Table of Contents
Recalling the Demonetization: November 08, 2016
Advantages of Demonetisation in India
Disadvantages of Demonetization in India
Analyzing Demonetization in India: A Bold Move or Blunder?
Seven years have passed since India witnessed a historic economic move — demonetization. In November 2016, the Indian government announced the sudden invalidation of INR 500 and INR 1,000 currency notes, affecting the country’s entire financial landscape. This bold step aimed to curb black money, corruption, and counterfeit currency. However, as we reflect on the journey since then, it is essential to evaluate the tangible impacts and repercussions that demonetization has had on the Indian economy.
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Recalling the Demonetization: November 08, 2016
In the midnight hours of November 8, 2016, Prime Minister Shri Narendra Modi addressed the nation, declaring the discontinuation of INR 500 and INR 1,000 notes as legal tender. The move, aimed at tackling corruption, black money, and counterfeit currency, caught the nation by surprise.
The sudden announcement led to long queues at banks and ATMs as citizens rushed to exchange their old currency for new notes.
The Opposition tore into the Central Government under Prime Minister Shri Narendra Modi, accusing of driving India economy and the global economy to the brink of disaster.
A long time has passed since then, and the country saw normalcy return in a few months. As we delve into the seventh year post-demonetization, it is crucial to dissect the advantages and disadvantages that have unfolded, shaping the narrative of the economic development in India.
Read on – Indian Economic Growth Story: Top Factors Leading to India’s GDP Expansion in FY22/23.
Advantages of Demonetisation in India
Aimed at curbing black money and promoting digital transactions, demonetization was a bold step that triggered significant changes in India’s economic landscape. Here are some of the top advantages of demonetization, backed by recent findings that shed light on the state of cash transactions in the country.
1. Recovering Black Money
One of the primary objectives of demonetization was to unearth and recover black money. According to the Reserve Bank of India, over 99% of the invalidated currency found its way back to the banks. Despite this, demonetization played a crucial role in compelling individuals with substantial cash holdings to disclose their income sources and pay taxes.
Piyush Goyal, the then-Finance Minister in 2019, announced a substantial black money recovery of INR 1.3 lakh crores through various anti-black money measures, including demonetization.
2. Reducing Anti-National Activities and Terrorism
Demonetization dealt a severe blow to the funding of terrorist groups and illegal activities. By rendering high-denomination currency useless, the government successfully curtailed money laundering and made it more challenging for illegal funds to circulate.
The move not only had economic implications but also contributed to national security by disrupting the financial networks supporting unlawful activities.
3. More people filing taxes
Demonetization led to a significant expansion of the taxpayer base. During the fiscal year 2017-2018, the Income Tax Department added 1.07 crore new taxpayers. This marked a growth of approximately 25% in the number of returns filed compared to the preceding fiscal year. The move forced individuals to formalize their financial transactions, contributing to greater transparency and accountability.
4. Increase in digital transactions
One of the lasting impacts of demonetization has been the acceleration of India’s transition towards a cashless economy. Digital payments, especially through the Unified Payments Interface (UPI), have seen substantial growth.
According to a recent survey by LocalCircles, UPI accounted for more than 78% of total retail digital payments in May 2023, with experts projecting a further increase to 90% by the fiscal year 2026–27. This shift towards digital transactions promotes transparency, reduces the circulation of untaxed money, and facilitates smoother tax collections.
Disadvantages of Demonetization in India
While demonetization brought about several positive changes, it was not without its drawbacks. The sudden announcement in 2016 led to panic and chaos, particularly affecting daily wage workers who found themselves unemployed due to a cash crunch. A few ailing and elderly people were also reported to have died while waiting at the long queues in front of the ATMs.
The increased government expenditure on printing new currencies added to the economic challenges. The unemployment rate reached a four-year high from 2016 to 2017, showcasing the short-term impact of demonetization on businesses and the economy. Small businesses, the informal sector, and rural areas were disproportionately affected as they struggled to adapt to the sudden cash crunch.
Analyzing Demonetization in India: A Bold Move or Blunder?
What seemed to be a blunder at the outset was obviously, found to be a bold move in the long run. While initial chaos and loss of lives were unfortunate indeed, the move actually ended up doing much more good than bad. The Supreme Court demonetization judgment passed in January 2023 found no flaw in initiating the move and remarked that it was not an “unreasonable” decision on the part of the RBI and the Central Government led by Prime Minister Shri Narendra Modi.
As India navigates the evolving landscape of financial transactions, the long-term impact of demonetization remains a subject of debate and analysis. But studies show that the 4 major objectives of the move by the Central Government were fulfilled:
- Promoting digital transactions
- Reducing the number of fake notes in circulation
- Curbing terror funding
- Black money recovery
There were also added benefits for the Indian economic future, such as more tax revenues being collected, identifying fake note manufacturers, stopping many potential terror activities that might have led to a loss of many lives and crores of money for Indian citizens and the Indian Government etc.
Data published by the NCRB showed a recovery of 2.60 lakh-worth fake notes from the states of Jammu and Kashmir alone.
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Read on – Indian Economic Growth: Top Reasons Why India Will Soon Be a $4-Trillion Economy.
Conclusion
Seven years after demonetization, as the debate rages on, India seems to have benefitted significantly since the time the move was made. It is true that the country still stands at a crossroads, grappling with the complexities of a digitizing economy and the persistence of cash transactions, especially in significant areas like real estate. However, the move achieved most of its intended objectives. It shaped the future of Indian economy in many ways and even had a positive impact on the world economy.
With India’s economy on the verge of becoming a 4-trillion dollar economy and even funding multiple space missions, glancing at India’s economy in 2023, the economic progress in India cannot be doubted. The economic growth rate in India stands at a strong 6.3% in 2023. However, the Government needs to be more proactive in educating people of the lowest socio-economic group about digital transactions before it reduces the circulation of cash notes once again, if ever. It also needs to implement checks and measures to reduce fake note circulation and terror funding, so as to avoid the announcement of sudden measures like demonetization and short-term hassles arising due to the same.
