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February 23, 2020
INDIA

DEMONETIZATION: GAIN OR LOSS?

Demonetization, the act of stripping a currency as legal tender, has now become a household name in India. Announced in a rather sudden manner by Prime Minister Narendra Modi, it was aimed at several problems prevalent in the country. The government launched its revolutionary policy of demonetization on November 8 2016. It rendered 1000 and 500 rupee notes valued at Rs 15.4 trillion, which accounted for 86.9% of the economy’s circulating cash, as unusable. The policy, according to the government aimed at combating India’s underground economy and to promote a cashless economy through digitization. ‘This would lead to higher GDP growth and tax revenues that could be used by the Government in India for inclusive and stronger economic growth within the norms of fiscal prudence, besides contributing to overall improvement in business environment’, RBI reports states. India’s underground economy comprise of black money, corruption money, counterfeit currency, tax evaded money and money laundered for terrorist and separatist financing activities.

Following the publication of demonetization report by Reserve Bank of India, a lot of varied interpretations have been made across the nation. The reports state that out of 15.28 lakh crore demonetized, 15.28 lakh crore (99%) has returned back to the banks. 0.0007%  and 0.002% of Rs1000 and Rs500 notes respectively were found to be fake. Q4 GDP growth accounted to a low 6.1% and Q1 of the new fiscal year accounted to be even lower at 5.7%. The reports stated that the lower growth accrues to a number of factors. First being the liquidity shock in a cash dependent economy. Decline in demand due to cash crunch, loss of production hour and loss of wage income for workers in construction and other labor intensive manufacturing sector have been considered as determinants of the shock.  Second factor is the wealth effect on the economy.

The opposition has declared demonetization as a failed attempt by the Modi government. Rahul Gandhi, the Vice President of congress has termed demonetization as ‘colossal disaster’ claiming that the campaign was run to turn the ruling party’s black money into white. Demonetization has been claimed to have eliminated over 5 million jobs, denied hundreds of thousands of small business of working capital andcrashed agriculture price leading to protest among farmers for loan waiver.

Those who see the policy as a gain consider demonetization as one of the measures among others taken by the government towards a corruption and cash free economy.  Other such measures are the drive against benami property, GST, PMJDY and JAM. 56 lakh people have filed income tax return which speaks a lot about tax compliance. Inflows of mutual funds have increased from Rs.9160 crore earlier to Rs1.7 lakh crore from between November and June. Increased value of debit and credit card transactions from 4 lakh crore to 6.6 lakh crore point fast growth towards a cashless economy.

The income tax department launched Operation Clean Money soon after the demonetization exercise, identifying 1.8 million persons for everification of large cash deposits. The second phase of the operation is a crackdown on properties whose owners have never filed income tax. 550,000 people have been identified for probe. A heavy fine equating to as much as 25% of the fair market value of the asset together with rigorous imprisonment up to seven years would be charged on the benami properties.

The Income Tax Department has questioned RJD chief Lalu Prasad Yadav’s wife and son on alleged benami assets worth Rs1000 crore. Detection of black money depends heavily on the department accruing to the amount of money returned back into the banks. The money deposited leaves a trail which can be traced by the Income tax department and if deposited money is found to be unaccountable to the person’s income then tax can be appropriated. The amount of suspicious transaction has been estimated to be around 1.6-1.7 lakh crore.

The Centre is already exploring new ways towards achieving a cashless economy. It has sought to make it mandatory for all government departments and agencies including railways and road transportation to accept digital payment. According to a senior official, the government has planned to announce some other ways to achieve the goal of a cashless economy on account of Gandhi Jayanti.

Whether demonetization is to be considered a gain or a loss can only be decided once the long run effects start showing.

 

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