Ghosts of Demonetisation 

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Few saw it coming. Late in the night when people were about to take rest after days of hard work BJP government, led by PM Modi, fired a salvo. It gave sleepless nights to everyone. He demonetised all currency notes of 500 and 1000 rupees with the aim of flushing out black money from the Indian economic system. The announcement came just after the alleged surgical strikes on Pakistan. There was no doubt that demonetisation was done keeping in view Utter Pradesh elections and keep the personality of Modi alive. He has, through his personality, famed the expectations of people which have now gone through the roof. People here or there expect him to do something new and new again and again. BJP without Modi will fall like a pack of cards and their sole aim of making the prime minister announce the demonetisation was to keep Modi wave going. Instead the announcement could have been made by Finance Minister Arun Jaitley. Nevertheless, Demonetisation was absolutely shocking.  

The next day panic set in. Throughout the breadth and length of India, people flocked to their respective banks and post offices to exchange the old money with the new one. There were serpents like queues outside ATM’s only to find out new currency was not available.  Modi government fired at the high speed growing economy of India. There was pessimism that economy will be strangulated with this move. And people were not wrong about it. All business establishments saw a drop of more than 40 per cent in sales. Many jobs, especially in construction were wiped out. Even the demonetisation move set migration in reverse mode. Lack of jobs forced the migrant workers to move to their villages. The exchange of old money required documents and bank accounts in which money could be deposited. 

Economics does back up demonetisation. It has even a moral ground as well. Black Money holders use the high denomination currency notes to evade the taxes. Black money is defined as the money earned through illegal ways or the amount of money which is kept outside the loop of income tax. Demonetisation punishes these persons by making their money irreverent to exchange or forces them to show their level of income so that it could be taxed. The tax as well as the extra penalty will be used for public welfare. Another relevant argument comes from usage of fake or counterfeit currency.  The government has made this argument that fake money is used in exchange which fiancés terror organisation. Since fake currency is completely wiped out terror finances crumbles down. BJP government used the same argument to justify relative peace in Kashmir valley and North-Eastern states which is dominated by Maoists. The BJP government has been at its best flushing out the opposition by using binary equations or logic. By aligning themselves with “Indian Nationalism’ perfectly it has snuffed out the independent thought. The use of terror logic in demonetisation move was aimed to gather support for this move.

It is uncertain, however, on now where this move will lead Indian economy.  There are certain positives as well associated with the move. It can bring more revenue to government through penalties and taxes. It can lead to more inclusive development through opening of new banking accounts. Financial accounting is the bedrock of development. Also Reserve bank of India could get a hold on its monetary policy which is made ineffective by presence of black money and hoarders. It can lead to digitalisation of economy as well. Customers will be forced to use debt cards and swap cards to make selling and buying. The online portals like flipkart, amazon saw huge spurt in sales as these sites accept online payments as well as cash on delivery services. PayTM and other mobile banking services also saw huge demand.

It is uncertain, however, on now where this move will lead Indian economy.  There are certain positives as well associated with the move. It can bring more revenue to government through penalties and taxes. It can lead to more inclusive development through opening of new banking accounts. Financial accounting is the bedrock of development. Also Reserve bank of India could get a hold on its monetary policy which is made ineffective by presence of black money and hoarders. It can lead to digitalisation of economy as well. Customers will be forced to use debt cards and swap cards to make selling and buying. The online portals like flipkart, amazon saw huge spurt in sales as these sites accept online payments as well as cash on delivery services. PayTM and other mobile banking services also saw huge demand.

 

 

Inspite of these opportunities that could come through this move there, however, remain pertinent questions. Indian economy is still dominated by rural areas where cash is a necessity. Around 40 per cent of Indians don’t have banking accounts and the worst nightmare is due to illiteracy that is present in Indian villages. It is intriguing to find out how these persons will be able to cope up with financial products. Illiteracy is their biggest hurdle. It was heart rending to see that people who worked hard to earn and feed their families had to wait outside banks for long hours. Their time was completely wasted which could have been spent on earnings. Opportunity costs of this move was huge, it will go into Crores of rupees. It was hard to find why all population of India was made to suffer because few holded black money.

The next problem on which this move deflected our attention was what about the money that is stashed in foreign banks. Modi government had promised to bring all the money back and deposit it in the bank accounts of poor. This move will not in any way lead to any problems for them. This could only legalise their banking accounts as foreign exchange is outside the purview of any country. They can simply change their foreign exchange with new Indian currency at any time in future. No doubt former prime minister of India called it legalised loot. There were further problems due to lack of proper implementation. Still only 2000 rupee notes are made available and it is difficult to buy anything due to its high value. Five hundred rupees are completely missing in the market as well as thousand rupee notes. This has put street vendors and small shops into huge problems as sales will not be forthcoming due to change. It was a usual seen on the streets that vendors were not able to sell anything. They were hit hard.
There is usually an erroneous belief held by the public and the authorities in general that black money is held only in cash, however, these can be stored in products as well e.g. Drugs, arms and ammunitions can be sold later on if there arises problems in the current time. Black money which arises through these illegal activities usually finds their way into bank accounts where by it remains immune from current demonetisation.

Even though this move is a step forwards this cannot be painted as a leap. Indian policy makers especially RBI has to make it sure that some concrete steps be taken to restore confidence of legal tender in India and help Indian economy grow as early as possible. India cannot afford to ignore decline in growth rates of Indian economy due to this move. Time is running out fast and Government has to implement concrete steps to stabilise cash situation as soon as possible.  

    

 

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