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Nov 24

One year of demonetization-The gains and the losses

Posted on November 24th, by Nisha Sharma 1 Comments

It’s been one year when the nation heard one of the biggest decisions of the government in the history of Indian economy on November 8, 2016. PM Modi announced demonetization and with that the end of big Rs. 1000 notes and the recently in circulation, but in newest forms, Rs. 500 notes. Where it greatly affected the entire nation it was promised by our very own “Modi Sarkar” that India will rise with its positive impacts in future. One year post demonetization, while we look back at the pros and cons and how it has affected the economy it is still hard to conclude if demonetization was a good step or bad. Let’s try to understand the actual impacts of demonetization on Indian economy one year post demonetization.

Was India ready for demonetization?

A country where 80-90 % of transactions are done in cash goes cashless overnight. An RTI enquiry revealed that Pradhan Mantry Jan Dhan Yojna had approximately 29 crores bank accounts till July 2014 but neither it guarantees availability of accessible branches or ATMs nor does it account for the section of people who are unable to use internet banking, mobile wallets etc. India has still not achieved 100% internet penetration, especially in the rural areas. Furthermore, citizens who may have access to internet facilities need not necessarily be competent enough to handle online transactions. The concept of Point of Scale machines and Unified Payment Interface was still at its dormant stage. Even if we stand here one year after demonetization, the said issues are still the same. In such a situation assuming that India will go cashless in a midnight was baseless.

Did digital payment work?

Straight after demonetization hit the Indian economy, digital payments including mobile wallets and mobile banking, credit/debit card transactions etc saw a sharp rise. Small vendors, started providing digital payment facility to their customers and the active cash users became flexible to accept online payments. Though lack of cash greatly affected the cash driven sectors like manufacturing and logistics, it helped streamlining the flow of cash in the market at the initial stage. But this was for a short span of time. As cash started flowing freely in the market again this year which we term as remonetization, digital payments started declining again. What has increased now is ATM withdrawals with the new currency notes hitting the market.

Did black money vanish?

It is more than evident that black money cannot be flushed out by demonetising notes. The hope was that those who have black money in the form of cash will not deposit it in the banks because they would end up creating an audit trail. This would end up destroying black money. As per reports around 99% of the invalidated currency made it back to banks. This basically meant that what was supposed to be an attack on black money became a big money laundering scheme.

In May 2012, the ministry of finance has published a White Paper on black money. As per data offered in this White Paper, it can be calculated that on an average around 4.9 percent of the black money is held in the form of cash. A bulk of the black money is held in the form of real estate and gold. Hence, claiming that demonetization was a hit on black money would not be so appropriate.

Highlights of Demonetization Impact

Positive Impact :

1. Un-precedent increase in tax compliance. New tax payers increased by 26.6% in the year 2016-17 as compared to previous year.

2. Increase in the income tax base. For the period, April to September 2017, Net Direct Tax collections represent 39.4% of the total Budget Estimates of Direct Taxes. For the same period last year, 38.65% of the Budget Estimates of direct taxes for FY 2016-17 has been achieved.

3. Stone Pelting incidents in Kashmir reduced by 75%.

4. Maze of shell companies dealing in black money and hawala transactions was uncovered. 2.24 lakh shell companies were struck off.

5. The country saw a “Less Cash Transaction” behavioral shift.

6. In Naxal-affected states, terror incidents are down 45 per cent, according to data from the South Asia Terrorism Portal or SATP.

7. Property became affordable.

Negative Impact :

1. Unorganized Sector suffered job losses. According to Center for Monitoring Indian Economy 1.5 million jobs lost in Jan-Apr 2017.

2. Comparing the escalating rise in India’s imports from China, the country’s import in first half of 2016-17 stood at Rs 1.96 lakh crore, whereas in 2017-18 it was increased to Rs 2.41 lakh crore.

3. Laborers in the textile, footwear, plastic and metal industry got adversely affected.

4. After one month of the announcement of demonetization, in 720 hours, there were 720,000 deaths, as reported by Forbes on December 8, 2016.

And now when we are struggling with GST effects, it is imperative to bring the Indian economy on track.

Nisha Sharma
Written by Nisha Sharma
Nisha is the Company Secretary of TaraSpan. She has a good hand over Indian Companies Act & Secretarial Matters and a keen learner of allied laws. She loves to upgrade herself with the changes in legal scenario.

    Pragya November 24, 2017 at 2:25 pm

    Thank you for sharing the insight abt Demonitization!! Hope will hv the positive effect of Demonitization in coming future.


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