CA S S Nayak
Mangaluru, Nov 28: Ever since Prime Minister Narendra Modi made the big and sudden announcement on the night of November 8, demonetisation has been the biggest issue grabbing headlines day after day. The issue has rocked the Parliament with the opposition parties firing all guns at the NDA government, even as the RBI and PM Modi himself have gone on record assuring the public that all would be well in a matter of days.
While debates rage on about the pros and cons of the move, here's a clear-cut picture of what demonetisation is, why it was done, and its merits and demerits:
What is demonetisation?
The government recalls the existing currency notes and issues new currency notes in its place.
Demonetisation is not a common exercise like annual budget. It is taken as an extreme step to streamline the economy and remove the effect of parallel or shadow economy.
Why was demonetisation done?
As per the government, demonetisation was done for the following reasons.
1) To tackle unaccounted money (called as 'black money') in the economy.
2) To lower the cash circulation in the country which 'is directly related to corruption in the country',
3) To eliminate fake currency and dodgy funds which have been used for illegal activities.
There are a lot of checks in place in the economic system like the Money Laundering Act, 2002 and Benami Transactions (Prohibition) Act etc. This has been instrumental in controlling illegal transactions being morphed as legal transactions. However, shadow economy and hard cash still plays a dominant role during periods like elections, property transactions, social occasions etc., much of which is done through unaccounted money. To curb these practices, it is essential to move to a cashless economy. Absolute cashless economy is not possible to achieve and even developed economies like USA and state-controlled economies like China have also had parallel and shadow economies. So, the process of demonetisation is aimed to achieve significant control over such shadow economy and to make the wealth created out of illegal economy as redundant.
Perceived Advantages of Demonetisation:
1. The biggest advantage of demonetisation is that it helps the government to track the 'black money', that is, undisclosed or unaccounted cash which has been stashed away by people at their homes and various places. And now that demonetisation is undertaken, they are left with the only option of depositing the same in their bank accounts. This helps the financial intelligence to trace the money so deposited and charge it to tax .
2. Since 'black money' is used for illegal activities like terrorism funding, gambling, money laundering and also inflating the price of major asset classes like real estate and gold; due to demonetisation all such activities will get reduced for a considerable time and also it may take years to generate that amount of black money again. Hence, in a way, it helps in putting an end to this circle of people doing illegal activities and using that 'black money' to do more illegal activities.
3. Another benefit is that, due to people disclosing their income by depositing money in their bank accounts, the government gets a good amount of tax revenue which can be used by the government towards the betterment of the society for providing good infrastructure like hospitals, schools, roads and many facilities for the poor and the needy sections of society.
4. With more deposits in the bank, there is an immediate inflow of cash. This has led to more funds available for giving loans, resulting in easy loans at lower interest rates. So for businesses that are planning for expansion this is the best time to borrow.
5. The real good news is that inflation is likely to come down. The government will be able to control inflation as less money will be in circulation. So overall consumption of goods and services will increase gradually and help businesses to make up for lost sales in the coming months. With GST to be implemented in the coming year, it will also reduce the overall central and state taxes. Interstate trade will increase and overall prices will come down. When consumption increases, profitability will rise higher than current levels.
6. Dollar rates have increased in the past few days. NRIs can now get more exchange value. This will prompt overseas investment to come to India and broaden investment opportunity in real estate and shares.
7. Even NRIs who earn salary abroad will get more Indian rupees for exchange and will benefit from it.
8. Exporters will gain better realisation for their products due to weakening of rupee.
9. The government is also thinking of reducing the income tax rates as fiscal budget deficit will come down. Individual tax payers can expect some relief in the tax rates for the next financial year.
10. There was also a belief that real estate would be hit by demonetisation. This is not fully correct. For buyers, this could be a great opportunity to get a deal, especially in ready to move-in projects, as real estate prices are likely to face a downward pressure and a few sellers may be more willing to negotiate and lower the prices of housing units. However, for real estate companies and builders this is bad news.
11. Status conscious people who buy gold for show-off, can use only the legal tender and accountable money. And as such, this money will be only limited and people may not buy gold and the demand for gold will come down. The consequence would be fall in the price of gold. Hence, gold is likely to lose sheen in the near future.
12. Share market prices have moderated in the course of demonetisation and this gives opportunity for the first time investors to invest in the stock markets.
Disadvantages of Demonetisation:
1. Demonetisation move has led to a huge panic in the country.
2. Loss of revenue due to loss of productivity, due to waiting in queues for the chance to withdraw at the ATMs for long hours.
3. Non-availability of cash in banks and at the ATMs causes a lot of inconvenience.
4. More deposits in the banks which needs to be disposed off will encourage reckless lending resulting in NPAs.
5. Due to lowering of the interest rates on deposits, it will directly effect the senior citizens who would have invested their savings in the form of term deposits. However, this loss of interest would be compensated by the inflation which is likely to come down in the near future.
6. There is a lot of money laundering undertaken, wherein the youth are lured to deposit money into their account. Also, the people under the below poverty line are convinced to deposit the money in their accounts. This may lead to cancellation of their BPL card just for momentary gains. Also, the youth fail to understand the extent of the legal repercussions for their action.
7. Black money holders who have parked their cash in gold, foreign currency and properties in tax haven countries seem to be out of the purview. (Although there is expectation that steps are being taken to deal with the same.)
8. Since the ATM card coverage in the country is low, the common man is facing several difficulties while paying for daily needs. Moreover, the people in rural areas are not familiar with plastic card usage. Proper spreading of awareness is required.
9. Rural economy, agriculture, transport and unorganized sectors are feeling a significant loss in business. Rural economy may take much longer to get actual cash. So businesses that have connection with rural economy may have a low business volume for some weeks to come. But, there is a news that to overcome this problem, the government has decided to make extra spending in rural areas and push more funds in the Rural Employment Guarantee Programme. Therefore, the business cycle may pick up again in the coming months and till then such businesses have to do effective cost management.
10. RBI wants to replace all the currencies which have been withdrawn from circulation, it will take atleast 4 - 5 months to print so much notes. Further, the intention of the government was to move to cashless economy. It is suggested that the retail business houses must have debit/credit card machines so that they do not lose customers due to shortage of currency. This is a sudden blow to the business houses because they would not have been prepared for the situation.
In short, owing to the response of people and several illegal acts of associations etc finally coming to light, this seems to be only a short term pain and long term gain. However, the two previous demonetisation schemes have not stopped the shadow economy. Experience of other countries that have undertaken demonetisation have not also been very encouraging. Also, just because the transaction is in cash, doesn't mean that it is a part of the shadow economy. However, whatever may be the pros and cons, majority of people have welcomed this move.