Javascript on your browser is not enabled.

Advertisement

Amit Manaktala

Amit Manaktala is the Member of Entrepreneurs' Organization, Kolkata.

More From The Author >>

After Effects of Demonetization – What It Means for the Indian Economy

Though there is a unanimous agreement that the execution and preparedness for the demonetization process could have been much better, one has to accept that the PM had given an opportunity to prepare for this eventuality and laid out a road map including the announcement of the Jan Dhan Yojana scheme and the Income Declaration Scheme.

To predict the future, it is recommended that you take a couple of steps back before you run forward and make a leap into the unknown. The couple of steps back is ostensibly to reach into the annals of history to find some parallel to the unfolding of the current event.

However, there is hardly a parallel to this act announced on the evening of November 8, 2016. Thus far, demonetization at this scale - 86% of the money supply was affected in this instance - has been the last resort of despotic dictators and bankrupt economies. It is not the first choice of economic tool for a nation which was in line to becoming the fastest growing economy in the world (the World Bank forecasted a GDP growth rate of 7.6% for India).It is like putting brakes to an economy that has been steadily gaining momentum and then trying to restart the engine.

Depending on who you ask, you will have different takes on the effect demonetization has had on the economy. The cash trade chain, including logistics, is adversely affected on account of 80% of the money supply vanishing without commensurate replenishment. The agrarian economy – where banking still has to make in-roads - is in dis-array. Daily wage earners are seen catching the long train back to their villages on account of lack of work (and pay). Consumerism is down, malls are empty. Serpentine queues outside banks & ATM’s are witness to the hardships that the common man has had to endure due to this unprecedented action.

The negative impact on GDP due to the liquidity squeeze could be anywhere between 0.8% to 2%, that is almost aRs 3 trillion erosion in GDP. However, this perspective ignores the fact that many transactions which were hitherto outside the ambit of the formal economy will now make their way back into the formal economy, thereby enhancing the recorded GDP.

To the chagrin of those who advocated demonetization as a tool to eradicate black money, it is expected that most of the old notes will make their way back to the banking system by exploiting holes in the enactment and through the misuse of Jan Dhan accounts. However, just depositing the old notes into the banking system does not turn black into white. As the Income Tax department has already demonstrated in the past couple of weeks, that supported by intelligent data analytics, they are willing to go after suspicious deposits and pursuing the money trail to its source.

Another argument made against, is that this measure only (partially) addresses the black money already in the system, and does not stem the generation of black money going forward. But with GST coming into place by September at the latest,the road to regeneration of black money will be arduous and long. Demonetization is thus only a preamble to the main act.

There are many economic side benefits of demonetization which deserve recognition.

Firstly, due to the liquidity crunch, the retail inflation rates have fallen to their lowest ever at 3.63% in November. If this can be controlled so as not to lead to stagflation, we have a winner on hand. Secondly, the over heated property market is expected to cool over the next year which may lead to a drop in property prices of upto 30% in the cities. This in turn will lead to a fall in rentals allowing many more middle class consumers to afford urban housing.  Thirdly, the FM has already hinted at a tax rate cut which will further mitigate tax avoidance and enhance tax collections. Finally, now more than ever before, there is an impetus to move to a cashless digital economy that is efficient and safe.

All of the above augur well for the economy and we should not be surprised to see a ‘hockey-stick’ recovery in the mid-term.

Though there is a unanimous agreement that the execution and preparedness for the demonetization process could have been much better, one has to accept that the PM had given an opportunity to prepare for this eventuality and laid out a road map including the announcement of the Jan Dhan Yojana scheme and the Income Declaration Scheme.

In history, symbols have served as a statement of something that has greater meaning that what they represent. Instead of looking at demonetization merely as an economic policy tool, the common man bearing the burden of its implementation,derives strength by looking upon it as a symbol of a larger battle against corruption, consumerism, terrorism and tax evasion amongst other social & economic ills. The deep ingrained belief that that there can be no gain without pain, instills in the common Indian the fortitude to endure this hardship in the hope of a better future for our country and children.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


Tags assigned to this article:
demonetization indian economy

Around The World

Advertisement