Demonetisation: A resounding success: 

Demonetisation: A resounding success: 

Context:

Massive economic reforms like demonetization cannot be measured solely by using economic parameters but need to take into account the structural shift that such reforms induce in society.

Introduction:

• On the economic front a heated debate is under way whether demonetisation has been a success or not. Several reputed economists have pronounced their judgments on demonetization.
• Dr Raghuram Rajan has mentioned that the short-term economic costs of demonetization would outweigh them and that there were alternatives available to achieve the main goals.
• There is lack of scientific data and thorough analytical studies on the economic impact of demonetization
• Societal and long-term economic changes are difficult to measure and require more reasoned, detailed, and patient analyses: this should increase our resolve to do deeper research rather than jumping to hasty, ill-informed conclusions.

What is the meaning of demonetization?

• Demonetization is the act of stripping a currency unit of its status as legal tender.
• It occurs whenever there is a change of national currency.
• Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.
• The opposite of demonetization is remonetization where a form of payment is restored as legal tender.
• Demonetization can also be referred to as the process of moving people from a cash-based system to a cashless system

Background:

• On November 8, 2016 Prime Minister announced that Rs 500 and Rs 1000 denomination notes will become invalid.
• The government introduced new notes of Rs 2,000 and Rs 500 .
• There was also no change effected in any other form of currency exchange like cheque, Demand draft (DD), payments made through credit cards and debit cards.
• The move was taken to curb the menace of black money, fake notes and corruption by reducing the amount of cash available in the system.

Changes brought by demonetization:

• To appreciate the changes that demonetisation brought about, there is need to carefully choose and measure the relevant short-term high-frequency indicators and a few emerging long-term indicators which point to the direction that the economy has since taken.

High-frequency and quantitative indicators include:

1. Cash-to-GDP ratio: cash-to-GDP ratio is now down to 9.7%, from 11.3% pre-8 November last year. This cash is now in the banking system which has helped swell the current accounts and savings accounts balances of bank.
2. Volume of digital payments,
3. Number of new registered taxpayers, and
4. Estimate of “unaccounted for” money and the number of tax notices sent indicate that demonetisation has generated material changes.

• Apart from these economic factors, there is another more profound behavioural change that has been accomplished.
• Indians are paying their taxes and moving towards a less-cash society.
• GST and the implementation of the benami transactions Act make it even more difficult for anyone in the economic chain to opt out of the taxation system.

Demonetization measurement:

• Massive reforms like demonetization cannot be measured solely by using economic parameters but need to take into account the structural shift that such reforms induce in society.
• Societal and long-term economic changes are difficult to measure and require more reasoned, detailed, and patient analyses: this should increase our resolve to do deeper research rather than jumping to hasty, ill-informed conclusions.
• Demonetization has provided Indian citizens a unique opportunity to re-imagine not only their currency, but also their own social mores, honesty, compliance with law, and their willingness to change and adapt to a more transparent and New India.

What are the consequences of demonetization?

Positive consequences:

• The growth in the direct tax base.
• The switch in the financial holdings of households from cash to bank deposits
• The increased use of digital payment

Negative consequences:

• The main negative economic consequence of demonetization has been the disruption of unorganized supply chains that are dependent on cash transactions.
• Demonetisation leads to decline in economic growth to a three year low of 5.7 per cent.
• RBI report had revealed that nearly 99 per cent of the scrapped currency notes had come back to the banks, and it would become 100 per cent if cash in the pipeline is accounted for.

What were the stated goals of demonetization?

• To curb black money
• To promote Digital Transactions
• One of the objective was that the quantum of cash operating in the system must gradually come down
• One of the stated objectives of demonetization was to increase the tax base.
• One of the aims was to bring about a shift from a cash based economy towards more digital or electronic forms of transactions.
• After demonetization, there was a spurt in electronic transactions through prepaid wallets, debit and credit cards, NEFT(National Electronic Fund Transfer).

National Electronic Fund Transfer (NEFT):

• The NEFT is an electronic fund transfer system maintained by the Reserve Bank of India.
• Started in 2005, NEFT is a facility enabling bank customers in India to transfer funds between any two NEFT-enabled bank accounts on a one-to-one basis.
• Unlike Real-Time gross settlement (RTGS), fund transfers through the NEFT system do not occur in real-time basis.