It is now almost two months that a very bold decision was taken by dynamic Prime Minister Mr. Narendra Modi. After initial shock within few days the opinion was divided vertically. Modi lovers in complimenting and Modi hater in condemning the decision were extra vocal. There was high decibel deafening debate in social media. Whether the move was really warranted? Whether the decision was politically motivated? Whether the implementation was faulty? Whether there was discontent amongst people? The media discussions for last 50 days were dominated by these issues. The entire winter session of parliament was washed out. It created lot of acrimony between the ruling party and opposition. As it happens in all such decisions that the real pains and gains are lost sight of. Now that the dust has settled down let us analyse the past (decision), the present (response of public) and future (effect on economy)
Long queues before Banks and ATM are enough testimony that the common citizen has undergone lot of hardships in last two months. While hearing petitions against the demonatisation the Supreme Court expressed the fear that if Government is not able to provide enough cash immediately it may invite large scale looting and riots. The situation may go out of control. The common citizen has belied the fear of Judiciary and many economic pundits. The critics are bewildered and opposition political parties are disappointed by the reaction of common citizen. Prime Minister’s credibility with common citizen is apparent. Most see him as person of integrity and determination. They may not know the economic therories, but they believe that what PM is doing is good for the country. And if it is good for the country we are ready to suffer little pain today for better tomorrow. This was also apparent from the election results at various places across the country.
There was parallel economy estimated at 20% to 30% is not disputed. The agriculture sector and small scale informal sector thrives mostly on cash transactions. It is parallel but not black economy. Absence of cash has definitely resulted into loss of business and unemployment in this sector. But hopefully it is transitional suffering, a temporary phenomena. Small businesses have inherent capacity to sustain and overcome such situations. The sector will bounce back sooner than later.
The other part of parallel economy is bribe money, large scale unaccounted transactions. They hurt the genuine businesses is uncontroverted. There is no quick and credible solution to stop it. Black money is used in many ways. Investment in real estate, gold, stocks etc are common means and are not easy to either detect or prove. The excess of black money is stored in high denomination notes. It is useful in elections and for getting big business deals. By demonetizing what the Government instantly achieved is that most out of that idle money, now stands accounted by depositing it in banks. Thus those who have chosen to deposit it have either to explain the source of income or pay tax on it. As per latest report over 1.5 lakh crores of notes have not been deposited in banks. Thus it has gone out of circulation. That is certainly a gain to economy.
The real estate and construction activity which already was going downhill has come to halt. The sector gives large scale employment to unskilled labour. Though there was excitement in air but the general business sentiment was dull for two months. It has resulted in loss of employment and it will take much longer to recover. The effect may be felt for months.
Large amount of cash in formal economy, cashless transactions which are recorded will result into greater tax collection. It augers well for the economy. As response to PMs message to nation on 31′ December 2016 some banks have reduced the lending rates and others will follow. It is positive development but will take at least three to six months to boost the business sentiments and demand. Unless the money supply comes to normal there will be less demand and till that time most Industries will suffer.
There is an explanation why the long queues lasted for so many days and why there were no riots as was predicted by many. Many local dons/goons, political bosses who need and hoard large amount of cash engaged their employees, supporters to convert demonetized notes into new notes. The employees/supporters were paid for their services of allowing the use of their identity and for standing in queue. Crores of rupees is already been again converted into black money in new notes as is evident from cash recovered in raids conducted. Cash so recovered is tip of iceberg. This is also failure of the demonetisation to an extent.
There is no visible indication that there is change in mind set of Government employees. There is no change in rules and power structure. The root causes, which breed corruption are not touched. There is not only apprehension but conviction that bribes in revenue, tax, land records, police, PWD, electricity, building permission departments and even in judiciary will continue unabated. The economy will again be in the grip of parallel economy. If that happens, euphoria generated due to demonetisation will be short lived.
The only hope against hope is that probably our Prime Minister is aware of it and has up the sleeve some concrete steps so that the parallel economy does not raise its ugly head again.
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