Short note on Aftermath of demonetisation

The Indian Prime Minister addressed the nation on November 8, 2016 and announced the historic decision to demonetise currency notes in the denominations of INR500 and INR1000, which accounted for roughly 86 percent of the total notes in circulation. While announcing demonetisation, the government stated that it hoped to achieve the following goals: to strike a deadly blow to the country’s black economy, to remove fake Indian currency notes (FICN) of INR500 and INR1000, to disturb the informal cash component, to strengthen the banking system, to fight terrorism and Naxalism, and to broaden the tax base. 

A brief view of the Aftermath of Demonetisation

The days following the demonetisation were a whirlwind of mayhem, with long lines outside banks and ATMs. The unexpected removal of 86 percent of the cash component from the system affected everyone in the country, whether a small or large firm or a service professional. However, the demonetisation process is practically complete, and enough time has passed to assess the repercussions. As a result, any government move is scrutinised solely through this lens.

Black Money

The primary and most crucial goal of demonetisation was to give a single deadly blow to the country’s colossal cash economy. The government thought that anyone who had collected large sums of money through criminal activities would not deposit in banks, making themselves susceptible to law enforcement officials. As a result, the government undervalued them, and they could develop new ways to convert the majority of their demonetised currency. The Reserve Bank of India stated that more than 99 percent of demonetised currency deposits in banks had been returned. According to a white paper on ‘black money in India’ written by India’s Finance Minister Pranab Mukherjee in 2012, the cash component of undeclared incomes ranges from 3.7 to 7.4%. The most common ways of hoarding wealth obtained through illegal means include real estate, jewellery, and bullion. If we examine cash, demonetisation was a complete failure; however, if we consider its influence on real estate, where most black money is invested, demonetisation did affect the cash economy.

Fake Indian Currency Notes

After demonetisation, banks discovered approximately INR 11.23 crores worth of FICN. Demonetisation appears to have been a complete failure on this front, given the suffering it caused and the impact it had on counterfeit currency. The Reserve Bank of India discovered fake Indian currency notes worth Rs 29.64 crores in 2015, while the police and other law enforcement authorities found FICN worth INR 43.8 crores. Thus, in 2015, a year before demonetisation, the total FICN discovered was INR 73.44 crores. It is also thought that just 16 of every 250 FICN were found in 2015.

The Informal Economy is Being Disrupted

The cash economy, or informal sector, accounts for 45-50 percent of the GDP and employs about 80 percent of the population. The demonetisation has badly hampered it. Even though demonetisation was meant to transition the informal sector into the formal sector, no significant changes have been observed in this area. Since the informal economy relies primarily on cash, demonetisation suffocated this labour-intensive industry. The argument concludes that demonetisation significantly influenced the informal sector, which has implications for both job creation and the broader economy. Demonetisation cannot be described as a success in this way.

Banking Sector Strengthening

Due to the large number of non performing assets that the banks were dealing with, the demonetised currency notes were expected to find their way into bank coffers to recapitalise them (NPAs). Banks in the public sector were in even worse shape. Demonetisation raised deposits in banks by reducing the amount of cash in circulation. Banks established roughly 2.33 crore new Jan Dhan accounts after demonetisation, with the total amount in these accounts increasing by 63.6 percent in just one month.

An Expansion of the Tax Base

According to the tax department, the number of I-T returns submitted for the 2016-17 fiscal year increased by 25% to 2.82 crores, mainly owing to demonetisation. As a result, in 2016-17, 9.1 million new taxpayers were added, increasing 80% over the previous year. In addition, as of August 5, 2017, advance tax collections of personal income tax (other than corporate tax) had increased by nearly 41.79 percent over the same period in 2016-17. As a result, the impact of demonetisation can be seen in the increase in direct tax receipts.

Conclusion

As can be seen, demonetisation produced a mixed bag of outcomes. The most successful aspect of demonetisation was the removal of FICNs from the economy and expanding the tax base. However, the most severe consequences were seen in the informal sector and job creation, which experienced one of the steepest decreases in recent years. Even once the goalposts were adjusted, demonetisation was an ill-advised step that failed to achieve its objectives. However, it had a significant negative impact on the economy, particularly in the unorganised sector. The ruling party recognised this and did not highlight it as a victory in the last elections. Demonetisation increased the deposits in banks.