Demonetisation has hit the small businessmen and manufacturers very hard as has been correctly pointed out in the article. Owing to the informal and unorganised nature of their businesses which is dependent mainly on daily wage labourers, they have experienced a sharp decline in their production capacities. This has adversely impacted their demand as well as the customers who buy from such small enterprises transact mainly in cash. Moreover, the transactions involving the use of online wallets, payment banks, debit/credit cards, etc. have seen a huge spurt with big players like Paytm, Freecharge, etc. taking a huge piece of the pie (They are celebrating DIWALI now!). Owing to such consumer behaviour towards these online payment portals, even CHETTA and BISTRO have started accepting Paytm. According to me, this move will make people used to transacting online and thus will help in truly making India, the DIGITAL INDIA that our Prime Minister promises.
Both the sides of the argument were presented briefly but a question arose in my mind as to whether the reduction in GDP calculated keeping in mind the surge in digital transactions and increased transparency resulting from it which would have a definite impact on costs or whether the angle of digitisation is kept out for the moment ?
Also, what will be the impact of demonatisation be in the long run and how will it change the economy, its preferences and the mode of payment ? Will the change be permanent or a restoration of liquidity will see the end of the changes taking place in terms of transactions in particular?
The increase in GDP due to the increase in the money flowing into Jan Dhan accounts has not been accounted for. This was mostly currency that was kept away and would not have entered the system had there been no demonetization. The immediate impact of demonetization on activities of recreation in Kashmir, Telangana and other peace loving areas has also not been explored. There has been positive economic impact for the conduits and the people working in cooperative banks who have backdated cheques and demand drafts.
The long-term benefits of going cashless are undeniably great but in the short term, the troubles caused to the informal sector are bound to be very painful. It is worth keeping in mind that while the urban populace may willingly go cashless and consequently persuade the retailers, etc, to accept cashless payment, it is not so easy for these middlemen to do so because they in turn need to pay their suppliers, who may be equally reluctant to go cashless for the same practical reasons. Additionally, the wage-earners and workers engaged in customarily cash-run industries such as construction are going to suffer and forced to either enter frictional unemployment or reduce their standards of living. The move will in the long-run reduce tax evasion and ought to hamper the underground sector, but the trade-off is strong - with innocent lower-income group workers bearing the brunt in the short-run .
Demonetisation is not the most prudent and well thought out move and it seems more like a hurriedly taken step. There are various issues with this step and its timing. Firstly, it has been wrongly timed. It was done after Diwali, a time when humongous transactions had just taken place and everyone had huge amounts of cash. Moreover, this is the time when marriage season is about to come and harvesting takes place. Most small and medium establishments will lose out the business generated by marriage season, which will be a huge loss (cause not everyone is Janardhan Reddy). Farmers will suffer as demand will be less and they need cash to pay back debts and buy inputs for Rabi season.
Next, it seems the government has forgot India still leaves in her villages. The social cost of this will be huge and will reflect in economic cost too. Most of the people in villages don't have bank accounts and many villages don't even have banks. The rural economy which is almost entirely cash based will collapse. Daily wage labourers are already getting no work. Healthcare for these people and many others has dried.
Talking about digital payments, not everyone is comfortable with it. Saying, that people will go digital because of this move is true but only to a small extent. Most of the people will move back to cash soon once the coercion is over, this can be also seen in the e-commerce sector where customers are reducing with reduction in offers and freebies (Flipkart has been devalued four times, Amazon is still pumping in money and freebies and many others have closed down once angel funded freebies were gone). Another issue is that of security. At present cyber security in India is very weak and as more more and more money goes virtual risks of attacks will be high and can prove very costly. Recently, many a banks and lakhs of accounts were attacked exposing our weak e-security.
Also problematic is the introduction of Rs 2000 currency. Right now no security changes has been made in the currency hence, it is reasonable to expect that if previous notes could be faked than this could be faked too. Hence, in future we can see fake 2000 notes come and being even higher value it will be even more convenient. Also, in the future it will make corruption much more convenient while making it inconvenient for daily transactions.
All in all I would like to say, it is a very weakly thought out and implemented plan and most of the reasons given from terror fighting to killing corruption are very flimsy and real motives seem to be something else.
