TOPIC – “Is Demonetisation a Curse or a Blessing?”
We select this topic because demonetisation is a landmark event in the history of Indian economy. We wish to explore the knowledge about the benefits and drawbacks of this reform to judge whether it will prove as success or failure for Indian economy.
Demonetisation is an act of stopping currency units of its status as legal tender. It was announced on November 8, 2016 by Prime Minister Narendra Modi to ban 500 and 1000 currency notes for circulation. This action has been implemented in India to give new shape to economy along with a motive of removing corruption, black money and reducing financing of terrorism activity and to promote digitalisation (Kumar & Kumar, 2016). This would lead to some positive and negative impacts on Indian economy.
Positive impacts of demonetisation
Singh (2016) suggested that according to finance minister Arun Jately demonetisation generates a new normal in Indian economy in terms of bigger, clean and transparent economy. One of the positive impacts of it is on deposits of banks. As we know in India, 86 percent of circulation of currency was 500 and 1000 notes and this act of demonetisation made public to deposit their money in banks. RBI had announcement that banks had received 5.12 trillion rupees of deposits till 18 November (Annex Table2). These deposits raised GDP by 0.5 to 1.5 percent. SBI (State Bank of India) which is the biggest public-sector bank stated that they received 1.27 trillion rupees of cash deposits.
According to Financial Express (2018) demonetisation of currency notes in November 2016 brings a great tax payers base and increased household savings. This survey also shows accurate evaluation of the impact of demonetisation from different perspectives. It was found that there was 0.8 percent monthly rise in new tax fillers but in November 2017 there was 31 percent increment of tax payers in comparison with suggested trend. This interprets roughly into 1.8 million additional tax payers only because of demonetisation-cum-GST. The main objective of this was to lead more Indians to pay tax and after November 2016, 10.1 million tax fillers were included in comparison with an average of 6.2 million in previous years.
Lele & Jain (2017) throws a light towards digital payment companies which came out as one of the most remarkable recipients of demonetisation. One of the few elements who witnessed this story were new age instruments like- UPI (Unified Payment Interface), AEPS (Aadhar Enabled Payment System), PPI (Prepaid Payment Instruments), RTGS (Real Time Gross Settlement), NEFT (National Electronic Fund Transfer) and cards. Some other factors which driven increase of digital payments were- the usage of Aadhar to verify transactions of ATM and banking correspondent outlets, this lead to growth of AEPS. Some institutions had re-organised the charges for NEFT and RTGS just to stimulate the acceptance of these systems. Some promotional efforts which offered loyalty points, instant cash backs and rewards to users and most importantly, the fact that consumers were facing issues related to the unavailability of cash leads to the experiments of these modes of digital payments as anyone can do payments easily by using them on their mobile phones as well.
Negative aspects of demonetisation
Basically, India is a cash-oriented or cash-intensive economy, around 78 per cent of cash transactions related to business activities are made in cash (RBI, 2017). Therefore, it was obvious that currency squeeze during the demonetisation period had some adverse impact on economic activity, although such impact was expected to be disappear with time.
Keohane (2017) concluded that the growth of gross value added adversely impacted by the liquidity crisis that is limited access to currency as a medium of exchange for effecting cash transactions in economic activities. This impact of demonetization had worked through two channels. First, decrease in demand due to non-availability of cash and second, disruption in production activities which made GVA growth slow. Moreover, the loss of wage income for workers became another cause of less consumption demand. The GDP growth of India was slow down from 7.6 % in Q3 to 7.1% in Q4 in 2016-2017 which is estimated by various agencies (Annex Table 2). This paper also studied the impact of demonetisation on Automobiles industry that witnessed sharp decrease in sale of two-wheeler, commercial vehicles and luxury cars in quarter four of year 2016-017 and their distribution channels primarily make payment in cash.
Sharma (2017) highlighted the major influence on Micro Small Medium Enterprises (MSMEs) which is labor-intensive and highly depended on cash. Around 74% temporary job losses had been seen during this regime. This sector include textile, fertilizer and specially cement production showed negative growth in the month of November by 87% due to cash crunch.
Jha (2017) revealed the impact of demonetisation on micro finance institutions. It is reported that number of disbursement payment decreased by 26% in third quarter of 2016-2017 as compared to last year due to non-availability of cash. In addition to it, the number of loan disbursed also reduced due to shortage of cash supply ad withdrawal limit on cash.
Dhanorkar (2016) described that real estate sector greatly affected by demonetisation. In real estate sector, most of the transaction are made through cash to avoid various duties and taxes on buying and selling of property, during this stage of economy value of property went down, which also shrinked the stock market. The author also tries to predict the future of this sector that showed downward trend in sales volume and number of transactions in residential and land markets.
Samuel (2017) tries to highlight the short-term impact of demonetisation. The less supply of money lead negative impact on disposable income because of liquidity crisis, replacement cost of currency and consumption behavior of people. Also, it shows the negative impact on income of Non-banking finance companies (NBFCs) which make disbursement and collection of loans in cash.
Kotnal (2017) defined the scenario of equity market after midnight on November 8, 2016. The two benchmark of equity indices that S&P BSE Sensex showed downward trend with 5.9% on each trading day and the Nifty 50 also fell 6.3% up to November 22. Moreover, a rise was seen in US dollar and the dollar which is equivalents of Nifty and Sensex fell by around 8% each. Another S&P Mid-Cap and S&P Small-Cap of BSE also declined by 8.2% and 10.9% respectively during the same period.
According to Pakistan & Gulf Economist (2018) a survey was conducted in six big cities of India- Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, and New Delhi. The 5297 household responses were obtained on different aspects such as general economic situation, the employment scenario, the overall price situation, people’s expenditure and earnings. Urban consumers have negative opinions on these aspects, except positive view for signs of deterioration for spending. As the situation was expected to improve before the 2019 polls, but it was not happened because the optimistic zone related to consumer confidence was dropped since June 2013 until the new NDA government was formed. Thus, the urban people were not happy with the disruptive actions taken by Government, which decreased the GDP and Goods and Services tax (GST) created problems for them. However, economists and analysts are optimistic about these reforms.
According to ESCAP (2017) economy will grow to 7.5% in 2017-18 and the main drivers will be consumption and higher infrastructure expenditure. As reported by the regional development arm of the United Nations, India will get benefit of various reforms such as, implementation of GST, deregulation of bankruptcy law and opening of pharmaceuticals, and civil aviation sectors which will focus on long-run economy growth. The 2016 demonetisation report shed light on that its impact will be for short time. However, this recovery will decrease the work speed of cash-intensive sectors and agricultural supplies. Moreover, it was founded that economy is growing well at moderate rate as compared to its historical trend.
Economic Times (2016) reviewed that the action taken by PM may create problems in economy but it will lead to big changes to achieve digital age, as said by Reserve Bank of India (RBI). RBI governor Urjit Patel has said that domestic economy will turn good in terms of greater negotiation, efficiency gains, accountability and transparency using digital payment methods. RBI declared in their latest financial stability report that demonetisation will minimise the size of cash transactions and maximize the use of digital money. Further, these initiatives accompanied by moderations in income tax rules which will results into less dependence on cash. Also, central bank praised this action to interrupt the dark economy for generating long-term benefits by taking the various measures like the income disclosure scheme, setting up of investigation team, enacting law regarding undisclosed foreign income to improve international base.