It has been almost a year since government demonetised 500 and 1,000 rupees notes. It was a major decision which had its impact on all sections of the society. Now, everyone wants to know if it was a masterstroke by the government or a setback to the nation. Demonetisation gave a new direction to the way people do monetary transactions in India and attempted to destroy parallel economy. Just like a coin has a flip side, demonetisation too has its advantages and disadvantages.
Advantages of Demonetisation
If we are to believe the supporters of demonetisation, the government has successfully completed its demonetisation drive and the Indian economy has made some major gains. Here is what the supporters of demonetisation have to say about the benefits of demonetisation:
- A major achievement of demonetisation has been that it has helped the government in tracking black money. The government claimed that large sums of black money were kept hidden by tax evaders and demonetisation has helped it uncover the huge amount of unaccounted cash. According to estimates made by RBI during the demonetisation drive, people had deposited more than rupees 3 lakh crores worth of black money in the bank accounts.
- A major reason behind demonetisation was that a big part of black money was being used for funding terrorism, gambling, in inflating the price of major assets classes like real estate, gold and other social evils. Demonetisation is acting as an effective countermeasure against such activities. Now all such activities are expected to get reduced for some time. If the claims are correct then it should take years for people to generate that amount of black money again and hence in a way it helps in putting an end this circle of people doing illegal activities to earn black money and using that black money to do more illegal activities.
- Another expected benefit was that due to people disclosing their income by depositing money in their bank accounts, the government will get a good amount of tax revenue which can be used by it towards the betterment of society by providing good infrastructure, hospitals, educational institutions, roads and many facilities for poor and needy sections of society.
- Another major objective of the government achieved through demonetisation was to push the Indian economy towards becoming cashless. The government succeeded in encouraging people to use digital means for making transactions.
- Economy has witnessed close to 20% decline in currency in circulation, number of taxpayers has considerably increased and a large number of shell companies have been identified.
Disadvantages of Demonetisation
On the other hand, the critics of demonetisation have a completely different opinion about the effects of demonetisation on the Indian economy. Here is what they have to say about the drawbacks of demonetisation:
- The biggest disadvantage of demonetisation has been the chaos and frenzy it created among common people initially. Everyone was rushing to get rid of demonetised notes while the inadequate supply of new notes affected the day to day budgets of citizens. Banks and ATMs witnessed long queues while small businesses suffered temporary financial losses. The situation was even worse in rural India where people struggled to exchange and withdraw cash due to lack of enough number of banks and ATMs in their vicinity.
- Another disadvantage is that destruction of old currency units and printing of new currency units involve costs which has to be borne by the government and if the costs are higher than benefits then there is no use of demonetisation.
- Another problem is that this move targeted the black money, but many people who had not kept cash as their black money and rotated or used that money in other asset classes like real estate, gold and so on were not affected by demonetisation. It turned out that more than 99% of demonetised currency came back to the RBI and was accounted for. Therefore, the government’s claim about black money fell on its face.
So, we can conclude that demonetisation has both advantages and disadvantages. Demonetisation alone cannot fight parallel economy and eliminate black money. Several other supportive measures are required by the government to change the economy for good. Moreover, it is critical to emphasise that demonetisation was a unique event, and hence, drawing inferences based on theory, armchair analysis or even short-term data, could lead to misleading conclusions. Serious research needs to be done extremely carefully and reasonably long-term data must be considered before reaching any conclusion about unprecedented policy events such as demonetisation. This becomes even more important when there are other related moving parts such as goods and services tax (GST), clean-up of the banking system, real estate sector reform and others going on at the same time. So, at the moment, it is better to wait a bit longer till complete analysis of demonetisation’s effects is done to reach correct conclusion.