For a second, let's leave behind the objectives of this demonetisation policy and remember the fact that 86% of currency circulated in the economy consisted in denomination of Rs 1000 and Rs 500. And such a large percent of money present in form of higher denomination is bad for emerging markets like India, as it leads to increase in price level- i.e. inflation, erodes the purchasing power of rupee, increases interest rates affecting the investment, lack of transparency and unaccountability in government transactions which leads to corruption, boosts parallel economy which has no tax compliance, and rise in illegal and terror activities occur using counterfeit notes. So, a system to review our monetary policy in this regard was needed sooner or later.
Coming back, certainly demonetization will paralyze the funding for terror activities, especially 'state sponsored' which has the access to technology used for printing Indian currency. Nevertheless, I find few objections in the merit of this policy.
First is the sudden remonetisation of money with the introduction of even higher denomination note of Rs 2000. which has created a gap of 1:20 in the money supply. Such a wide ratio in denomination results in transactions problems, thereby lowering demand and results in downturn in economic activity. Currencies all over the world have either the ratio of 1:2 or 1:2.5 as it leads to stable money supply and matches demand for every other price level. So, the government should have instead introduced Rs 200 or Rs. 250 note as legal tender. This would have not only met the purpose of demonetisation-large circulation of higher denomination notes- but also eased out the problems faced by the people and the businesses after sudden implementation of this policy. However, if gov. came with Rs. 2000 note just to meet large demand, which it failed to, and later demonetise it, then this is a horrible idea. As rupee will then be seen as unstable currency globally and will loose investors confidence as safe commodity to invest.
Secondly, I doubt that after demonetisation Rs 400 crore of 'black money' (I don't know why it's called black: it can be dark, gloomy, or dirty?) will be brought back to the banking system, even 50% for that matter. This money is mostly used to invest in safe assets like gold or real estate sectors, where regulations are such that it can be converted to 'white money' ( ..?) and then legally circulated in the economy. Rest of all is held in stocks, offshore accounts, or even foreign government bonds. There can be no assurance either that going forward, these notes will not be counterfeited( Can you stop thy neighbour?) or corruption will end as suddenly, as the demonetisation was announced. (By the way, petrol pump wala asked me 5% to demonetise my Rs. 2000 note). To fight corruption in our bureaucratic system is rather complex. For that change to happen, the government must lower tax rates, both personal and corporate to broaden the tax base, deregulate the economy and strike off the regulations in our tax system that invites evasion, end loopholes in tax code which enable individuals to stash their unaccounted income safely. This would give higher tax revenue to the government resulting in lowering fiscal deficit, hence enabling RBI to cut interest rates further which will lead to increase in consumption, investment, and thus GDP.
Lastly, I would like to point out to those mooting blindly that demonetisation will bring the digital payment system in every sphere: cashless society is easy to monitor, where you become a public entity just like any other organisation. Cash transactions are the most secure and private means of exchange. If we go cashless, every transaction we do will be recorded by the Big Brother (However, I doubt that day will come soon as 90% of exchange is done in cash). I don't understand the point why people who earn legally should be forced to give details to the gov. of what they do with their income, as happened in this case of demonetisation. Is it just to punish black money hoarders on behalf of ordinary people? Let me recall the maxim, "for the law holds it better that ten guilty persons escape, that one innocent party suffer." If that's the case, then welcome to the world where you are tied by the government with liberty at the back of your hand, which will have absolute control over your 'spending habits' and then tax you more!
The Prime Minister exhorted the people to bear the sufferings and grant him 50 days to weed out all the Black Money in the Indian economy, terming it as short term pain for long term gain. However, the government must remember the words of John M. Keynes, who said that “in the long run, we are all dead.”
The black economy, which the government wants to curb, prospers due to lax government regulations and high tax rates. It is also pertinent to point out that black money is accumulated over a period of time through illegal activities like bribery, etc. and it is mostly stored in the form of assets like real estate, foreign currency cash, etc. The demonetisation drive will largely be ineffective in this regard as unaccounted wealth in the form of cash is the least preferred instrument for storing wealth.
