Demonetisation Is A Good Move, But Government’s Implementation Is Not

Posted by ashu arora
December 14, 2016

Everything was normal. Common people had their normal, mundane but overwhelmed problems. Rich were also worried in their own way. Then suddenly an announcement by our PM regarding demonetization of high denomination currency notes snatched away the sleeps of many. Whole nation found itself helpless. This time both were suffering- rich and the poor. Unless any natural calamity like flood or starvation, this move impacted every sector of the human institution. With the roar that it is for curbing the black money and it will affect the economy and the nation positively, this is among one of the adamant move by the government.

Long queues outside the ATMs/banks, sun on the head, hazaar- paanch sau notes in the hand, rage in the heart, discussions with the surroundings… and many more things. This is the common scenario we had been observing since nearly the last one month. Although the intensity has been lessened in these days but still it seems that it will take few many more days to normalize the situation.
Demonetization ia a standard tool in any government bag of public policy instruments. It’s not that only Indian government has taken this this bold move to curb the black money from the economy. Many other countries/governments have demonetized their currencies time to time for different reasons like this year only European Central Bank halted its 500 Euro notes, Singapore killed its 10,000 dollar note and Canada its 1000 dollar note in the year 2000. Moreover, this move is not new to India. India had ceased the 1000, 5000 and 10,000 rupee notes to be considered as the legal tender in the year 1978. The impact was very small as at that time these notes were very few in circulation and many were even unaware of its existence. It wasn’t the token of common man. At that time our economy was closed, population was low, income level and expenditure was low, price of gold was low and many other factors. Its not the step taken in hustle but a well planned move. The inconvenience caused to common people was likely to happen when we have 85 % of cash in these no longer alive tenders. Declination in prices of commodities, effect on stock market, and over all negative impact on GDP are short term effects.
The present move is surely causing many people to suffer, some deserving and many non deserving. But apart from the politics, benefit , or other discrepencies (as many are claiming it to be) this move has beneficial and strong economic implications in the long run which many common people certainly can not analyse. Few of them are-
1. Firstly this will curb the present unaccounted money from the economy without causing any harm to the government. A simple example to realize this can be stated. Suppose we have 1000 notes in quantity of some value in circulation in an economy. Out of these 800 notes are still in circulation and people hided the 200 notes which is now a black money. Now when the government demonetized this note and introduces another currency of the same value and it will supply the same quantity as supplied earlier i.e., the quantity of 1000. Now 800 notes are in circulation, so 800 old notes will be exchanged with the new one but those unaccounted 200 rupee notes will not be exchanged. Hence, government will be automatically in surplus of 200 notes. This means that this 200 notes will be injected in the economy in the form of government expenditure. However the present data of RBI has not shown any significant dividend.
2. Gold and property rate will decline which accounts most of the black money of our country. Firms will keep their price low as much as possible in order to pay less tax.
3. The people will more and more invest in the financial assets instead of physical assets which will give continuous and longer returns and will also channelize the economy towards the organized entity i.e, it will lead the economy from informal to formal one.
4. India generates its 40 % GDP from the unorganized sector i.e., the small entrepreneurs, non registered works etc. it was obvious that it will cause them inconvenience for some time but when this effect will be combined with GST, SMEs and alike sectors will be forced to maintain their accounts and they will contribute more effectively to the GDP.
5. GDP will decline in the short run but it will soon build up with new and strong assets.
People are saying that USA don’t have more than 100 dollars, U.K with only 50 pound highest. They are the least cash economy like 3.64 and 7.74 % respectively. They don’t need much cash so why to have them. They curbed it long ago. Also, most of their transaction is through online transactions.
The reason for introducing the 2000 rupee note is to lessen the burden of banking sectors and RBI itself. When 1000 and 500 rupee notes are curbed the whole responsibility comes to 100 rupee note to fulfil the need. Now its very difficult to produce 10 times and five times 100 rupee note per 1000 and 500 rupee notes respectively. So introducing 2000 rupee note will reduce the burden 20 times in respect to 100 rupee note and it will be easy for the banks to distribute the 2000 rupee note as compared to 100 rupee note. Further when the government will demonetization this 2000 rupee note (a possible situation) in the future, it won’t affect the Economy like the very recent demonetization.
If they would have introduced the new 500 and 1000 rupee note instantly then it would get difficult for income tax department to account the number of old notes exchanged with the new one.

To conclude, surely many are suffering due to this move of demonetization and still many don’t find the cue of its importance but it will surely yield the result. The government owes an explanation that why they did not prepare themselves thoroughly to implement this move. They should have arranged banks, ATMs, and public help centre at the places it lacks.
Nevertheless, the government needs to learn how to act with full preparation and after this move one can only hope that the government will try improve their manner of implementing these kinds of policies.