Demonetization and its Impact on Indian Economy (Part-1)
Last year on 8th November, PM Modi took everyone by surprise when he delivered his midnight speech on the national television. The move because of which the whole country trembled was to demonetize the Indian currency of ₹1000 and ₹500. It created a havoc among certain people around the country who held a large amount of cash in their hands. We witnessed large sums being burnt at various places. The Income Tax Department reached a new high with frequent raids and arrests. We came across a word which was flaunting on every lip i.e. Demonetization.
So, what actually is Demonetization and why is it done?
Demonetization is the process under which a currency loses its value and become obsolete. Demonetization generally happens in a country when the government decides to take down the current legal currency. There can be several reasons behind taking such a big step. One of the reasons could be the hyper Inflation (when inflation becomes more than 20%). In such situation, the government decides to curb the currency to replace it with the new one. The other reasons include eradicating the existing corruption from the economy. It is considered as the easiest way to finish off the black money market from an economy. There can be other reasons like facilitating trade or to promote a cashless economy.
Now, the question arises that why did India took this step?
India is a vast country and one of the fastest growing economies around the world. But, with time it was noticed that even though the average income of India is rising at a decent rate but with that, the rich -poor gap has reached an all-time high. One of the vital reasons is the ever-increasing black money circulation in the economy that has shaken the roots of the development. The propaganda of BJP in the 2014 Lok Sabha elections was filled with such catchy lines that promised to fill the accounts of every citizen with 1 lac rupees after bringing the black money to its hometown.
When the people almost lost hope of those promises, the thunderstorm came without any sound on Nov, 8. The Prime Minister declared that from Nov 9th, the current denominations of ₹1000 and ₹500 will only be a piece of paper. This struck people like pellet guns would do. Many people lost their sleep, others lost what they have piled up all their life. The 1000 and 500 currency notes amounted to 86% of the whole currency available as cash in the country. However, the government gave enough time for the replacement of the old currency and extended it too.
The Sudden Impact on India
Queues lined up in front of banks and post offices. Chaos rose up in the economy where maximum handlings were done in cash. From buying vegetables to purchasing cars, people liked it to do in cash. And, this was one of the vulnerabilities that comforted the black money market in the country and even abroad. The government acclaimed all the compliments for this great work but also get a lot of abusing for putting the whole economy and in citizens at risk. The reaction of opposition parties was mixed. Some clapped their hands while others chattered with their mouths.
While the big businessmen and educated people behold the situation with the online banking facilities, the impact on the daily lives of middle-class people and daily workers was huge. The people who were not even familiar with the ATM machines were pulled out of the system to line up at the doors of banks in the unyielding heat of the Sun. The country where around 79% of the transactions were dependable on the cash was put to a halt. Of the 2,00,000 ATM’s, only 1200 were operational. Banks shut down for a day, ATM shut down for weeks.
The newly introduced bank notes of ₹2000 and ₹500 were of different sizes and thickness which needed all the ATMs to be calibrated. Moreover, the daily withdrawals and deposits limit added to the misery of the people. The declaration of the waving off of the transaction fees did help people to survive. The acceptance of old currency in hospitals and petrol pump stations provided some relief to the common people.
Government’s View Point
The Government aim behind the sudden burst of such decision was to reinforce the eradicating economy of the country.
The first objective was to eliminate the counterfeit currency from the system. Several cases of fake currencies were lurking around for years but no one took a heed to this matter seriously. Nobody knew how do these fake currencies reach the pockets of the innocent people. The roots were way far from the sight. What more good technique would have been to decimate this.
The second objective was to get rid of the terrorist financing activities, which were on an ever-increasing graph in the country. The militant activities were on the verge of eating the whole country without even burping. The killing of soldiers around the borders had become a routine. A routine that needed to be wiped off.
The third reason that would have been to tackle the tax evasion. It is a shameful fact to notice that only 1% of the Indians pay their taxes. The country has suffered a lot because of such tax hiding citizens. For the development that we all want, paying the taxes is essential. With this decision, the companies and individuals who held a large amount of cash were forced either to throw it away or to take that sum to the banks and provide relevant documents about its source. If they were unable to render the source, a 200% tax was to be submitted. One bullet and two targets, isn’t it?
The other reasons included the promotion of a cashless economy, where every transaction will be monitored by the Income Tax Department. Where no one could hide the money beneath his pillow. An economy where the wallet will be filled with smart cards and even the grocers and hairdressers will be having card accepting machines. This will also pave the way for virtual currencies like bitcoin. Japan has already sanctioned Bitcoin as a legal tender. India may join it soon, it is believed. Far isn’t the day when everyone will have banks at their fingertips and cash would be for RBI only.
Well, this was the Part-1 of the Demonetization Scheme. The Part-2 will on the ‘India’s position after the Demonetization- How will it help in Long term’. Comment with a YES, if you want Part-2 today only and don’t forget to share it with others.