Arguments are being put forward pointing out that terrorist activities and stone-pelting have been stymied in Jammu and Kashmir and other parts of India. This may be true for the short term, as scarcity of cash must be making it difficult to hire the stone-pelters. However, in the long run when the cash flow normalises, such delinquent activities may increase. Laxity in law enforcement cannot be substituted for distorted concoctions.
The whole drive prima facie seems ill planned for an ill prepared banking system. The RBI has frequently changed the rules with regards to withdrawing and exchanging of old currency notes. India must be the only country which is denying people to withdraw their own money from banks, a clear violation of right to property. Also, as per the RBI guidelines, the co-operative banks, which form the backbone of rural economy in states like Maharashtra, have been debarred from accepting deposits and exchanging currency notes. Not only farmers but also the local self-help groups run by women have been greatly affected. This has crippled the rural economy.
90% of people work in unorganized sector which include daily wage labourers involved in sectors like agriculture, construction, etc. They depend completely on cash, transact in cash and also store in cash. The demonetisation drive has harshly reduced their limited purchasing capacity. Also, most of these people don’t have bank accounts, debit cards or even smartphones to PayTM. These people, being poor and illiterate, are most vulnerable to exploitation at the hands of their employers who pay them in the banned currency notes or coerce them to deposit their (employers) unaccounted wealth into their Jan Dhan accounts.
There are many encouraging effects of demonetisation like lowering in the prices of houses due to decreased demand, more liquidity in the banking sector which may see lower equated EMI, etc. However, these encouraging effects can’t be substituted for the people who have lost their lives in this rigorous drive. The Revenue Secretary to the government of India recently said that all the demonetised money is expected to return to the banks. This has effectively undermined the hull-bulla about Black money and also diminishes prospects of windfall gain for the government. On the hindsight, it will be the government who will bear the cost of about 1.50 lakh crore of the whole demonetisation exercise. It seems very unlikely that the government may recover the whole cost of it making the policy inefficient.
The government, in order to track black money, could have empowered its enforcement agencies like CBDT, CBI, etc. to track down the benami and hawala transactions and also to track down black money stashed in foreign banks. This demonetisation drive will have short terms as well as long term economic consequences as it has severely decreased people’s confidence in India’s banking system.
I would like to share the impact of demonetization on my family's business. A guest house is owned by my uncle in my village which is also a tourist destination. Almost everyone is preferring normal(non-ac) rooms to deluxe(ac) rooms nowadays, apparently to save money. In another prasad shop, the quantity and quality of sweets demanded has decreased substantially. Altogether there is a huge decline in daily sales primarily because people in village can not use online ways of transaction like Paytm or FreeCharge so all the transactions are in cash and also because people are postponing their tours as it is definitely not something which is necessary for living and one can save considerable amount of cash by postponing it. So hopefully most of the sales which are lost will be recovered once there is enough cash in circulation because of the nature of the industry.
My parents own a stationary and mobile shop in the Jaipur city. The sales have declined by a huge amount and these sales lost are mostly non-recoverable After few days of this announcement they and many other retailers in our neighborhood just like chetta and bistro have adopted e-payment methods but the problem is that not everyone is comfortable in using these apps for instance manual laborers so they are suffering alot.
Undoubtedly this policy has some potential positive outcomes but immediate dent in GDP can not be neglected and I hope that government has carefully done the cost-benefit analysis before implementing this. So far as i am concerned, I think the cost of this policy is way higher than the benefit.
The aim of the policy is two fold- [a] To exterminate fake currency out of circulation [b] To prevent further corruption. However the policy was clearly put into action without clearly planning its implementation. With regards to it's first aim it meets the short term goals in the sense that it makes the old tender redundant and puts them out of circulation. However with no significant additional security features, it is bound to be imitated much like the old notes. Furthermore this is not cost efficient in the long term. Another issue is the introduction of Rs.2000 note, which would induce more corruption as cash payments still constitute the bulk of payments in real estate and jewel business. These sectors are identified as the major areas where bulk of unreported income is flowing to save from income tax dept's scanner. This new note further facilitates such high value transactions. Also 'black' money is not kept in cash form generally and is stored in high value properties such as gold. Instead of Rs.2000, a new note for Rs.200-250 would have been a much better idea. Therefore the ease of counterfeiting along with its suitability for use in high value transactions promotes corruption rather than it's inhibition. Moreover recent seizures had a sizable amount in this same currency questioning how when people don't have access to cash and with daily withdrawal limits imposed, how did certain individuals had access to this amount of currency.
