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Demonitazation - What were the gains and the loses


Demonetisation can be defined as an economic policy of stripping a currency unit of its recognition as legal tender. In other words, after demonetization of a certain currency it can no longer posses the value it used to hold.

After nine months of Prime Minister NarendraModi's announcement of banning Rs.500 and Rs.1000 currency notes, on November 8 of the last year, it is still a controversythat- is demonetisation, a success or a failure? Or, more specifically, what are the gains and loses of demonetisation?

Though primary purpose of demonetisation was to unleash the country from the 'grip of corruption and black money', it was also implemented with an intention to cease terror funding and curb counterfeit currency.

PremisesBy banning total Rs.15.44 lakh crore which accounted 86 per cent of India's total currency, it was expected that a sizeable amount of these banned high-value currencies would not return into the banking system, but would remain at the hands of holders. The amount of this scrapped currency notes(was estimated to be between Rs.3-5 lakh crore) would be used in various public welfare schemes and infrastructure development projects. It was also anticipated that the counterfeit currencies either would be caught or would become useless pieces of paper.

Result Although demonetization is not a big disaster like the global crisis of 2007, it still acted as a liquidity shock across the nation, disrupting the entire economy.

According to RBI's annual report, as much as 98.96 per cent of banned currency has returned to central bank, only a piffling amount of Rs.16,000crore didn't come back.

The purpose reducing counterfeit currency does not seem to be served as well. In 2015, the amount of total detected counterfeit currency in circulation by National Investigating Agency was Rs.400crore, while the total value of the fake money that has come to the bank is Rs.41 crore, which is nowhere near the former amount.

Ray of Hope

  • Because of demonetisation, the huge amount of money, which has been unbanked, has come into the banking system. This cash came back to the banks,will be taxed and that's a obvious gain. If most of the black money is detected, the economist SurjitBhallahas calculated, the additional revenue in the first year will be Rs.2.5 lakh crore with a further increase of Rs.1.5 lakh crore in perpetuity.
  • Finance Ministry said, terrorist financing has stopped almost entirely, because of demonetisation of special bank notes.
  • Severe cash crunch caused by 'NoteBandi', led people to lean more and more on digital transaction. Measures have been taken by government to promote cashless economy as well.

Dilemma and Discord

  • The actual motive behind banning high value bank notes, however, is quite unachieved. Till now, the Reserve Bank of India cannot detect the total amount of black money. Lakhs of accounts are under scrutiny. The number of the such accounts is huge for CBDT to scrutinize and it mighttake years to complete the whole scrutiny process.
  • Government has claimed that terror funding is stopped, but no proof has been provided.
  • In November, shortage of papercurrency led people to bank upon digital transaction, but it dipped roughly therafter, which means demonetisation isn't completely successful in reducing people's dependence on hard cash. Let's have a look in the statistics below:
November December July
No. of transactions (million) 671.49 957.50 862.38
In value terms (Lakh Crore) 94 149 107

That means, the use of cash diminished initially, but has been steadily increasing with waning effect of note shortage.

Conclusion Experts say, there is a little impact of demonetisation on black economy, since only 1 per cent of black wealth is kept as cash. The process of demonetisation was carried out without preparation and caused big loses to the informal sectors.

All in all, it affected most ominously to those who never possessed any black money. The beneficial spin-offs ofdemonetization could have been achieved by other and less-self-defeating ways.

Though, India has achieved significant gains in various field, especially after liberalization, the prosperity of our country is still shackled in the chains of corruption, illicit activities, tax evasion, opaqueness and inefficiency of administration etc. Few people believe, to settle all these factors lagging our nation behind, once and for all, a huge disruption was needed and demonetization did just that.

-Susmita Sarkar