The following article is based on my own interpretation of the said events and/ or publicly available information. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Moumita Biswas, MBA 2016-18, Vinod Gupta School of Management, IIT Kharagpur
On 8th November 2016 India’s Prime Minister, Mr. Narendra Modi, announced that Rs 1000 and Rs 500 notes will no longer be the legal tender in most places. India’s two highest denomination currency bills accounted for up to 85% of the total money in cash. Owing to the fact that a high percentage of the transactions in the country took in the form of cash, the decision to demonetize caused immediate economic slowdown in the country. For a fast growing economy like India, having black money account for 20% of the GDP, it was an essential step for the government to purge the black economy of the country. The citizens were given until the end of the year to return any old notes. The solution to the cash shortage was to be met by the two new high denomination banknotes of Rs 500 and Rs 2000.
This step described by many as “draconian” received the wrath of the critics. The immediate effects could be seen in the form of inflation. Although the step was to purge the black money of the rich millionaires it affected the lifestyle of people from all strata. Office goers had to stand in queues from early morning to get cash for the rest of day as the exchange amounts were low. Villagers who are not so fluent with the working of banks and ATMs struggled to cope with the changes. Day to day life became a bout for some. To many it seemed like the ones hoarding the piles of illicit cash had an easier time dealing with the changes.
The decision was termed a “fiasco” by many based on the facts that there were numerous ways by which the black currency could be retained. The country saw what could be called “The intelligence of evil”. Black money was converted to gold or other forms jewelry by many, some companies started giving salaries in advance. Others salvaged their illegitimate wealth by employing people who would go and stand in queues to get their currency exchanged. Some resorted to the help of their poorer relatives. Criticisms came in other forms too. The lack of proper credit leading to the shutdown of small firms, religious and marriage ceremonies being halted combined with the very fact the new currency notes of 2000 gave an easier opportunity to pile up black money turned out demotivating. Owing to these facts demonetization shaved off some amount from the GDP growth of the country.
All decisions come with pros and cons and so too did demonetization. The aim of improving the economy by breaking down the shadow economy was partially fulfilled as a huge amount of money was deposited by people all over the country. The tax take of the country was boosted. As depositing a great amount of money would look conspicuous and attract the attention of the government a good amount of the money was not deposited back. This serves as an asset for the government. The RBI can reprint notes up to this value and transfer it to the government. Although the promotion of electronic methods of fund transfer came under scrutiny as various scams had previously occurred in the country, it made record keeping easy and the banking process more efficient allowing for better tracking and taxing proceedings.
Having achieved what demonetization achieved and having caused what turmoil it did one must look at the political nature of the mixed reactions of people. Every move made by the Prime Minister or any renowned political leader of the country receives harsh criticism at the hands of the political leaders of the other parties. A lot of criticism blown out of measure and a lot of appreciation lost in the midst of piling disapproval. A single move cannot be expected to take out all the dirt that floats around in the country. Backup measures that accounts for amount of money deposited in bank by wealthy people, amount of gold and jewelry bought etc. must be monitored. Keeping all aspects of the view in mind the ultimate price for the success or failure or the risky tactic is to be paid by Mr Narendra Modi. Only the next election can reveal the true effect of the radical move.