The demonetization in November 2016 was a bold step by Modi Government to wash out ‘black money’ and counterfeit notes from India. With 86% currency nullified the newly inducted notes ensured that white money was circulated in the market, besides changing the mind-set of the general public. Irrespective of the widespread anguish and household disturbances, an optimistic sentiment was shown in favour by the poor and middle class of India. The result was the banks were flooded with money and circulation of currency increased in the market, a step towards a healthier economics of the country.
Advantages of Demonetization- To reduce the impact of sudden commercial collapse, a 50 day period ensued where the population could (ideally) exchange their cancelled cash for newly designed 500 and 2,000 rupee notes or deposit them into bank accounts. The old notes could be utilized in Mother dairy, govt cooperative stores, medical bills and petrol pumps. With this following scenario was observed: -
1. Digital payment significant increased
2. New tax payers in the income tax net
3. Cleaning of India financial system by throwing out Black money and pumping in white money.
4. Blow to terrorism
5. White money circulation
Presently 17.73 lakh suspicious cases have been identified that do not match the tax profile. Deposits worth Rs 3.68 lakh crore are under suspicion and 2.24 lakh shell companies faced the axe. In addition, Stone-pelting incidents in Kashmir came down by 75% from the previous year.
The informal sector in India employs workers and transactions are in cash. There existed a vast discrepancy between the payment to the worker and the ledgers of the company. Now most of this workers have accounts in the banks and are able to handle their money in digital form such as paytm. With few new notes the middle class realized that they had sufficient money to meet their day to day expenses and they were more or less squandering their money. The two thousand note conversion made most of them feel uplifted. While for Rich it was lesson not to indulge in black money.
Disadvantages of Demonetization-Even though demonetization move created adverse short-term impact the medium/long term policy impact needs to be assessed keeping in sight the goals of the country. Presently the following thoughts are predominating the minds of the citizens of India.
1. The economy of the India is growing at a slow rate.
2. Millions of Jobs lost.
3. Inflation is threatening to pick up.
4. Indian banking sector is vulnerable given that large segments have low profitability and is burdened with huge bad loans. There are few takers for bank loans. Consumer confidence is down. Gross non-performing assets (NPA) of the public sector banks is increasing.
5. Indian corporate remains highly leveraged and at high risks. So the combination of weak banks and weak corporates leaves India vulnerable to a tightening of global financial conditions.
However advantages outweigh the disadvantages. The citizens of India are welcoming and adapting to these changes. Steps like GST etc are essential for a sound economics of the country.