Impact of demonetization
The Indian economy, which was dubbed as the fastest growing among major economies in the
World, while the rest of the world powers were struggling to keep up with their growth rates,
came to a sudden jolt when, on 8th November 2016, ...See more
Prime Minister Narendra Modi announced
immediate demonetization of Rs 500 and Rs 1000 notes. 86% of India currency, in value, ceased
to be legal tender as the two highest denomination notes were to be replaced with the new Rs
2000 denomination note. As per the continuously shifting government narrative, the plan was an
attempt by the government to wash the stock of counterfeit money out of the economy, which has
allegedly been used to fund criminal activities, such as terrorism and drug trafficking. In
addition, the scheme aimed to draw a large part of the black economy into the banked and taxable
part of the economy. While there was some breathing space for citizens to get their notes
exchanged or deposited in the banks, all incidents of extraordinary deposit were subject to tax
Sudden announcement left the nation in jitters and the banks and the notes printing facilities were
ill prepared to deal with the crisis due to the highly classified nature of the program. This led to a
lot of trouble for the citizens. People queued up to banks for hours in hopes of depositing their
money in exchange for the new currency. Banks too had limited amount of new currency and
hence cash remained out of circulation for few weeks. India is primarily a cash based economy.
Businesses came to a standstill. It was hard to buy items of immediate necessity on credit in
environment of such uncertainty. Major impact was felt by the poor and lower middle class, who
had no alternate means of transacting. Some families didn’t even have bank accounts.
Unorganised labour lost their jobs and farmers and fishermen had hard times selling. However,
government had provided many relaxations for special needs like medicine, fuel etc., which
prevented any devastating consequences. The problem continued for few days before the cash
slowly started to circulate in the market. It has been around eight months since demonetization
today and cash in the economy is in circulation as it was before 8th November. Loan functions of
the banks took a backseat for few months as the banking manpower was busy dealing with post
Many revolutionary changes could be immediately noticed in the nation post demonetization.
There was noticeable drop in terrorist and communist activities and the circulation of counterfeit
currency. But now it seems these activities have surfaced back because demonetization did only
reset the cash economy for one time while there are still many loopholes in our taxation, banking
and legal systems which need to be fixed for any permanent solutions. Another positive outcome
was multi-fold adoption of usage of modes of digital payment. Mobile based wallets witnessed a
crazy growth of new users. This could complement government in its agenda of encouraging
digital payments for transparency and compliance. But this too has faded down because of
continuous and further increase in levying of service charges for ATM operations and other
modes cashless transactions.
Despite the magnificence of the decision, there was no economic hurricane. Overall move has
been welcomes so far. Surprisingly, our economy grew by 7% in fourth quarter of 2016. It is
expected, and effects can already be seen, that such stringent action will lead to lesser tax evasion
and thus broaden the tax base, which will ultimately lead to reduction in taxes. Liquidity is still
low in the market as compared to pre demonetization era but there is a significant pace with
which cash is flowing back in the economy. Many parts of the informal sector which operated
informally, only due to convenience and indifference, have now been pulled into the national
economy. Market indicators like sales of vehicles, FMCG products etc. have started showing
rebound after few months. We did not see any significant dip in GDP post demonetization.
Although, one of the reasons could be the quality of Indian statistics because the informal sector,
which borne the major brunt of demonetization due to extensive cash dependency, is largely
underrepresented in the national accounts. Also, a major obstacle in analyzing the effects of
demonetization is the lack of credible or extensive data on the same as reserve bank and the
government has been since long very mum on releasing the comprehensive information.
With abundance of money with the banks, banks have reduced deposit rates. Almost entire
household savings have become a part of the national economy. Demonetization has led to
greater financial inclusion of the poor sections of the society by connecting them with the banks.
People have started worrying about tax evasion. Fall in real estate prices, if it persists, can be a
real boon for the lower and middle class. Demonetization could have potentially derailed the
process of implementation of GST, the biggest tax reform India has witnessed, but GST is in
practice without any hindrance.
While economists are still waiting to monitor the long term consequences of demonetization, the
nation seems to have recovered quite well from the short term consequences pretty quickly. It so
appears that the Indian economy is the best practice of resilience.
Added: 1 year ago