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Demonetization: Success or Failure?

On November 8, 2016, all existing notes of Rs.500 and Rs.1000 ceased to be legal tender. The demonetization of Rs.500 and Rs.1000 notes was heralded as a historic step to fight black money, corruption, terrorism, and counterfeit currency by the central government.

Even after two years, the intellectual, political, and social debates sparked by the ‘economical surgical strike’ hasn’t died down. No doubt, the demonetization has been the subject of a thousand memes and as many movies since.

Over the course of Indian history, there has been two instances where currency of certain denomination was banned. The first instance in January 1946, when Rs. 1,000, Rs. 5,000 and Rs. 10,000 notes were taken out of circulation. These notes were reinstated later in 1954. All three notes were banned again in 1978.

Opposition was quick to berate the prime minister for this historical move. Words like ‘monumental mismanagement’, ‘organized loot’, and ‘legalized plunder’ suddenly became part of our vocabulary. But, there are many people who maintain that the long term benefits of demonetization will easily outweigh any short-term inconvenience it may have caused.

Let us see how this catalytic decision has influenced our economy in the last two years:

Indians have opened up to the idea of digital money

mobile-banking

One of the key effects of Demonetization 2016 has been that people finally began to trust the digital payment systems because they were left with no other option. Digital transactions have grown since then. In the period of January 2016 to August 2017 NEFT transactions increased from Rs. 7086 billion to Rs.12500 billion; Debit cards transactions increased from Rs.2328 billion to Rs. 2700 billion; credit cards from Rs. 214 billion to Rs.366 billion and the IMPS transaction which was not used by the people, got a share of Rs.651 billion.

The tax revenues of the Indian Government have considerably increased

An important metric to measure the effect of demonetization on black money is tax compliance. A ministry of finance press release says that the number of returns filed as of August 2017 was up almost 25% compared to an increase of about 10% a year ago. The rising tax compliance is an indication of success in the war against corruption. People were forced to deposit their unaccounted money in banks and this data was used by the tax department to identify people with cash deposits disproportionate to their previous tax returns.

There is no doubt it was a badly implemented policy

Such a large undertaking should have had years of planning and preparation. Instead what we got was a shoddy, thrown-together-at-the-last-moment attempt which was poorly planned and badly executed, which reminded me of my final year engineering project.

The black money problem is still prevalent

Indian-Rupee

Reserve Bank of India (RBI) in its annual reports disclosed that almost 99.3% of the old currency had been returned to the banks. Before demonetization, 15.41 lakh crore of the old currency of ₹500 and ₹1000 were in circulation, and after demonetization, a total of 15.31 lakh crore has been submitted to banks, the report said. Which means that the primary objective of demonetization was not met. Which in turn means that the poor people had suffered for nothing.

Demonetization has helped combat terrorism

Though demonetization could not completely eradicate terrorism, fake notes and financing of terrorism have come under control. Banning of higher denomination currency notes by the government have dealt a body blow to funding of terror in Jammu & Kashmir as well as Left-wing extremist violence across several states. With no unaccounted cash to fund violence and protests, the country has seen a decline in terrorist activities as lead troublemakers have been forced to lie low.

 

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