It was on Nov 8, 2016 that PM Modi announced demonetisation and brought it into effect. Time flies past so quickly. It was around this time that year when PM Modi announced demonetization of Rs.500 and Rs.1000 notes. It’s been two years since. Let’s see how India has taken to this move of the government.
The government made the move with the clear objective of to wipe out illegal money from India. As expected, this move was not taken well by the opposition who criticized the move severely. Taking this to the next level, on the occasion of the second anniversary of demonetization on Thursday, Nov 08, 2018, the Congress party has made an official declaration that it will be holding pan-India protests to seek an apology from PM Modi for devastating the Indian economy through his dictatorial move of demonetization. In fact, Congress party made a suggestion asking PM Modi to address the nation at 8 pm just as he did on Nov 08, 2016 when he announced the demonetization move without giving any prior notice.
What was the immediate impact of Demonetization?
On one end, demonetization drew a lot of flak from the opposition parties. However, on the other hand, the immediate impact of the noteban exercise was that it had rendered around 86% of India’s old currency denominations of Rs. 500 and Rs. 1,000 invalid.
This unexpected move of PM Modi of withdrawing Rs. 500 and Rs. 1,000 notes from the market led to immediate liquidity shortage in the country. Need not even discuss the long queues that people had formed outside banks. Other immediate impact included fall in demand, crisis for small businesses, and decline in GDP growth by around 1.5%. Many SMEs were affected adversely by this move and reported heavy losses for elongated periods such as 6-9 months. The common man of India was immediately impacted by the move. The soaring long lines outside banks and ATMs just told the story on panic-struck India.
Gradually, the RBI had introduced a new version of Rs. 500 and Rs. 2,000 notes as the replacement for the ones withdrawn. However, the pace at which the remonetization took place was very slow, which was not helping. In fact, RBI had to get all the ATMs recalibrated since they were not manufactured to accommodate for the sizes of the new Rs. 2000 and Rs. 500 notes.
What were the remonetization initiatives taken by the government?
The government of India along with the RBI had issued around 74 notifications during the period of execution, which was 50 days. This had included several rollbacks that were done during that period. The government had allowed people to exchange Rs. 500 and Rs. 1000 notes at all banks and RBI branches until Dec 30, 2016. This started immediately after the PM had made the demonetisation announcement.
Initially, the government had allowed people to make a withdrawal of only Rs. 2,000 per day per card (via ATMs) and over-the-counter exchange of Rs 4,000 per day per account. However, the government increased the limit to Rs. 2,500 and Rs. 4,500 on Nov 13, 2016. Going forward, on Nov 18, 2016, it limited the exchange of currency over-the-counter to Rs. 2,000, and stopped this facility completely on Nov 24, 2016. Initially, the RBI had mandated people depositing more than Rs.5000 in old denominations of Rs.50 and Rs.1000 to submit a copy of their PAN card. However, it withdrew this condition on Dec 21, 2016.
How has demonetization benefited India?
Until now, we have conducted a practical on-the-ground analysis of how demonetization immediately affected your and our lives along with understanding the remonetization move of the government. Now, let us look at how the move of demonetization benefited India.
According to India’s Finance Minister, Arun Jaitley, the move of demonetisation has been successful in achieving the larger purpose for which it was made in the first place. The FM further stated that demonetization has helped India largely in moving from a tax non-compliant society to one that is tax-compliant. This was extremely necessary for the economic progress of the nation. The FM said this resulted in formalization of the Indian economy, which rendered a body blow to all the black money launderers.
According to the FM, in the two years prior to demonetization, the income tax collections grew 6.6% and 9%. However, this, the FM said, changed drastically post demonization, when the income tax collections grew 15% and 18% during the two years after the move, with the trend looking good for the third year. The FM also highlighted the fact that the number of income tax returns filed rose to 6.86 crore during 2017-18 from 3.8 crore during 2013-14. The FM stated that the IT returns in the last two years increased by 19% and 25%. Therefore, the FM added, the IT collections increased during the last two years from Rs. 6.38 lakh crore during 2013-14 to Rs. 10.02 lakh crore during 2017-18.
What did the World Bank think about the impact of demonetization on the Indian economy?
Backing up the points highlighted above by the FM and the Indian government, the World Bank stated in April this year that:
- It appears that the Indian economy has recovered from all the disruptions that were temporarily caused by the demonetisation and GST introduction moves.
- According to the World Bank, India was projected to grow 7.3% in 2018 and 7.5% in 2019. However, the World Bank has also pointed out that India was not creating enough jobs despite growth.
All these factors augur well for a strong economic future of India.