DEMONETIZATION FACE OF INDIAN ECONOMY
“Surgical Strike”, “Great,” “Masterstroke,” “Historical” echoed commentators, think tanks, rating agencies and the public at large, when in the late evening of 8th November 2016 the Prime Minister Narendra Modi announced that Rs500 and Rs1,000 currency notes would no longer be recognized legally as currency.
The Prime Minister narrated that the move complements the country‟s Swachh Bharat Abhiyan. “For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development.” “To break the grip of corruption and black money, we have decided that these currencynotes presently in use will no longer be legal tender from midnight.” Added Finance Minister Arun Jaitley: “The goal of this is to clean transactions, to clean money.”
Question is whether this masterstroke is “masterful” enough. Will November 8, 2016, be remembered as grand event in the history of India or will it be just another passing event? Is the weaponused is sharp enough to win?
MAGNITUDE OF THE IMPACT
According to RBI figures, as of March 2016 currency in circulation amounted to Rs16,415 billion. Of this, Rs.500 notes accounted for 47.8% in value and Rs1,000 notes another 38.6%. Together, they were more than 86% of the value of the notes in circulation. Thats a whopping amount to be frozen.
Taking India‟s GDP is $2,000 billion (Rs 125 lakh crore) and estimated parallel economy 23 percent, makes it about Rs 28 lakh crore. A large percentage of this amount is invested in real estate, gold, and cash. Real estate accounts for more than 50 percent and the rest 50 percent is equally divided between cash and gold. Around 68 percent of that cash is kept in denominations of Rs 500 and Rs 1,000 notes. Roughlyestimated calculations show that Rs 3 lakh crore or $45 billion will flow into India‟s white economy, which is equivalent to GDP of more than 100 countries!
As per RBI, total 9026 currency notes were in circulation before demonetization, out of which 25% are of Rs.500 & Rs.1000 denomination. There are 1570 crore of notes of In one denomination and 530 crore notes of the other (Total 2100 crore notes) as narrated by Sh. P.Chindabram, ex Finance Minister,in oneT.V. interview. Capacity of printing the notes is 300 crores per month of printing presses of Government and RBI. As such, seven months will be taken for printing the replacement of these notes.
Though it may not be predictable what is stored in future , yet this move is expected and bound to potentiallyimpact the common man also as it will not only have economic impact but also social, political and cultural ramifications, both from immediate and long-term perspectives as it may include / involve any or all of the followings:
IMPACT ON FINANCE/BUSINESS/COMMERCE:
1. Normal life may be adversely impacted because of demonetization. Honest taxpayers have to stand in queues for Cash withdrawal of his hard-earned money saved with banks for managing the house hold and daily needs for quite a long time- a quarter of the year or so.
2. To address the challenge, consumers have to take shelter under umbrella of net banking and e-wallets.
3. Small/medium sized business, trade, industries, village and cottage tiny industrial units which mainly relyon cash transactions may confront a demand collapse and no real income or cash generation.
4. To Overcome This Challenge For Their Survival Such Entities Will Have To Per Force Resort To CARD SWIPE MACHINES AND E-WALLETS LIKE PAYTM, FREECHARGE, MOBIKWIK, OXIGEN, CITRUS PAY, NOVA PAY
5. Online companies shall be minting money as most of the white income class shall be bound to resort to online shopping.
6. People having large chunks of so called black money shall be using unscrupulous means to convert it into legitimate (white) money. Those falling prey to such efforts may have to suffer in the hands of Income Tax department, though House wives may be given some relief.
7. Precious metals, Gem and Jewelrybusiness will be hard hit. Gold and Silver prices shall fall.Real estate prices will collapse and the turn over will drop. Home seekers shall be benefitted.Pre-used cars other House Hold appliances/goods market will crash badly.
8. CAs will be having the best time of their profession.
9. Banks will be having a historic tough time. Banks will be flooded with cash deposits of old notes and ever persisting demand for new currency notes.
10. Reserve Bank of India shall be under tremendous pressure for spontaneous, timely and regular supply of New currency on one hand and disposal of Old Notes of the Size of Himalayas.
Impact on Indian economy
In Short Term,as consumption will fall, GDP will be adversely impacted and Indirect tax collection may be lower unless GST is implemented with much higher than presently discussed rates. Additional Direct Tax Revenue may prove compensatory. Production of Goods and Services shall move from Unorganized Sectorto Organized sector, and may prove irreversible. In long term, the size of the formal economy will increase significantly. This step may have positive implications for tax revenues.
In long term Demonetization may also benefit as:
1. Income taxes rates are expected to come down as more people will be in tax net.
2. Loans & Borrowing from Banks and Financial Institutions will become cheaper.
3. Housing will be affordable.
4. In Asset Markets a. Bonds prices to increase in the near future. b. Real estates and Gold to fall. c. With drop initially, Equity markets to gain in next six to 12 months. d. FDI to sky rocket.
5. Fiscal deficit will come down.
6. Currency is likely to become stronger, other things being equal.
7. Inflation will come down.
8. Hawaala and Aangriya transfer of money, Benaami Transactions shall be curbed.
1. Normal life may be adversely impacted because of paucity of cash.
2. Extravagancy will be curbed.
3. Prosecution for those who are engaging in black money.
4. Less privileged people may actually have to pay taxes and lose their BPL status if found guilty of misutilisation of concessions.