Moreover the associated costs are much more higher than the benefits especially the poor who have no formal access to financial services. While the govts. claims to have provided the facilities through financial inclusive policy, however the per cent of accounts which are active needs to be checked. Moreover with majority of poor keeping cash as the basis of their saving especially inter-state and migrants from neighboring countries. Moreover the case made for cashless economy is obnoxiously false. Digital literacy more with respect to digital currencies is almost negligible amongst the majority, hence question the legitimacy of such claims. Also digital payments needs a lot of infrastructure and other related services. Moreover these payments can be tracked, which further raises legal issues regarding privacy. Moreover in rural areas, dearth of cash has led to promises made in kind or in deferred promises which further causes problems. With majority of payments done in cash, this policy has truly has put poor Indians in middle of nowhere.
In the short term, the informal sector of the economy has taken a strong hit and keeping in mind a large portion of the Indian workforce working in the informal sector it might have a huge impact on the economy. The daily wage earners are the hardest hit by this policy as they would find it difficult to get their daily wages due to this liquidity crunch. Even though people might be willing to go cashless and prefer paying using the online means, it would be difficult for the intermediary to coordinate with the end supplier as the supplier might insist on a cash payment. For example, in this year's StrawberryFields the organisers demanded a cash payment for their services amounting in lakhs which turned out to be an inconvenience to some extent for the Event Management Committee. Also, coming to this whole going digital thing, it might not be feasible for everyone to just go digital specially in case of a country like India where a large percentage of the population lives in villages and many do not even have an access to internet, a pre-requisite for such transactions. Also, it might not be feasible for some of the small shopkeepers to set up these digital payment equipments or it might not be feasible to accept payments which are to be regularly used for further daily purchases to be accepted through these online gateways. Also there is always a time lag between a shift from current system to an online one as people's preferences are not perfectly elastic, and that has to be taken into consideration as well. This will though benefit the online payment gateways like paytm. Yet I personally believe that going online was not the primary concern of the implementation of this policy, and rather it is a coincidental consequence of the same. Another thing is that the introduction of the Rs.2000 note in place of Rs.500 and Rs.1000 notes was also not a well thought of move as this has led to a kind of liquidity crunch as people are not spending in order to hoard the Rs.100 notes with themselves as that is comparatively easier to exchange. A better move in this case would have been the introduction of the Rs.500 note first. Now, coming to the more important objective of this scheme that is to curb the black money and to reduce tax evasion, which the government seeks to realise in the long term. But, the question is whether the government will be able to realize this objective? One of the things to be noted is that it might not be as effective a measure as it looks to be because one of the important things to consider is that people generally do not tend to hoard large quantities of money in form of cash reserves, rather they prefer to hoard it in form of assets such as gold or property and this money would still not be recovered by such measure. Also, another factor is that the government has kept the window open for disclosure of such undisclosed income but the tax rate charged on such income is quite high which can be a disincentive for the people to disclose their incomes. To some extent though it might be effective and might also lead to a fall in prices of property, etc. but the overall effect will be below expectations. Also, another aspect of this demonetisation, as brought out by one of the seniors, in terms of legal matters is related to the use of marked notes as evidence wherein a trap is laid for the accused wherein the authorities mark the notes with phenolphthalein and give it to accused as bribe. The authorities then raid the person concerned and wash his hands in NaCl solution and the colouration of solution to pink determines that the accused has taken the bribe. These notes are submitted as evidence before the courts. But now as a result of demonetisation, the parties who supplied the authorities with the notes are coming and requesting the courts to return the money so that they can exchange it before the RBI exchange deadline gets over. This would lead to a destruction of a crucial piece of evidence. Thus, demonetisation poses a lot of problems and the benefits do not look as bright.
