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One year of Demonetisation: A detailed analysis of the Advantages and Disadvantages

21-NOV-2017 05:20

    Definition of 'Demonetisation': Demonetisation is the act of stripping a currency unit of its status as legal tender. In simple terms, the Central Bank of the country pull out the old currency from the circulation and introduces new notes to replace old ones. The main motive behind the demonetisation is to make economy free from fake note and black money.
    Prime Minister Narendra Modi had banned old notes of 500 and 1000 rupees all over the country on November 8, 2016. This step is known as demonetisation. This article is doing an analysis of the advantages and disadvantages of the demonetization.
    Main Motives of Demonetisation were:
    1. To remove circulation of the counterfeit currency from the economy.
    2. To finish the black money from the economy
    3. To create fear among the tax evaders and corrupt officials
    demonetisation india
    Benefits of Demonetisation:
    1.Increase in the number of Digital Transactions: In a note, the Finance Ministry said that the number of digital transactions increased by 56% to 1.1 billion between October 2016 and May 2017. The biggest advantage of increasing the number of digital transactions will be that the Reserve Bank will have to print lesser quantity of new notes. This will save the printing costs of the Government. Now Government has launched BHIM App and UPI App to increase the number of digital transactions.
    2. Increase in Government Income: Increasing digitalisation in the economy will increase the transparency in the economy, which will reduce the incidence of tax evasion. This will increase the tax revenue of the government because more and more people will be taxed.
    Advance tax collections of Personal Income Tax (i.e. other than Corporate Tax) as on August 5, 2017 showed a growth of about 41.79% over the corresponding period in previous financial year.
    3. Help in Controlling Black Money: Controlling the black money was the one of the main motive behind the demonetisation. Now the entire process of buying and selling houses has to done through online transaction. Now it is mandatory to make all transactions amount more than 3 lacs in digital mode only. This start will reduce the generation of black money in the economy.
    4. Abatement in Corruption: The money earned by the corrupt officials got immersed through demonetisation. So the corrupt officials will not be much interested in taking the bribe because government can ask them to show the proof of the income. After the demonetisation, Central Government had issued notice to more than 18 lac peoples who have deposited money beyond a limit in their accounts.

    Corruption in india
    image source:India Today
    5. Decrease in the number of counterfeit Notes: This is one of the main reasons behind the thought of demonetisation. Those who are running the parallel economy in the country and have a huge amount of counterfeit currency; post demonetization their currency loses the value immediately.

    Where do Printing of Security Papers, Notes and Minting take Place in India?
    6. Cheaper Loans: Due to demonetisation; huge amount of rupee returned to Indian banking system. Now banks are providing cheaper personal loan, vehicle loan and house loan to the customers. The personal loan which used to sanction at the rate of 18 to 20% is now available at the rate of 12% only.
    7.Pending payments Received: Just to spend old currency notes; the consumers/companies paid pending bills of electricity, water and Telephone etc.
    8. Abatement in Sponsored Terrorism: It is observed that so many young boys in Jammu & Kashmir and Paksitan are involved in the terrorist activities just because of money. When Indian government banned its notes, there was a sudden abatement in the terror activities in the Jammu & Kashmir and other parts of India.

    stone pelters in kashmir
    image source:YouTube
    Drawbacks and losses from Demonetisation:
    Prior to the demonetisation, the number of 500 rupee notes in the economy was 17165 million and the number of 1000 rupee notes was 6858 million, total market value of these notes was 15.44 lakh crore. After the demonetisation, the RBI said in June 2017 that people have deposited 15.28 crores (99% of total circulated currency) in the form of white money. So just Rs. 16,000 crores not returned to the banking system or in other words the government got only Rs.16,000 crore as black money.
    1. Expected Result Not Found: The Reserve Bank has said that after the ban, the amount of Rs. 16,000 crore did not come back to the banks which can be considered as the profit of the government. But the government spent Rs. 7,965 crores on the printing of new notes. So if we deduct this amount from the 16000 cr then total profit of the government is reduced to Rs. 8035 crore only.
    2. No Abatement in the Corruption: The government claims that the demonetisation has reduced the corruption in the country which is not true. A recent report released by the Transparency International says that India is the most corrupt country in the Asia. In five of the six public services—schools, hospitals, ID documents, police, and utility services—more than half (69%) respondents have had to pay a bribe.
    3. The Logic of lack of Terrorism: Some people believe that the demonetisation has reduced the terror activities in the J&K and in rest of the country but this is true only for a short period. Now the incidents of encounters in j&K with the security forces are still reported on daily basis.
    4. Note Printing Cost: According to the figures released by the Reserve Bank of India, the cost of printing notes increased to Rs 7,965 crore in FY17, which was Rs. 3,421 crore in FY16. So demonetisation increased the cost of printing currency notes in the country.

    printing indian notes
    image source:Business Standard
    5. No reduction in fake Notes: The number of fake notes in the banking system jumped by 20.4 % to 7,62,072 during 2016-17 compared to previous year. During 2015-16, 6.32 lakh fake currency notes were detected. Apart from this, we have heard the news of the fake notes coming out of ATM across the country.
    6. Fall in Employment:
    India’s employed force grew from 401 million in April 2016 to 406.5 million in December 2016, it fell to 405 million between January and April in the year 2017.There are 73% Manufacturers did not hire for 3 months after the demonetization.

    unemployment rate india 2017
    image source:SlideShare
    7. Decrease in GDP growth: During the Demonetisation, many industries were not able to continue their production activities this is why the country's growth rate, which was 7.5% in September 2016 declined to 5.7% in June 2017. It means the demonetisation caused reduction of 1.5% in the Indian GDP.

    gdp slow down india
    It is worth to mention that India spends nearly 1.5% of its GDP on the defense sector.
    One of the biggest reasons behind the less effectiveness of the demonetisation is the openings of Jan Dhan accounts. There were 2.2 crore Jan Dhan Accounts opened within the 4 months of the demonetisation. A large amount of black money was deposited in these accounts.
    The rich people used poor once again for their benefit and deposited their black money in their accounts and take back this money as white.
    Jan Dhan Yojana was a very wonderful and revolutionary scheme in itself, but corrupt people have used it for their benefit.

    In summary, it can be said that demonetisation was a revolutionary step to check the black money in the country but in the absence of proper planning it could not give expected results. In the end it is expected that the positive results of the demonetisation will be experienced in the coming years.
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    DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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