5. Politics may under go a change.
6. The society will become more equitable with lesser class distinction.
7. Curbs on drug mafia and terror funding networks.
8. Impacted Low-income people may resort to criminal activities.
9. Marriages to become less expensive Dowry System may be evil of the past.
10. All purchases, shopping and spending to be in white money / through banking system.
11. Big blow to gambling and illegal forward trade.
12. Bankers will regain dignity in society and matrimonial prospects of unmarried shall become better.
IMPACT ON POLITICS -
All NON RULING parties will come closerbecause of the issue of demonetisation scheme and attempt to prove it as a big scam of ruling party (BJP). -Ruling Party (BJP) may use demonetization as election propaganda and tend to seek better voting in its favour in forthcoming elections in Punjab ,UPand else where. -No cash doles out in elections. Whole electioneering will change for the good of democracy.
IMPACT ON CULTURE
1. Bribes, corruption, hafta vasuli, terrorism funding, drug supplies will become no longer attractive and socio-financial culture will be better for new generations.
2. Cash-rich economic culture will be transformed to Less-Casheconomy intermediately and Cash-Less economy ultimately.
3. Habit of Holding of cash savings by House wives/ladies will be no more attractive and may be replaced by Bank Deposits or by gold.
4. Cheque Books, Pass Books , Demand Drafts will become show pieces of Drawing Rooms and shall be replaced by Debit / Credit cards, Smart variety of mobiles with Apps of Banking and e-Wallets. Presently less than 15%of population has debit cards, and around only 2% have credit cards.
5. Masses will become Tech-savy, financial transactions will be driven electronically..
6. Electioneering shall be free of Cash doles, feasts and parties and common sense and intelligence shall prevail over these for better legislatures and parliamentarians.
7. e-commerce and digital commerce shall replace existing markets though barter system may crop up again among the illiterates and in remote areas.
8. Culture of holding Cash for Old Age and Rainy days shall transform into participation in Pension Schemes and nation will move from “Pension-less Society” to “Pensioned Society”.
WILL IT WORK OR ADD TO SUFFERINGS?
Will Fake Currency problem be resolved? Though as all such fake currency would be invalid, but it cannot be guaranteed that replica of new currency would not come again. Finance minister confirmed that only design has been changed and not security features. Infact, the Press notificationof Finance Ministry on demonetization reads about FICN (Fake Indian Currency Notes) as primary issue focused on curbing terrorism. Black money elimination was secondary. As per study of estimation of the quantum of FICN in circulation, done by Indian Statistical Institute , Kolkata, it is said that at any point of time, fake currency of Rs. 400 crore flows in Indian market and that too mixed currency of various values. If we really see this amount in comparison to Indian economy, it is not even fraction. Also, even with simple logics, one can see that for two days working on holidays, banks paid on an average Rs. 1000/- per person to almost 10 lakhs employees all over India and this itself amounts Rs. 200 crore. Additional amounts spent on other resources utilised will be almost equal.
Is it conclusive attack upon black economy / black money?
Data says that only 6% of black money is in cash forms. Also, it is highly advocated that major amount of black money is in Swiss banks. The real fact is that the government has not even made public names who have high deposits in Swiss bank accounts. Most of the in-country black money holders may be officials and politicians who already have sufficient assistance to convert their black in to white through various available mediums. There is no tracking upon gold accumulation and declaration, wealth accumulation and property investments of such persons. Many may have hidden partnerships with real estate and other booming groups. Even while talking about demonetization in 1978, former RBI governor I G patel in his book Glimpses of Indian Economic Policy stated that idea that black money is held in suitcases is naive and there will be little useful effects on reducing corruption or black economy.
Ending black money is not a bulb that goes on suddenly, but a gentle sunrise. Demonetization builds on new legislations—Black Money Act, Revamp of the tax treaty with Mauritius, Benami Transactions (Prohibition) Bill, GST, TDS/PAN requirements, etc—and FINANCIAL INCLUSION (Jan Dhan, Aadhaar, direct benefit transfer, mobile banking, Universal Payment Interface, Bharat Bill Payment System, new bank licences, etc). Future possibilities include a cap on cash payments, tax on cash payments, re-registration of properties, etc.The aim behind the government‟s action seems to simultaneously combat tax cheating, counterfeiting and corruption. Black money is only one of several symptoms of corruption. Only a small percentage (by some estimates as low as less than 6%) of the unaccounted wealth is held in cash. Demonetization is a one-time draining of current stock of black money but unless the root causes are removed, corruption will continue. It is like a dialysis, more of a short term cleaning up than a solution of the problem. It may need to be repeated periodically.Demonetization will place a temporary brake on illegal transactions in cashtill operators find out alternative ways.
Anticipating all good things, there is a bitter truth as well. The black money may reemerge as now there is Rs 2,000 notes. So, paying bribes will be much easier. Bribes may continue to be paid in gold, Foreign currency and now in smaller denomination notes, or through consumer durables. The whole plan may bounce back as there is a complete demand collapse and people may lose their jobs in the un-organized sector in the near term. So there is need for strong administration and effective policy framework.The Indian reality is that many trades and areas are still cash-based and cannot be digitized just by wishing it. Over half of India‟s total employees are working poor as per International Poverty Line and majority of Indians still live in rural India with high illiteracy, less digitalization and inadequate banking reach. If some of the key sectors are hampered for long, there is risk of mob violence and rioting.
Though the entire country is at risk, but there is no way of anticipating and preparing for risk, either. Demonetization has to be coupled with a more streamlined integrated tax system, transparency in licensing, sanctioning, approving, granting day to day requests and applications of the public so as to leave no scope for bribe.A new citizens‟ interface, paperless, 'presence-less‟, and cashless has to be evolved for moving to a society in which cash is used less frequently that too for small transactions.
This will have a positive impact on corruption, terrorism financing, the drug trade, tax evasion, human trafficking, informal employment, money laundering and extortion. In the short term, demonetization could prove to be painful for some who are legal and clean, if they use cash payments. But everyone will adjust with passage of time. And while it can hurt some small businesses and individuals,yet it is better to do it than not. All is well that ends well