12 comments:
Demonetisation has hit the small businessmen and manufacturers very hard as has been correctly pointed out in the article. Owing to the informal and unorganised nature of their businesses which is dependent mainly on daily wage labourers, they have experienced a sharp decline in their production capacities. This has adversely impacted their demand as well as the customers who buy from such small enterprises transact mainly in cash.
Moreover, the transactions involving the use of online wallets, payment banks, debit/credit cards, etc. have seen a huge spurt with big players like Paytm, Freecharge, etc. taking a huge piece of the pie (They are celebrating DIWALI now!). Owing to such consumer behaviour towards these online payment portals, even CHETTA and BISTRO have started accepting Paytm.
According to me, this move will make people used to transacting online and thus will help in truly making India, the DIGITAL INDIA that our Prime Minister promises.
Both the sides of the argument were presented briefly but a question arose in my mind as to whether the reduction in GDP calculated keeping in mind the surge in digital transactions and increased transparency resulting from it which would have a definite impact on costs or whether the angle of digitisation is kept out for the moment ?
Also, what will be the impact of demonatisation be in the long run and how will it change the economy, its preferences and the mode of payment ? Will the change be permanent or a restoration of liquidity will see the end of the changes taking place in terms of transactions in particular?
The increase in GDP due to the increase in the money flowing into Jan Dhan accounts has not been accounted for. This was mostly currency that was kept away and would not have entered the system had there been no demonetization. The immediate impact of demonetization on activities of recreation in Kashmir, Telangana and other peace loving areas has also not been explored. There has been positive economic impact for the conduits and the people working in cooperative banks who have backdated cheques and demand drafts.
The long-term benefits of going cashless are undeniably great but in the short term, the troubles caused to the informal sector are bound to be very painful.
It is worth keeping in mind that while the urban populace may willingly go cashless and consequently persuade the retailers, etc, to accept cashless payment, it is not so easy for these middlemen to do so because they in turn need to pay their suppliers, who may be equally reluctant to go cashless for the same practical reasons.
Additionally, the wage-earners and workers engaged in customarily cash-run industries such as construction are going to suffer and forced to either enter frictional unemployment or reduce their standards of living.
The move will in the long-run reduce tax evasion and ought to hamper the underground sector, but the trade-off is strong - with innocent lower-income group workers bearing the brunt in the short-run .
- Aman Vasavada
Demonetisation is not the most prudent and well thought out move and it seems more like a hurriedly taken step. There are various issues with this step and its timing.
Firstly, it has been wrongly timed. It was done after Diwali, a time when humongous transactions had just taken place and everyone had huge amounts of cash. Moreover, this is the time when marriage season is about to come and harvesting takes place. Most small and medium establishments will lose out the business generated by marriage season, which will be a huge loss (cause not everyone is Janardhan Reddy). Farmers will suffer as demand will be less and they need cash to pay back debts and buy inputs for Rabi season.
Next, it seems the government has forgot India still leaves in her villages. The social cost of this will be huge and will reflect in economic cost too. Most of the people in villages don't have bank accounts and many villages don't even have banks. The rural economy which is almost entirely cash based will collapse. Daily wage labourers are already getting no work. Healthcare for these people and many others has dried.
Talking about digital payments, not everyone is comfortable with it. Saying, that people will go digital because of this move is true but only to a small extent. Most of the people will move back to cash soon once the coercion is over, this can be also seen in the e-commerce sector where customers are reducing with reduction in offers and freebies (Flipkart has been devalued four times, Amazon is still pumping in money and freebies and many others have closed down once angel funded freebies were gone). Another issue is that of security. At present cyber security in India is very weak and as more more and more money goes virtual risks of attacks will be high and can prove very costly. Recently, many a banks and lakhs of accounts were attacked exposing our weak e-security.
Also problematic is the introduction of Rs 2000 currency. Right now no security changes has been made in the currency hence, it is reasonable to expect that if previous notes could be faked than this could be faked too. Hence, in future we can see fake 2000 notes come and being even higher value it will be even more convenient. Also, in the future it will make corruption much more convenient while making it inconvenient for daily transactions.
All in all I would like to say, it is a very weakly thought out and implemented plan and most of the reasons given from terror fighting to killing corruption are very flimsy and real motives seem to be something else.
