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Demonetisation was Legal !! But was it Economically Sound?

Impact of demonetisation

Overnight, come up with a new story! An unforgettable moment was created in Indian history. On 8th November 2016, Prime Minister Narendra Modi’s announcements crafted another story of reign in India. The sudden withdrawal of ₹ 500 and ₹ 1000 created a chaotic situation among a number of Indian citizens. What about your view on the impact of Demonetisation on Indian Economy? Is the intention behind the actions gained, or was the action a complete failure? 

Demonetisation is a never-ending discussion area both in Indian political and economic views. 

There are a number of agendas that have been put forward along with the demonetisation action. The prime two are the fight against black money and promulgating a cashless economy. What about the agenda, the cashless economy where only 20% of people haven’t a bank account yet? Could the government achieve this goal? Let’s go too deep…

Demonetisation in Indian history …

It is wondering that this is not the first time India has faced demonetisation. Two times India witnessed demonetisation before 2016, that was in 1946 and 1978. The most curious factor is that the intention was the same as to eradicate black money from the Indian cash lubrication. In 1978, under the Janata party, a coalition government implemented demonetisation for the banknotes ₹ 1000, ₹ 5000 and ₹ 10,000, which were reintroduced in 1954 after the first demonetisation of the same banknotes. From the three demonetisation actions, unanimously got the point that demonetising the notes is not a full-fledged solution for eradicating the black money flow.

More in the sense it is not the apt initiation for curbing counterfeit money. According to the report of the Central Board of Direct Tax, most of the black money dealing happens in the form of Benami properties; Most of the black money holders only kept less than 6% of the money as cash; points demonetise has nothing great impact on the shadow economy. 

Was 2016 demonetisation legal? 

Even the former RBI governor Raghuram Rajan objected to the demonetisation action and came against it by writing a report on it, mentioning, “At no point during my term was the RBI never asked to make a decision on demonetisation”. It is only just one month after Raghuram stepped down from the Governor in Charge, the government declared demonetisation. 

Demonetising currency was taken up by the supreme court by questioning the validity of actions. The Supreme court verdict on demonetisation agreed on the legality behind the actions. According to the verdict, the government has not broken the rules, and everything has been planned and implemented legally. The verdict claimed that RBI is an autonomous body, and no one has the power to force RBI to sign for approval. Moreover, the supreme court has also pointed out the government’s initiation to spend 6 months discussing the idea with folks at the central bank.

But on another point, Justice Nagarathna, one of the judges who handled the case, came up with a dissenting opinion. According to the judge’s point of view, the action was against Section 26(2) of the RBI rule book. The section points out that demonetisation must have been initiated by RBI and not by the central government. Even though the five major petitions filed against the exercise pointed out Article 19(6) regarding the public interest, the verdict was against the petition. Out of 5 judges, four favourably declared the upholding not for justifying the actions. 

Impact of demonetisation in 2016 in India 

One can define the cause of demonetisation action by pointing out the grail that unclosed black money, corruption, fake currency and currency storage etc., but the results in black money curbing were quite the opposite of the prediction. For instance, if 20- 30% of ₹ 15 trillion of demonetised currency is black, then it won’t come to the bank in return; people will burn it. But after the 2016 demonetisation, 99% of the money has been deposited to the bank. The GDP rate was always going down; before the demonetisation, the currency in circulation to GDP ratio was  12%, but it dropped down to 8%. It is not over after all these 7 years of demonetisation.

The cash crunch in the country and the loss of near rupees two lakh crore are the most criticised negative impact of demonetisation. As in the case of digitisation and a cashless economy, as per the report of RBI, digital payments, including inter-bank payments, especially through RTGS, NEFT, IMPS, credit cards, debit cards, UPI etc., still has the same level of growth before and after the demonetisation. Even the report put forth that the deal with RTGS and NEFT accounted for 98% but reduced after the experiment to 90%, but there is growth in the UPI payment methods from 0 % to 5%.

Government experiments that just make worthless two banknotes bring a crisis for the commoners at the very beginning of the declaration. There is only a limited time was provided for the public to exchange the notes. 

Furthermore, India was never prepared to cope with the sudden withdrawal of 86% of the cash circulation in the economic system. 

impact of demonetization on indian economy

Analysis of India Demonetisation

Black money control, to a limited extent, was possible through demonetisation. Prevention of terror financing through black money utilisation is another pro of the experiment. Moreover, Illegal actions through black money prevention, Initiation to increase revenue collection, proper tax collection etc., are positive aspects of Indian demonetisation. Real estate, which can be mostly considered a major resource of black money generation, leads to a bottom-up level. The more it can be considered as the primary step towards the cashless economy. The election works that going through nefariously using black money should be prevented through the demonetisation experiments. 

By evaluating the negative aspects of Demonetisation in 2016, there are several; the prime fact is that black money has never been stoked as in cash format, and the black money is mainly generated through corruption and tax evasion. The sudden shift and increasing huge demand for the new currency create another chaotic situation in the Indian economy. The difficulties in traders or small-scale shopkeepers etc are another result of this experiment. The establishments, mainly banks, hospitals, etc., were stressed. 

The challenges mainly rely on the digital divide in the country while looking for a cashless economy. Only 27% of the villages have banks within 5 Km; the remaining will still have to grow. More significantly, only 46% of the penetration of the banking sector in India. Logistics and cost challenges to replace the banned notes are other challenging impact of demonetisation. The huge rush and long queues are the most criticised negative impact of demonetisation. 

Indian economy, consumption and political atmosphere all the major aspects are correlated to the demonetisation, GST, and unpredictable changes in the tax regulations etc., in these years. As the constitution of demonetisation, we face the transitions in Income tax, VAT system, and GST implementation, along with changing the rule in tax registration. All the changes are essentially known factors for Indian citizens. An accounting job seeker without familiarity with GST, changing tax regulations, income tax law, VAT etc., cannot develop a stable career in the industry.

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