A year ago on this day, Prime Minister Narendra Modi announced “demonetisation” that is banning the High value currency notes (Rs. 500 notes and Rs. 1000 notes) which constituted upto 86% of the Nation’s currency. The primary aim of demonetisation was to curb black money, Counterfeit currency notes and to avoid tax evasion.
A quick recap of immediate effects of demonetisation
- The High value currency notes were banned with no prior information on Nov. 8 around 7 p.m. It was said that the banned notes will be of no value from the midnight of November 8 2016. And people were allowed to exchange the currency notes at banks and post offices.
- Cash transactions were shattered
- It was announced that ATMs will not be functioning till 9th of November and at some places, till 10th of November 2016.
- ATMs were flooded with people. Back then, long queues were seen outside all the banks and ATMs, for exchanging the currency notes.
- Illegal exchange of currency on a commission basis was in practice.
10 graphical representations to show the impact of demonetisation
IMPACT ON THE ECONOMY:
- The rural and informal economy suffered a lot as most of the transactions were cash based transactions.
- Wholesale Price Index (WPI) declined sharply as Perishables such as fruits and vegetables and other immediately consumable goods became aftermath.
- By turning farm markets into buyers’ markets, demonetisation may have also contributed to the decline in prices of pulses.
- New project announcements declined sharply in the wake of demonetisation, a Centre for Monitoring Indian Economy (CMIE)analysis showed, hurting the capex cycle.
- RBI’s domestic earnings declined as it had to pay interest of Rs17, 426 crore after it mopped up excess liquidity in the banking system following demonetisation.
- RBI’s printing costs also went up because of the move.
- Increase in the tax base. According to the finance ministry’s estimates published in the latest Economic Survey, the tax base expansion attributable to demonetisation was Rs. 10,600 crore, lower than what RBI spent on interest expenses, and equivalent to only 0.1% of India’s gross domestic product (GDP). The full effect on tax collections “will materialize gradually” as reported income of new taxpayers grows, said the survey. How far such gains materialize remains to be seen.
- The growth in detected counterfeit notes after demonetisation has not been unusually large, shows RBI data, even as counterfeits of the freshly issued notes have already emerged in the system.
- Demonetisation did provide a boost to non-cash payments in the short term but that effect may be waning, with the cash-to-GDP ratio back to double-digits.
- There seems to have been some impact on the stock of black money (rather than the flow), given that the construction sector has been hit hard. But this may also have led to large-scale job losses.
- At the end of fiscal year 2017 (FY17), the proportion of high-value notes stood at 74%, considerably lower than that in FY16. But this figure may rise significantly by the end of FY18.