Demonetization is the withdrawal of the legal tender character of old bank notes. In India this was done last month against the denominations of Rs. 500 and Rs.1000. It was said that this sudden step was taken to address a host of issues ranging from Black money, terror financing, and prevalence of counterfeit notes in the economy. However, whether these issues have been addressed, needs to be seen after a considerable period of time. The immediate effects have been quickly showing their results socially, economically, and politically.
Demonetization has had a profound impact on the political scenario in India. It is an unhidden fact that elections in India are fought with cash-for-vote as a component to woo the poor electorate. The recent Tamil Nadu elections are a testimony to this fact where a large amount of cash was found in vehicles during the elections. Besides, leaders of few political parties are also known to sell election tickets. With demonetization in place, in the short term, such practices are expected to take a hit. On the other hand, the demonetization has divided the parliament into two groups, one being the government and the other being the entire opposition parties. This has impacted the winter sessions of the parliament, with frequent adjournments without any meaningful debate or discussion on the impact and handling of demonetization process. Demonetization is also making it hard for Maoists and naxalites to fund their operations. Post demonetization, the situation in Kashmir has also returned to near normalcy as old currencies are no longer a means to finance such anarchy.
Socially, demonetization has brought mixed impact on the people. As the old notes of Rs. 500 and 1000 must be deposited in the bank or be used at specific services like petrol pumps, airline tickets etc., people are finding difficult to get cash for their day to day expenses. The problem is more severe for families involved in marriage ceremonies or funerals. However, it is expected that in the short term, there will be an impact on the inequality prevalent in the Indian society. Tax evaders and corrupt politicians and bureaucrats are finding it difficult to deal with the money they had stashed illegally with some resorting to even burning the old cash. The other crucial impact has been the push towards digital modes of transactions. With lesser cash, digital wallets, mobile banking have been gaining acceptance among people. However, its reach is limited to the urban and educated masses. It is expected that with cash becoming scarce commodity, digital economy will gain ground in the near future.
Of all the impacts, the economic one has been wider and is being felt severely across all sectors. This can divided into the formal and informal economy. In the formal one, Productivity has taken a hit as more and more people have to rush to banks or stand in serpentine queues for availing cash for their needs apart from the problems of daily limits on withdrawals. The rural economy has also taken a hit in the Rabi season. Farmers are finding it hard to fund their agricultural activity. As the economy slows down due to drop in spending by people as well as many small scale industries finding it hard to deal in cash, employment in the unorganized sector is also hit. Banks are benefitting by the way of large deposits both from parallel as well as mainstream economy. Hence, a rate cut is expected which can further develop economic activity in the near future.
On the other hand, in the informal economy, as a large amount of black money is in the form of assets like real estate and gold, the impact has only been to the extent that real estate prices have come down. Demand for gold has also come down after the initial jump. However, it is expected that tax evasion is likely to reduce due to a new income disclosure scheme as well as demonetization. But the new Rs. 2,000 note is also finding its counterfeit, besides it can also be duplicated. Hence, the impact on the informal economy has been to the extent of invalidation of wealth stored in the form of cash of the larger denominations.
Demonetization has impacted every aspect of life in India ranging from social, economic and political. It could have been implemented in a better way without affecting its intended impact on the parallel economy by proper mobilizing of resources like cash and ATMs as well as the day to day transaction limits, keeping in view of honest taxpayers' and economy's requirements. It may have impacted people in short term but is expected to bear fruit in the form of better tax compliance and increased digital penetration of formal economy.
- Ritesh Kumar