency notes and fewer currency notes of Rs 2000 and new Rs 500. Above all the printing of new notes may cost more than Rs.15000 crore. Less than a half of currency cancelled is back, and that too stashed away for emergency. I hope this may not meet the total loss. Demonetization hit the Indian economy when it is in a cruise mode, fired by good monsoon and seventh pay commission. The expected growth rate of 8% in the financial year 2017 is beyond grasp now.

The overall hiring of employee has gone down as managers seek to revenue/profit targets. This depends on how temporary the pain is and it will rise again in a few years .But it must be noted that informal jobs are hit worst by the cash-crunch. Due to low circulation of currency notes, the consumption of people (A big contributor to the GDP) may reduce.

Small enterprises, Micro Finance enterprises and Non-Banking Financial Company will take the worst hit. There is also a 40%-plus drop in enquiries and sales of real estate across key markets of Mumbai, Delhi, Bangaluru and Pune. November-December is a peak tourism period, but the cash-crunch may also hit it on a high note.

There were higher sales rate of gold against old currency notes during the second week of November. However, it has drastically dropped down due to the government’s warnings. Due to this lower rate of purchases of goods, a lower rate of GDP is expected for about a half of a year.

People are not sure when the supply of currency notes will be normalized. As a result, the demand of currency will be 50% more. RBI even started returning soiled 100 rupees notes totally worth 50 crore rupees in SBI Tamil Nadu alone, to meet the requirement. People in the unorganized sectors suffer the most. They do not have credit cards or debit cards and they do not even know what a digital transaction is.

So, they need more currency notes. Of all the classes of people, the poor and lower class are hit the worst. If people do not have an actual bank account, they can use their Jan Dhan Accounts for currency exchange in the banks. However, there are also thousands of people whose Jan Dhan accounts have been used by their landlords without the knowledge of the account holders.

Demonetization would strike hard to the great Indian weddings. With the advent of wedding season, people are getting worried because of the money withdrawn before demonetization move and lack of cash in the form of currency notes after the cash crunch. Goods prizes are soaring up post demonetization. Health sector is also suffering.

As the old currency notes are allowed in medical stores and hospitals, some of them remains closed and some of them misuse it as a chance to convert their black money to white. The illegal properties stored in the form of real estate, gold, foreign investment etc, will not be able to eliminate. Only a few percent of illegal property is stored in the form of currency notes.

Moreover, people have started finding ways to recycle this too. Above all, it is an open secret that politicians have black money too, but in an organized form. The objectives of demonetization include curbing of terrorist funding. There are state actors who are involved in counterfeiting. They can counterfeit the new currency notes also, and this time they will get more of 2000 rupees notes and the terrorist funding will be huge.

It is also clear to everybody that black income generation will continue as before, and storage of black money in the form of 2000 Rupees notes will be much easier than before. Rich people and politicians are also misusing their powers for exchanging their old currency notes (black money) to new currency note (e.g. Recently 19 bank employees have been suspended relating to this case).

If we want to abolish corruption, black money and illegal tax evasion, we need much more advanced steps like passing a stronger Lok Pal Bill and stronger anti-defection law. Demonetization does not seem a long term solution to the concerned issue. Above all, it must be noted that demonetization should be fast. It must be executed in a way that it can bring minimal grievance to the common people.

Dead of 111 people because of demonetization doesn’t seem good. In the end, we must remember that our government is a democratic form of government wherein the decisions of the government must be taken in a way that the people are happy with it. Above all, facing corruption needs every citizen’s involvement to fight it. Let us join our hand together to fight corruption and illegal tax evasion.

The government must not forget that the people of India are optimistic towards demonetization for a better India.