Impacts of Demonetization
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Impacts of Demonetization

Author: Kriti dheer calender  13 Sep 2018

Impacts of Demonetization

Demonetization is an act of cancelling the legal tender status of a currency unit in circulation. It occurs to change the National currency; i.e. to pull a form of currency out of the monetary flow. Anticipating positive changes on the liquidity structure as a whole; nations often adopt demonetization policy as a measure to combat inflation, to combat corruption and crime (counterfeiting, tax evasion), to discourage a cash-dependent economy and to facilitate trade.

Demonetization in India

On November 2016, Government of India also announced the demonetization of all Rs.500 and Rs.1000 notes. The objective of demonetization as claimed by Government of India was to curtail the black money running as shadow economy and to stop the use of counterfeit cash to fund illegal activity and terrorism.  

Around 22,000 crores of rupees are supposed to have been accumulated by corrupt officers, businessmen and politicians. But still, even after demonetization, a calculated sum of 16,000 crores is missing out of 22,000 crores. It was thought that if cash was squeezed out, the black economy would be eliminated. But cash is only one component of black wealth: about 1% of it. It has now been confirmed that 98.8% of demonetized currency has come back to the Reserve Bank of India. But in accordance with the writ petitions filed in the supreme court, an estimate of over Rs.90 lakh crore (remain uncovered.

Demonetisation: Demerits faced 

According to a survey, demonetization had led to Rs 2.8 lakh crores less cash (Equivalent to 1.8% of GDP) and Rs 3.8 lakh crores less high denomination notes (Equivalent to 2.5% of GDP) in the Indian economy. The Economic Survey has also clarified that income tax collections have touched new high with demonetization and introduction of GST, “From about 2 per cent of GDP between 2013-14 and 2015-16, they are likely to rise to 2.3 per cent of GDP in 2017-18, a historic high.”

But India is an agriculture-based economy. Due to the cash crunch, the farmers especially small and marginal who largely depend on cash to buy seeds, fertilizers and to pay for sowing, borrowing water for irrigation and for other related agriculture types of equipment remained affected and could not complete the crop-related activity on time.

The big failure of demonetization is that it was carried out without proper planning and execution and caused big losses to the different sectors. This has not been factored into the recent data on growth rate, so the loss to the economy would be in lakhs of crores of rupees. Farmers, traders and the youth are all agitating.

The black economy needs to be tackled, but demonetization is not the way. The brunt of this move has been borne by those who never had any black money. 

Demonetization: Benefits Targeted 

Demonetization policy of the Government has been termed as the greatest financial reform that aimed to curb the black money and corruption. All the people who were not involved in malpractices welcomed the demonetization as the right move. It suddenly rose the direct tax collections by 19% in April-July of the financial year 2018. In absolute terms, direct taxes, made up of personal and corporate taxes, have been Rs1.9 trillion, and the number of individual tax returns filed jumped 25.3%. Money laundering eventually comes to halt as the activity can easily be tracked and the money can be seized by the authorities.

The unaccounted cash was deposited in the Pradhan Mantri Garib Kalyan Yojana after paying 50% tax. The money was kept deposited for 4 years with the banks without incurring any interest. However, after 4 years the amount is supposed to be returned. This amount was utilized for social welfare schemes and making the life of low-income groups better. Demonetization had also improved transmission in the banking system and led to the greater financialization of savings.

It was very difficult to make India a cashless economy in the foreseeable future but, certainly, we have moved in a less-cash regime. Now even the small transactions have started going through banking channels and the small savings have turned into a huge national asset.


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