Why in news?
November 8th marks the 1st year anniversary of the announcement of Demonetisation.
What were the objectives?
- 86% of the currency in circulation was withdrawn in one fell stroke.
- This was done to achieve -
- a lower cash-to-GDP ratio
- subsequent reduction of black money
- cutting fake currencies
- curbing terror fundings
- pushing digital transactions
- increasing the tax net.
What are the positive effects?
- DeMo has rung in a climate of tax compliance, even if through coercive means.
- Deposits worth nearly Rs.3 lakh crore are under the scanner.
- According to the Finance Minister, an additional 9 million people have come under the tax net.
- Over 200,000 shell companies have been deregistered.
- Real estate shenanigans have been reined in.
What are the negative effects?
- Growth - Growth has been slowed down since DeMo.
- GDP growth in Q1 of 2017-18 was at 5.7%, against 7.9% in 2016.
- Rural sector was affected the most with 2.3% growth in Q1 2017-18, against despite record foodgrain output in 2016-17.
- Earlier a rapid recovery from the slowdown was predicted. But the narrative has now been changed into ‘short-term pain for long-term gain’.
- Price - Prices have crashed in major markets for kharif crops such as maize, green gram, groundnut, soyabean and sunflower despite their output being either flat or marginally lower than last year.
- It is primarily because of the disruptive impact of the withdrawal of cash on supply chains and inventories. Click here to know more about Impact of DeMo on Prices
- Unemployment - The rate of loss of jobs registered in the trade sector and industries was “almost” 55% in the two months after the note ban.
- The job loss is significant in the middle-age group (40 to 50), among people with limited options.
- Job creation was zero in November-December 2016.
- It improved to a growth rate of 10%-15% in January-March 2017, and to 20%-25% in April and June, but again, between July and October, fell to 5%-10%.
- Return of cash - Though cashless transactions prevailed initially, cash has returned.
- The major reasons for this are connectivity issues with POS, the transaction charge and security concerns.
- Logical flaw - To say that a 12% cash-to-GDP ratio for India is too high, when compared with other countries, is incorrect.
- This comparison is not valid as India has a large informal sector.
- So its cash needs are also higher.
- A lower cash-to-GDP ratio could mean that the informal sector has shrunk due to demonetisation thereby needing lower cash.
- This indicates rise in unemployment.
- Ignoring Other Factors – Government projects that it achieved a lower cash-to-GDP ratio of 9% after demonetisation, from over 12% earlier.
- This might be due to a combination of factors apart from a shift towards digital transactions.
- It might be due to lower currency supply, shrinkage in cash-dependent enterprises due to the note ban, and shortage of cash in pockets of the economy.
- Terror Funding - Since demonetisation, the number of infiltration attempts in the Valley has reached a high,.
- The number of civilians killed has trebled.
- In the theatres of Left Wing Extremism, more security personnel have been killed in Naxal attacks but in fewer incidents, which have dropped 21%.
What should have been done?
- Cash plays a significant role even in developed economies such as Japan.
- So the criminalisation of the entire cash economy seems unfair.
- Hence the debate on DeMo is about ends and means.
- The same outcomes could have been achieved with less pain.
- DeMo could have been implemented in a gentler way — with ‘nudging’ rather than bureaucratic diktat.
Source: BusinessLine, Indian Express
