By Aishwarya Krishnan
As the clock struck 8 pm on November 8, 2016, India came to a standstill and Prime Minister Narendra Modi announced one of the most ground breaking changes in the Indian economy. The Indian Prime Minister announced his plans of banning Rs 500 and Rs 1000 notes with several motives in mind and thus began India’s struggle with demonetization. A year after the country was wiped out of old currency, the effects of Narendra Modi’s demonetization can still be felt in the economy. Demonetization has been one of the most criticized moves by PM Modi and everyone from former Prime Minister Manmohan Singh to former RBI Governor Raghuram Rajan has condemned this move and its effects of the Indian economy.
From slowing down the economic growth in various sectors to giving people nightmares of the long queues and the inability to spend liquid cash freely, the hullabaloo created by demonetization is remembered by one and all on its first anniversary. Demonetization began as a way to curb the black money from our economy was later addressed as a means of making India cashless and giving digital India a boost.
Demonetization was initiated with a wide array of motives like stripping the Indian economy of its black money, push people to pay taxes for the unaccounted pile of cash, curb terrorism, promote the digital India movement and make India a cashless economy.
Demonetization and Personal Finance
Piggybanks have been transformed to savings accounts as people turn towards increasing bank balances instead of stashing emergency cash in different corners of the house. People finally began to trust the digital payment systems; because that was the only option they were left with. Demonetization proved that Indians can strive and adapt to any changes and made people financially aware about the different spending options. The government’s efforts to revamp the currency system provided people with a boost to use the cash that was lying around and invest it in a more productive way. The more native and conservative people also opened up towards the era of plastic cash and made several Indians tech friendly.
Demonetization and Black Money
One of the most important points that pushed people to support demonetization was its associating with bringing an end to the black money problem in India. However, almost 99% of the money was deposited back to RBI. The statistics revealed that either the hoarders found a way to legitimize their black money or did not hold them in the form of cash. But this was known by many before the RBI reports as well. Black money hoarders do not hold the money in cash according to several finance experts and when this point was highlighted time and again, other important effects of demonetization were publicized by the government, like the role of demonetization on curbing terrorism.
Demonetization and Terror Funding
The second reason to support demonetization was its role in curbing terrorism by increasing the obstacles in terror funding. Terrorist organization were known to use fake Indian currency notes for funding their projects and the government believed that this could be contained with the help of demonetization. The Income Tax department seized Rs. 474.37 crore in new and old currency from November 9, 2016 to January 4, 2017 (the demonetization period). However, there are no reports if the money seized had any association with terror funding. In spite of these numbers, there is no doubting that the cash reserves of several terror groups were severely hit in the early days of demonetization.
Demonetization and Digital India
Pushing India towards becoming a cashless economy was another reason that demonetization was publicized for. People turned towards digital transactions for everything from buying groceries from a road side vendor to paying utility bills during the time of demonetization. However, as the flow of cash into the economy began to increase, the use of these apps and digital wallets saw a slide once again.
Demonetization and Tax Payments
Pushing Indians to deposit and account the cash lying in their house also meant a rise in the tax payments for the country. According to government reports the income tax payers saw a record increase in the post demonetization era. 9.1 million New taxpayers were added to the slab which was an 80% rise over the typical yearly rise. This increase in the number of taxpaying citizens in the country has been credited to demonetization. This increase was also resonated in IT returns filing and advance tax payment.
Demonetization and GDP
The ban on old notes is being cited as one of the key contributors to the economic slowdown. With the gross domestic product (GDP) for the April-June quarter slipping to 5.7%, the reality of the economic slowdown could not be ignored. The World Bank has reduced the India GDP growth forecast to 7% for 2017-18 owing to demonetization and GST (Goods and Service tax). The slowdown is being cited as a delayed consequence of demonetization by the World Bank and while there are various other reasons at play, the steep decline has been credited to be an effect of demonetization.
Demonetization and MSMEs
Demonetization had a lasting effect on Indians MSMEs (Medium, Small and Micro Enterprises). Various medium and small enterprises turned towards digitalization, however, the micro industries were affected by the worst of its wrath. The micro industry owners were not a part of the black economy and they were clearly unprepared for the effects of demonetization. Many micro industry workers returned back to villages and the growth rate of these companies went as low as 1%. The MSME sector has been recovering from the drastic changes and its impact on the revenue, but demonetization forced the MSME sector to be friendlier and more accommodating towards the digital arenas and made them more accommodating towards change.
While these are some of the effects of demonetization on the national and economic front, demonetization gave individuals several lessons that have changed the way we look at managing finances. Demonetization made sure that we monetize our earnings to get the best returns possible whether it is by turning to monthly investment schemes to save better or by turning our safe cash pile into an easy withdrawal FD (fixed deposit). The government’s revenue will see an increase because of demonetization and its initial effects are already prevalent in the income tax filings post note ban. Demonization has played a crucial role in bringing digitalization and financial planning into the forefront for many. India has withstood the immediate chaotic impacts of demonetization and it is evident that the returns of the hardships will begin to show in the coming months.