The day the earth stood still – one year since demonetization.
On the 8th of November 2016, at 8 PM, the Prime Minister of India, Mr. Narendra Modi made an announcement on television which had a far-reaching impact on the lives of a billion people. Narendra Modi announced that from midnight, the same day, two currency notes, namely the 500 and the 1000 rupee notes, comprising 86 % of the total currency in circulation amounting to a staggering 14.83 trillion rupees or roughly 220 billion USD would cease to be legal tender and would be replaced by a new 500 and a new 2000 rupee note.
The purpose of demonetization, he announced were many:
- To squeeze out forged currency circulating in the country, pumped in by an enemy country, and one purpose of the action was to fight terrorism funded by counterfeit notes.
- To bring into circulation, unaccounted cash, lying in people’s homes by having these deposited in the banks, for which people had up till the 30th of December 2016 to do the needful.
- To catch hoarders and tax avoiders and ensure a larger tax collection post declaration of unaccounted holdings.
- To curtail black money and reduce corruption.
As can be imagined, and much has been written on this in the global media and enough coverage was given to the pain that the people of India went through post demonetization with economists referring to the action as despotic and that this action would do more damage than good and the costs far outweighed the gains. Media at that time felt that the demonetization was badly planned and that it had brought havoc to India hurting the poor, small businesses, and the honest tax payer causing serious disruption to the economy immediately after demonetization and for at least three months thereafter with continued shortage of cash and hence working capital issues. Transport sector was badly hit and so was agriculture and a steep decline in stock market followed. GDP forecasts for India’s growth were reduced by 1 to 3 % for the coming year.
From the day of the announcement of demonetization and for many months thereafter a huge cash crunch was faced by ordinary people, who were not used to digital banking ways. Of course, with it came many positive surprises as well. Crime reduced dramatically as there was no cash to fund it. No act of arson was reported in spite of such a far-reaching decision and most political parties opposed the act with silent protests unlike usual where riots are a normal course. Demonetization impacted radical groups and surrenders followed. Acts of terrorism slowed down and sleeper groups came out of their slumber to launch suicide attacks.
Now exactly one year to date, the jury is still out on the impact of demonetization and questions that was it the biggest blunder the world had ever seen or a masterstroke only a very brave Prime minister could have made. In 2017, the GDP growth actually fell by over 1 % and there was a considerable drop in Industrial output for the same period resulting in job losses in the small scale and the unorganized sectors.
For a country, where less than 2 % of its population actually paid taxes, there was an increase in the number of tax payers and the tax net increased by 25 % and personal income tax through self-assessment grew by a staggering 35 % in just one year.
On October 31st, the world bank released its report – Doing business 2018: Reforming to create jobs where it placed India on the 100th position for ease of doing business. Interestingly a year earlier India was at 130. A stupendous 30 positions positive jump, the highest the world has ever seen. It credited India with having conducted reforms in 8 out of 10 doing business indicators. The report indicated that India had successfully implemented 37 reforms since 2003 and half of these were implemented in the past four years.
It is difficult to say if this jump was a direct result of demonetization, but it would be safe to say that Demonetization was intended for far reaching national gains, it may not have been the smoothest of implementations, but in such a large country with an over billion population, nothing comes smooth, but it’s long term impact should hopefully dwarf the short-term pain and as a philosopher may have said, no gain without pain.