Placement Preparation – A Guide To Demonetization And Black Money

On 8 November 2016, PM Modi announced on national TV that currency notes of Rs 500 and 1000 cease to be a legal tender from midnight. The reason that he gave in the very elaborate speech was to curb the menace black money, fake notes and funding to terrorist groups. As per the arrangements made by RBI, new notes of Rs 2000 and 500 were printed, old notes were mandated to be exchanged by 31st Dec. It is being said that idea of Demonetization came from a presentation made by Arun Bokil, member of Pune based Arthkranti. Here’s the link to the presentation made by Bokil.

Initial Impact: 86% of India’s currency notes were in the denomination of 500 and 1000 in November, 2016. This created a distinctive chaos amongst people for sure. While Government claimed that they were preparing for Demonetization for almost 9 months; ex-governor of RBI, Raghuram Rajan, whose term ended in Sep 2016, recently disclosed that preparation from Demonetization didn’t start till his term. National productivity was estimated to take a dip due to queues for changing the currency notes. The economy was expected to take a hit due to lack of liquidity in the system. Several deaths were being reported of people who were standing in queues or didn’t have money to pay hospital bills. By end of December, RBI estimated that close to 90% notes of 500 and 1000 have already come back into the system.

Situation after 10 months:

  • GDP of India has seen a decline for 3 successive quarters after Demonetization. Dr Manmohan Singh, in his speech in RajyaSabha earlier this year, predicted a reduction in GDP growth of almost 2% which almost came true in GDP data released for last quarter.
  • Real estate sector which was speculated to accommodate the maximum black money took a hit and hasn’t recovered.
  • Informal sector of India has taken a strong hit and witnessed large scale unemployment. As per CMIE, 1.5 million jobs were lost in first four months of 2017.
  • The stand of government has changed several times during the last 10 months:
  • As per RBI, 99% of total notes which were demonetized have come back. It took them more than 9 months to count the notes as there were concerns that money which got back into the system could have more than the amount demonetized.
  • Cost of printing the new notes was close to Rs 8000 crores, opportunity cost lost in GDP growth is more than Rs 2 Lakh Crore, whereas the gain achieved by RBI in terms of notes not returned is Rs 16000 crore.
  • While initially, government claimed it to be a measure to curb black money.
  • It later went to claim that actual goal was to negate the fake currency being circulated and put a check on funding to terrorist and separatist organizations.
  • Arun Jaitley recent held a press conference where he said that Demonetization’s primary aim was to expand tax net in India.
  • Ex-RBI governor Raghuram Rajan, in his book “I Do, What I Do” on tenure as RBI governor as put several question marks on Demonetization and also said that Govt asked for his opinion on Demonetization in April 2016. He replied that short term economic cost of this step would outweigh the long term economic benefits.
  • The figure of the increase in number of taxpayer has been seriously disputed and CBDT, MoF have different figures to quote.
  • As per many reports, majority of the new taxpayers in system might not show income greater than Rs 2.5 lacs per annum, which effectively puts them out of the tax paying bracket.

My take on the Issue:

  • Long term benefits of Demonetization can be leveraged only if Govt used the data of offenders and doubtful deposits effectively without creating problems for honest citizens.
  • Informal economy of India is really crucial as it generates maximum employment, they are not connected to formal credit channels and aren’t documented. Government must take strong measures to provide relief to this sector.

Sachin Mandot

Sachin Mandot is an IMT-G Alum (Batch of 2018). With an aim to help MBA aspirants, he has been writing on InsideIIM platform since March 2017.