Demonetization: What We Have Gained and What We Have Lost ... How much ?

It’s almost a couple of years after demonetization . There is always a opinion wind blowing either from the east or west. they were merits but on some place it would be demerits. Are they true or false lets dig up the actual breakout. On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 bank notes of the Mahatma Gandhi Series. The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. The sudden nature of the announcement and the prolonged cash shortages in the weeks that followed created significant disruption throughout the economy, threatening economic output. The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the Government of India on 28 December 2016 ceasing the liability of the government for the banned bank notes. Demonetization technically is a liquidity shock; a sudden stop in terms of currency availability. It created a situation where lack of currencies jams consumption, investment, production, employment etc. The intensity of demonetization effects clearly depends upon the duration of the liquidity shocks. Following are the main impacts. • Currency crunch in our economy • Welfare loss for the currency using population. • Consumption was adversely affected Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓ • Loss of Growth momentum • Increase in bank deposits and reduced interest rate • Countering of black money • Check on counterfeit currency Criticism against demonetisation Critics say, the Demonetisation as a means of tackling the black economy, carried out on the incorrect premise that black money means cash. It was thought that if cash was squeezed out, the black economy would be eliminated. But cash is only one component of black wealth: about 1% of it. • Black money is a result of black income generation. This is produced by various means which are not affected by the one-shot squeezing out of cash. • Any black cash squeezed out by demonetisation would then quickly get regenerated. • So, there is little impact of demonetisation on the black economy, on either wealth or incomes. Changed narrative from Black money to cashless economy The original intent of demonetisation was to address the issue of black money. There is enough work that suggests that people with black money hold a very small proportion of it in cash. Most of it is usually invested in gold, or real estate, or in the stock market, or abroad, and the share of black cash is 6% of the total black economy. • The primary pitch and narrative of the demonetisation drive by Prime Minister seems to have taken a major shift to cashless economy from the initial key highlights of war against black money, corruption and counterfeit currency. • Now Government says that idle money has come into the system, the cash-to-GDP ratio will decline; the tax base will expand. But none of these required demonetisation and could have been implemented independently. • The government now also said that demonetisation is only one of the many steps to tackle the black economy. • The government’s argument that cash coming back to the banks will enable it to catch the generators of black income, and there will be formalisation of the economy, may not hold. Then the goalposts started shifting when it became apparent that the main reason was not justified by what was happening. First it was cashless, then less cash economy, then formalisation of the economy. The final step was in saying this would give IT authorities the information to go after people who had deposited black money. Who mostly have borne the brunt? Large deposits by businesses do not automatically become black. The Income Tax department has to prove that the sums deposited resulted from generation of black income. According to the Finance Minister, big data analytics would track black money holders who have deposited cash in their bank accounts. • The negative effect of demonetisation can be seen in terms of big losses to the unorganised sector, farmers and traders. • The start-up world has seen a drop in investment activity • The brunt of this move actually has been borne by those who never had any black money. The note shortage is slowly waning and the long-term economic and social effects are becoming evident. Critics overlook the significant gains of demonetisation which have begun to accrue and will gather momentum For India to achieve prosperity for all, three ingredients are essential: a transparent, effective government, flourishing of competitive free markets, and huge investment in the poor. Corruption had made the government dysfunctional, crony capitalists flourished at the expensive of honest entrepreneurs, and rampant tax evasion that hindered state’s capacity to invest in uplifting the most vulnerable citizens. Note ban was announced to overcome these issues to some extent. Short-term costs inevitable There were always going to be costs in the short run — people would be short of currency, businesses would be disrupted, consumption would fall, and GDP growth would take a hit. • The government announced the Pradhan Mantri Garib Kalyan Yojana where cash could be declared, deposited, and a hefty penalty paid. For those determined to deposit their illicit wealth without disclosure, the cash has not become white. It will be scrutinised by the tax authorities and penalties levied. • The gains may accrue in the coming year once tax authorities have scrutinized through accounts with suspiciously large deposits. • According to Finance Minister, between November 8 and December 31, 2016, deposits between ₹2 lakh and ₹80 lakh, and deposits of more than ₹80 lakh amount to some two-thirds of the value of the demonetised currency. The holders of these suspicious accounts will now be in the tax net for perpetuity. • However, not all of that money deposited is black. Perfectly white cash holdings were common. To able to distinguish the black from the non-black would be the responsibility of the IT authorities. They have to analyse the deposits and correlate them with the tax payment records, which is relatively easy to do.

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