- Binit Agrawal
For a second, let's leave behind the objectives of this demonetisation policy and remember the fact that 86% of currency circulated in the economy consisted in denomination of Rs 1000 and Rs 500. And such a large percent of money present in form of higher denomination is bad for emerging markets like India, as it leads to increase in price level- i.e. inflation, erodes the purchasing power of rupee, increases interest rates affecting the investment, lack of transparency and unaccountability in government transactions which leads to corruption, boosts parallel economy which has no tax compliance, and rise in illegal and terror activities occur using counterfeit notes. So, a system to review our monetary policy in this regard was needed sooner or later.
Coming back, certainly demonetization will paralyze the funding for terror activities, especially 'state sponsored' which has the access to technology used for printing Indian currency. Nevertheless, I find few objections in the merit of this policy.
First is the sudden remonetisation of money with the introduction of even higher denomination note of Rs 2000. which has created a gap of 1:20 in the money supply. Such a wide ratio in denomination results in transactions problems, thereby lowering demand and results in downturn in economic activity. Currencies all over the world have either the ratio of 1:2 or 1:2.5 as it leads to stable money supply and matches demand for every other price level. So, the government should have instead introduced Rs 200 or Rs. 250 note as legal tender. This would have not only met the purpose of demonetisation-large circulation of higher denomination notes- but also eased out the problems faced by the people and the businesses after sudden implementation of this policy. However, if gov. came with Rs. 2000 note just to meet large demand, which it failed to, and later demonetise it, then this is a horrible idea. As rupee will then be seen as unstable currency globally and will loose investors confidence as safe commodity to invest.
2/2-
Secondly, I doubt that after demonetisation Rs 400 crore of 'black money' (I don't know why it's called black: it can be dark, gloomy, or dirty?) will be brought back to the banking system, even 50% for that matter. This money is mostly used to invest in safe assets like gold or real estate sectors, where regulations are such that it can be converted to 'white money' ( ..?) and then legally circulated in the economy. Rest of all is held in stocks, offshore accounts, or even foreign government bonds. There can be no assurance either that going forward, these notes will not be counterfeited( Can you stop thy neighbour?) or corruption will end as suddenly, as the demonetisation was announced. (By the way, petrol pump wala asked me 5% to demonetise my Rs. 2000 note). To fight corruption in our bureaucratic system is rather complex. For that change to happen, the government must lower tax rates, both personal and corporate to broaden the tax base, deregulate the economy and strike off the regulations in our tax system that invites evasion, end loopholes in tax code which enable individuals to stash their unaccounted income safely. This would give higher tax revenue to the government resulting in lowering fiscal deficit, hence enabling RBI to cut interest rates further which will lead to increase in consumption, investment, and thus GDP.
Lastly, I would like to point out to those mooting blindly that demonetisation will bring the digital payment system in every sphere: cashless society is easy to monitor, where you become a public entity just like any other organisation. Cash transactions are the most secure and private means of exchange. If we go cashless, every transaction we do will be recorded by the Big Brother (However, I doubt that day will come soon as 90% of exchange is done in cash). I don't understand the point why people who earn legally should be forced to give details to the gov. of what they do with their income, as happened in this case of demonetisation. Is it just to punish black money hoarders on behalf of ordinary people? Let me recall the maxim, "for the law holds it better that ten guilty persons escape, that one innocent party suffer." If that's the case, then welcome to the world where you are tied by the government with liberty at the back of your hand, which will have absolute control over your 'spending habits' and then tax you more!
The Prime Minister exhorted the people to bear the sufferings and grant him 50 days to weed out all the Black Money in the Indian economy, terming it as short term pain for long term gain. However, the government must remember the words of John M. Keynes, who said that “in the long run, we are all dead.”
The black economy, which the government wants to curb, prospers due to lax government regulations and high tax rates. It is also pertinent to point out that black money is accumulated over a period of time through illegal activities like bribery, etc. and it is mostly stored in the form of assets like real estate, foreign currency cash, etc. The demonetisation drive will largely be ineffective in this regard as unaccounted wealth in the form of cash is the least preferred instrument for storing wealth.
