On November 8, 2016, exactly one year ago, the Government of India decided to demonetise the high value currency notes –of Rs 500 and Rs 1000. These notes ceased to be legal tender from the Midnight of 8th of November 2016. The public were given up to 31 December 2016, to exchange the notes held by them. The currency demonetised valued at Rs 15.4 trillion, constituted 86.9 percent of the total value in circulation. The demonetisation move was aimed at eliminating corruption, black money, counterfeit currency and terror funding, Prime Minister said in its address to the nation on the eve of November 8, 2016.The government also decided to introduce Rs2000 note with new security features and colour. Exchange of notes was initially allowed up to Rs 4,000 while cash withdrawal at ATMs was capped at Rs 2,000 per card per day and withdrawal at banks was allowed with a limit of Rs 10,000 per day and Rs 20,000 per week. Immediate impact of this move was that there were long queues outside the ATMs and people rushed to banks to get their old currency exchanged. In short, there was complete mayhem at the banks and ATMs for few weeks.
Indian Economy: Cash intensive and highly unorganised.
Indian economy is traditionally a cash intensive and unorganised economy. About 78 per cent of all consumer payments in India are made in cash. The unorganised sector accounts for about 45 per cent of GVA and 82 per cent of total employment. It was, therefore, obvious that currency squeeze during the demonetisation period would have had some adverse impact on economic activity, although such impact was expected to be short term pain.
One year on.....
Are corruption, black money, counterfeit currency and terror funding eliminated? Has our economy become cash less, fully digitalised or economy less dependent on cash. Recently, RBI reported that by June 2017 the 99 % of the scrapped notes are back into the system. We need to analyse whether the desired objectives were achieved or not. Let’s take the corruption first, has corruption reduced! We just need to have an honest look around and you will get the answer. We still get news of counterfeit currency seized by the police and terrorism is still a big concern for not only India but for the whole world.
Let’s now analyse the economic indicators. The organised sector on the whole remained resilient. However, some manufacturing and services segments were adversely affected. The recovery in organised sector still seems a distant dream. The unorganised sector was the worst hit. People in unorganised sector tried their best to cope with demonetisation but after the few weeks, they gave away. Impact of which is reflected in the latest GDP figures.
MSMEs which provides employment opportunities to over 80 million people, contributes about 8 per cent to GDP and constitute 45% to the total manufacturing output and 40 per cent to the exports from the country. The 94 per cent of MSMEs are established in the informal or unorganized sector, heterogeneous in terms of the size of the enterprises, variety of products and services produced and the levels of technology employed. These MSMEs felt helpless and started cutting their production process and releasing the daily wages and contractual workers which has impacted their turn around significantly. They have still long way to go before they are on the way to recovery. All the cash driven sector be it agriculture, construction textile, leather etc are facing the same fate.
Are we on the way to Cashless economy?
As per the latest data available, cash still rules the Indian Economy; we Indian just love the cash.No doubt, the digital transection spiked up in the initial months of demonetisation. However, RBI data reflects that digitalisation of economy is still far from achieved. The overall electronic payments stood at Rs 200 trillion in August 2017 — an increase of 5 per cent over August 2016.(Which is still 0.7 per cent lower than at the peak of demonetisation in December 2016,Rs 201 trillion). The report also says that usage of wallets, non-UPI banking apps and Aadhaar-enabled payments has been slow to catch on, while that of debit cards has fallen. Mobile banking—major driving force in digitalisation of economy-- saw the fall of 30 % since August 2016. By August 2017 the debit card payments also recorded fall of 2.2 per cent to Rs 2,706 billion from Rs 2,767 billion in October 2016. The report also reflects that people are swiping their cards more often for smaller amounts at ATMs.
Some questions still remains unanswered.
The anniversary of notebandi --in cash intensive and informal economy-- provides a vantage point to analyze this bold step. The step was not only based on economic prudence but also had some political prudence too. The fact that currency issuer RBI had no role in the decision, as testified by the former Governor Raghu Ram Rajan. It would be difficult to make a cost benefit analysis of this move. Was this exercise worth, in view of the financial and economic cost associated --leave alone cost of human lives (In India, we don’t really care for human life. Do we?Visit any government hospital you will understand what I mean)? There is no doubt that we do not have any comprehensive study on the social impact of demonetisation- we may sadly never have one.Could it have been planned better? How can any policy decision be more important than the human life? What forced the Government to change the rules again and again? These question needs some honest examination.The cash less economy also came in as another objective of this move, which was nowhere initially. The argument given by the economist in favour of demonetisation is that its benefit will be reaped in the long run. We can keep arguing about whether demonetisation was good or bad, one thing is clear demonetisation certainly did not turned out to be a economic masterstroke as it was portrayed initially. Though, the political results may say otherwise.
