3 Years Of Demonetization: Was It Really A Political Stunt?

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It’s been 3 years to the day when at the stroke of midnight, the nation lost 86% of its monetary base as the PM announced the rolling back of the INR 500 & INR 1000 series. Aimed to destroy the base of the parallel economy operating in India that gives way to corruption, drug trafficking & terror financing via counterfeit currency along with aiming towards the digitization of the Indian economy.

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The issue that no one dared to raise due to its political sensitivity & the political trap it could create, instead of playing neutral the ruling government in its 2nd year tackled the situation head-on through its financial surgical strike.   Demonetisation is found to be a major success in other countries as Zimbabwe & Australia, However, in the Indian context, it is said that that the move was hasty and failed to prepare the masses with the backup of currency in smaller denominations for the day to day operations, harming the unorganized sector the most.

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The ruling government faced the issue with implementing demonetization that taking stepwise measures would have provided the culprits to take advantage of the loopholes in the law and the system; which is overall backed by rival countries through the thin borders of China, Pakistan, Nepal & Bangladesh making the Indian economy weaker.    The decision was termed as “disastrous” but meant to be beneficial in the long run towards “cashless society” instead turned out to be a society with “less cash”. The cash crunch proved to be harmful to the small farmers, wage laborers, merchants as many had no linked bank accounts and were short on cash as wages were not credited.

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Most of the black money in India is in the form of land holdings, gold & in overseas banks as the Swiss bank with only 4% of the money in liquid form.    With the already looming global slowdown, minimal private investment & industrial growth taking place, demonetization hit the growth hard, lowering the inflation.     

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The move was beneficial in regard to the deposit of cash as it increased from 83% in 2016 to 96% in September 2019 as per the RBI report. Also, it made way for breaking the bubble of fake liquidity showing up due to the flow of counterfeit currency.

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The aim of having a digitized economy was however realized to a much much greater extent with the adoption of apps like BHIM UPI, Bharat Pay, Paytm & Google Pay, Mobile banking & NEFT, especially in the Tier II & Tier III cities. Overall digital transactions are reported to grow by 440%.   There is an improvement in tax compliance with a number of people opting for banking transactions and coming under JAM trinity, the tax base is reported to be widened with the number jumping to 1.07 crore in Financial Year ‘18 from 86.86 lakh in Financial Year 2016-2017. 

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Since December 2016, over 1,30,000 crore has been recovered & properties worth INR 50,000 crore have been seized. Nearly 3,38,000 shell companies have been identified & deregistered.   Real Estate was hit badly due to demonetization along with the implementation of the RERA Act which led to the shrinking of the number of developers by 50% in all the major cities like Pune, Thane, Kolkata, Bengaluru, Delhi & Mumbai, the sector has still not been able to emerge from the slowdown.

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The resultant slowdown has led to the loss of jobs in the unorganized sector with a lack of household consumption pushing the economy in slumps, with relief reported for only a brief period in 2017-18.    The masses already concerned over rising unemployment were hit by a 3% reduction in jobs especially in rural areas during the period of 2016-18. Cash transactions are still crucial in the Indian economy, thus cash crunch leads to a rise in the price of the input factors especially in the agricultural market.    In order to hit the menace of counterfeit currency & black money, not a major impact has been reported with doubling of fake notes among the new designs of INR 500 with an increase in 121% & those of INR 2000 increased by 21.9%.

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The journey has seen more cons than the pros, but it is still a long way to go with cash still being the king as currency with the public is 133%. The step has surely hit the menace of black money & has indeed hit the target of digitization. But given that households engage in low valued transactions more, in order to revive the economy, it makes sense to increase the volume of lower dominations while easing out on the policy front to boost investment.    We can say it was mostly to benefit the masses & not just a major political move as reported by a large number of people.
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