Arguments are being put forward pointing out that terrorist activities and stone-pelting have been stymied in Jammu and Kashmir and other parts of India. This may be true for the short term, as scarcity of cash must be making it difficult to hire the stone-pelters. However, in the long run when the cash flow normalises, such delinquent activities may increase. Laxity in law enforcement cannot be substituted for distorted concoctions.
The whole drive prima facie seems ill planned for an ill prepared banking system. The RBI has frequently changed the rules with regards to withdrawing and exchanging of old currency notes. India must be the only country which is denying people to withdraw their own money from banks, a clear violation of right to property. Also, as per the RBI guidelines, the co-operative banks, which form the backbone of rural economy in states like Maharashtra, have been debarred from accepting deposits and exchanging currency notes. Not only farmers but also the local self-help groups run by women have been greatly affected. This has crippled the rural economy.
90% of people work in unorganized sector which include daily wage labourers involved in sectors like agriculture, construction, etc. They depend completely on cash, transact in cash and also store in cash. The demonetisation drive has harshly reduced their limited purchasing capacity. Also, most of these people don’t have bank accounts, debit cards or even smartphones to PayTM. These people, being poor and illiterate, are most vulnerable to exploitation at the hands of their employers who pay them in the banned currency notes or coerce them to deposit their (employers) unaccounted wealth into their Jan Dhan accounts.
There are many encouraging effects of demonetisation like lowering in the prices of houses due to decreased demand, more liquidity in the banking sector which may see lower equated EMI, etc. However, these encouraging effects can’t be substituted for the people who have lost their lives in this rigorous drive. The Revenue Secretary to the government of India recently said that all the demonetised money is expected to return to the banks. This has effectively undermined the hull-bulla about Black money and also diminishes prospects of windfall gain for the government. On the hindsight, it will be the government who will bear the cost of about 1.50 lakh crore of the whole demonetisation exercise. It seems very unlikely that the government may recover the whole cost of it making the policy inefficient.
The government, in order to track black money, could have empowered its enforcement agencies like CBDT, CBI, etc. to track down the benami and hawala transactions and also to track down black money stashed in foreign banks. This demonetisation drive will have short terms as well as long term economic consequences as it has severely decreased people’s confidence in India’s banking system.
I would like to share the impact of demonetization on my family's business. A guest house is owned by my uncle in my village which is also a tourist destination. Almost everyone is preferring normal(non-ac) rooms to deluxe(ac) rooms nowadays, apparently to save money. In another prasad shop, the quantity and quality of sweets demanded has decreased substantially. Altogether there is a huge decline in daily sales primarily because people in village can not use online ways of transaction like Paytm or FreeCharge so all the transactions are in cash and also because people are postponing their tours as it is definitely not something which is necessary for living and one can save considerable amount of cash by postponing it. So hopefully most of the sales which are lost will be recovered once there is enough cash in circulation because of the nature of the industry.
My parents own a stationary and mobile shop in the Jaipur city. The sales have declined by a huge amount and these sales lost are mostly non-recoverable After few days of this announcement they and many other retailers in our neighborhood just like chetta and bistro have adopted e-payment methods but the problem is that not everyone is comfortable in using these apps for instance manual laborers so they are suffering alot.
Undoubtedly this policy has some potential positive outcomes but immediate dent in GDP can not be neglected and I hope that government has carefully done the cost-benefit analysis before implementing this. So far as i am concerned, I think the cost of this policy is way higher than the benefit.
-Saloni Goyal
The aim of the policy is two fold-
[a] To exterminate fake currency out of circulation
[b] To prevent further corruption.
However the policy was clearly put into action without clearly planning its implementation.
With regards to it's first aim it meets the short term goals in the sense that it makes the old tender redundant and puts them out of circulation. However with no significant additional security features, it is bound to be imitated much like the old notes. Furthermore this is not cost efficient in the long term.
