Is Demonetization a right step?

At 8.00 PM on 8th November 2017, Prime Minister of India Narendra Modi announced that 500 and 1000 notes, which amounted for around 86% of total currency I circulation, will no longer be valid. It was a drastic step. Every person living in India felt the impact of this decision. It has caused great discomfort to Indian citizen. In the following essay we will look into whether this step was right or wrong.

 

The main reason demonetization was implemented was to curb the black money. However, with the recent data provided by RBI around 98.8% of banned currency has been deposited. Centre government is fighting another case in Supreme Court to not allow another window to deposit banned currency. These statistics certainly casts doubt on the output of demonetization in curbing black money. However, Government has often referred that they have got the information of people who have deposited these money and the investigation will be done to identify black money deposited in the system. Even after discovering huge deposits, another problem government may face is to probe that the money deposited has illegitimate source.

 

Moreover, The impact of demonetization has been felt in growth and job production. When demonetization is announced, Indian banks were holding large amount of NPA (Non Performing Assets). This has already causing strain in the investment in new business, which generates new job opportunity. The demonetization put more pressure on the investor. This resulted in further low investment in new company and new business in already established companies. Moreover, the already employed daily waged worker faced the burden. Some sector, especially construction, reduced the amount of construction work. This caused lose of job opportunity. All these impact caused reduction in GDP from 7 in 3rd quarter of 2016 to 5.8 in first quarter of 2017.

 

Another reason the demonetization became too inconvenient was the way it was implemented. The new 2000 notes did not fit the ATM present at time and required modification in all the ATM machines. This caused in delay in providing 2000 notes to people. India has mainly been a cash based system and the delay in getting cash resulted huge inconvenient and in some cases panic.

 

However, demonetization did have some positive impact. One of such impact is the increase in tax base, which increased by 20% as per the government. It also provided enough liquidity to the banks to deal with the effect of NPA. Demonetization also increased the push towards digital economy. All these positive result could have been achieved from another measures without such drastic steps.

 

Demonetization is an effective way to curb the black money, but the way it has been implemented in recent case in India has not been effective in achieving its intended result.

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