Today marks one year of the decision of the NDA government to withdraw high-value currency notes of Rs 500 and Rs 1000 and extinguish 85% of the value of the currency in circulation. This was the third instance post Indian Independence when high value denomination notes ceased to be legal tenders. The major difference between the latest and the previous two rounds was the degree of Impact on the common man. Although it is still too early pass any judgment, one can still try to analyze the impact of the exercise.
Aims
1. Curb black money
2. Promote Digital Transactions
3. Bring down Cash in circulation
4. End Anonymity of cash owners
5. Increase the tax base
6. Eliminate counterfeit notes
Reality
Nearly 99% of banned notes back with the RBI.
There is no evidence of expansion of digitization in any major economy through demonetization.
The RBI spent Rs 7,965 crore to print new currency notes from July 2016 to June 2017, more than twice the Rs 3,421 crore in the same period the previous year. But, if the currency in circulation does decline consistently, it could offset this huge one-time expenditure and other related expenses.
The Income tax department, through its “Operation Clean Money” project launched in January, has tracked 13.33 lakh accounts with cash deposits of around Rs 2.89 lakh crore, and has received over 9 lakh responses so far.
According to the government estimates, the savings in the form of investment in equity mutual funds, life insurance premiums and other products have risen after demonetization.
According to the government, assets under management of mutual funds up 54% by June-end 2017 from March 2016.
The RBI transferred a surplus of only Rs 30,659 crore this year to the government, compared to Rs 65,876 crore last year.
The Positive Side
The tangible benefits may be in the form of less cash in the economy, higher tax compliance, and an initial spurt in digital payments which after the early momentum has seen a dip, indicating a reversal in trend with remonetization.
The switch in the financial holdings of households from cash to bank deposits.
There is significant increase in the tax base. The number of tax payers increased from 55.9 million in 2015-16 to 65 million in 2016-17. The 16% increase in 2016-17 is unprecedented. There was also an almost 27% surge in new income tax filers in 2016-17-compared to 20% in the previous year and 5% the year before that. Direct tax collection between April and July 2017 increased by more than 19% over the same period in the previous year.
The broadening of the tax base has several macroeconomic implications –
• The extra resources it generates can be spent on important public goods and welfare programmes, including those pertaining to health and education.
• By broadening the direct tax base, a successful fight against black money reduces the reliance on indirect taxes.
• It can result in authorities lowering tax rates, especially for those at the lower end of the income spectrum.
• Black money stays out of the formal financial system.
• Black money seeks alternative destinations through capital flight in the form of export under invoicing or import over invoicing.
The Negative Side
The move has proved to be a volatile, fruitless and almost fatal for most MSMEs in the country.
Demonetization brought many small industries closer to digitalization, the micro industries had to go through an unstable phase.
Big losses to the unorganized sector, farmers and traders.
The hardest-hit were those in rural areas, where access to banking and the internet are quite low (The Reserve Bank of India (RBI) 2016 report on branch authorization policy classified 93% of rural centers in the country as unbanked; Only 3% of households in underdeveloped rural access to internet in a 2016 consumer economy survey)
The liquidity squeeze led to a pile-up at wholesale markets, leading to a sharp decline in the Wholesale Price Index (WPI) of perishables.
Rural consumer sentiment too took a hit, with domestic sales of two-wheelers plunging sharply.
New project announcements declined sharply in the wake of demonetization, a Centre for Monitoring Indian Economy (CMIE) analysis showed, hurting the capex cycle.
Data from the Centre for Monitoring Indian Economy (CMIE) estimate that about 1.5 million jobs were lost during January-April 2017. Labour Bureau employment survey also reflects a sharp decline in jobs after demonetization. This lack of job opportunities is mirrored in the data sets for the government’s flagship skilling scheme, the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).
Data released by the Central Statistics Office (CSO) showed the economy grew 5.7% in April-June, the first quarter of the current fiscal year, slower than the previous quarter’s 6.1%. The first half of the last fiscal year, that is the period prior to demonetization, recorded a real growth of 7.7%.
Verdict
Government should focus on ensuring growth, job creation and investment. The urgent need is to get the private sector to start investing. It has launched a multi-pronged attack on corruption and black money. There is a concerted attempt to improve ease of doing business, and technology is being used to deliver public services without leakages.
From the analysis above, one can infer that there is no absolute “Yes” or “No” answer to the Demonetization puzzle. It was a big move and will continue to impact our lives in years to come. There is a future beyond the present.
