Face the decline: 

Face the decline: 

Context:

• According to the critics, demonetization halted the recovery of rural economy.

What is demonetization?

• Demonetization of currency means discontinuity of the particular currency from circulation and replacing it with a new currency.
• In the context of India, the government banned the 500 and 1000 denomination currency notes as a legal tender on 8th November, 2016.

What was the objective behind the demonetization in India?  

• The government’s stated objective behind the demonetization policy are as follows:

1. It is an attempt to make India corruption free and to curb black money.
2. It is expected to control escalating price rise and to stop funds flow to illegal activity.
3. It is an attempt to make a cashless society and create a Digital India.

What is its short term and long term effects in the economy of the country?

Short term:

1. India’s GDP which grew at 7.6% in FY 2015-16 has seen a drop by 0.5% to 1.5% in 2017 as per reports of various agencies.
2. As for agriculture, wholesale vegetable markets have been witnessing declining demand and prices of tomatoes and other food items have fallen drastically making it economically unviable for the farmers to produce these crops.
3. The withdrawal of the old currency notes had initially put pressure on the mandis; farmers were having problems in selling their produce as both the parties have to agree on the mode of payment.
4. Rural economy and demonetization:

• Most critics of demonetisation have argued that it caused a decline in rural demand and contributed to a fall in agricultural prices following the good harvest in 2016.
• A sharp drop in inflation did occur and this is what contributed to whatever real wage growth took place.
• Also, nominal wage rate growth had fallen sharply after 2014 to 5 % per annum from a high of more than 15 per cent during 2008-2013.
• The trend since July 2016 in nominal wages remains the same but appears higher in real terms because inflation fell sharply from a level of 5 per cent until October 2016 to less than 2 per cent by June 2017.

Long term:

1. The UN World Economic Situation and Prospects revised report projected that India will achieve an impressive 7.9 per cent GDP growth in fiscal 2018, revising upwards its January estimates when it had said India’s growth will be 7.6 per cent next year.

2. India’s tax-to-GDP ratio is quite low at 16.6% compared to other emerging economies.

• Thus, it is estimated that since more money, including black money, gets accounted for this will lead to better tax compliance owing to better targeting of income.

3. The digital initiative of the government will also result in higher indirect tax revenue for the govt. in the form of service tax.

4. Since consumer demand has slowed and consequently industrial production has declined, employment generation has been adversely impacted by the currency demonetization drive.