Another issue is the introduction of Rs.2000 note, which would induce more corruption as cash payments still constitute the bulk of payments in real estate and jewel business. These sectors are identified as the major areas where bulk of unreported income is flowing to save from income tax dept's scanner. This new note further facilitates such high value transactions. Also 'black' money is not kept in cash form generally and is stored in high value properties such as gold. Instead of Rs.2000, a new note for Rs.200-250 would have been a much better idea. Therefore the ease of counterfeiting along with its suitability for use in high value transactions promotes corruption rather than it's inhibition. Moreover recent seizures had a sizable amount in this same currency questioning how when people don't have access to cash and with daily withdrawal limits imposed, how did certain individuals had access to this amount of currency.
Moreover the associated costs are much more higher than the benefits especially the poor who have no formal access to financial services. While the govts. claims to have provided the facilities through financial inclusive policy, however the per cent of accounts which are active needs to be checked. Moreover with majority of poor keeping cash as the basis of their saving especially inter-state and migrants from neighboring countries. Moreover the case made for cashless economy is obnoxiously false. Digital literacy more with respect to digital currencies is almost negligible amongst the majority, hence question the legitimacy of such claims. Also digital payments needs a lot of infrastructure and other related services. Moreover these payments can be tracked, which further raises legal issues regarding privacy. Moreover in rural areas, dearth of cash has led to promises made in kind or in deferred promises which further causes problems. With majority of payments done in cash, this policy has truly has put poor Indians in middle of nowhere.
In the short term, the informal sector of the economy has taken a strong hit and keeping in mind a large portion of the Indian workforce working in the informal sector it might have a huge impact on the economy. The daily wage earners are the hardest hit by this policy as they would find it difficult to get their daily wages due to this liquidity crunch.
Even though people might be willing to go cashless and prefer paying using the online means, it would be difficult for the intermediary to coordinate with the end supplier as the supplier might insist on a cash payment. For example, in this year's StrawberryFields the organisers demanded a cash payment for their services amounting in lakhs which turned out to be an inconvenience to some extent for the Event Management Committee.
Also, coming to this whole going digital thing, it might not be feasible for everyone to just go digital specially in case of a country like India where a large percentage of the population lives in villages and many do not even have an access to internet, a pre-requisite for such transactions. Also, it might not be feasible for some of the small shopkeepers to set up these digital payment equipments or it might not be feasible to accept payments which are to be regularly used for further daily purchases to be accepted through these online gateways. Also there is always a time lag between a shift from current system to an online one as people's preferences are not perfectly elastic, and that has to be taken into consideration as well. This will though benefit the online payment gateways like paytm. Yet I personally believe that going online was not the primary concern of the implementation of this policy, and rather it is a coincidental consequence of the same.
Another thing is that the introduction of the Rs.2000 note in place of Rs.500 and Rs.1000 notes was also not a well thought of move as this has led to a kind of liquidity crunch as people are not spending in order to hoard the Rs.100 notes with themselves as that is comparatively easier to exchange. A better move in this case would have been the introduction of the Rs.500 note first.
Now, coming to the more important objective of this scheme that is to curb the black money and to reduce tax evasion, which the government seeks to realise in the long term. But, the question is whether the government will be able to realize this objective? One of the things to be noted is that it might not be as effective a measure as it looks to be because one of the important things to consider is that people generally do not tend to hoard large quantities of money in form of cash reserves, rather they prefer to hoard it in form of assets such as gold or property and this money would still not be recovered by such measure. Also, another factor is that the government has kept the window open for disclosure of such undisclosed income but the tax rate charged on such income is quite high which can be a disincentive for the people to disclose their incomes. To some extent though it might be effective and might also lead to a fall in prices of property, etc. but the overall effect will be below expectations.
Also, another aspect of this demonetisation, as brought out by one of the seniors, in terms of legal matters is related to the use of marked notes as evidence wherein a trap is laid for the accused wherein the authorities mark the notes with phenolphthalein and give it to accused as bribe. The authorities then raid the person concerned and wash his hands in NaCl solution and the colouration of solution to pink determines that the accused has taken the bribe. These notes are submitted as evidence before the courts. But now as a result of demonetisation, the parties who supplied the authorities with the notes are coming and requesting the courts to return the money so that they can exchange it before the RBI exchange deadline gets over. This would lead to a destruction of a crucial piece of evidence.
Thus, demonetisation poses a lot of problems and the benefits do not look as bright.
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