Skip to main content

Counter-productive? Demonetisation a short-term remedy for a long term problem

By NS Venkataraman* 

In November 2016, Indian Prime Minister Narendra Modi sprang a surprise on the country men by announcing demonetisation of high value currency notes. After announcing the decision, Modi spoke to the surprised and confused people and explained as to why demonetisation was necessary.
Modi said that considering the urgent need to wipe out black money circulating in the country, root out corruption and eliminate counterfeit notes , he had taken this measure. While stating that demonetisation was one of the measures that he would initiate to achieve the objectives, Modi also implied that curbing currency in circulation is a pre condition to achieve such objectives.
The demonetisation announcement was followed by long queue in front of the banks, causing hardships to people in several ways.
Of course, the pledged admirers of Modi appreciated his courage of conviction to take such bold decision and sworn critics of Modi opposed his move bitterly . However, the fact is that, by and large,common people in India viewed Modi’s move as necessary and appropriate, which became clearly evident when Modi’s party was voted back to power with clear majority in subsequent election to parliament.
The consensus view was that the demonetisation measure put huge fear in the mind of the corrupt people and black money holders and huge quantity of unaccounted money was brought to light, which justified the demonetisation measure.

Huge increase in currency circulation

One of the claims made at the time of demonetisation by Modi government was that the currency in circulation would be significantly brought down and digitalisation would be promoted in a big way.
While the currency in circulation was significantly brought down immediately after demonetisation, the present ground reality is that the currency in circulation has now increased by over around 83% after the demonetisation period in 2016.
Soon after demonetisation, the currency in circulation fell to a low of about Rs 9 lakh crore on January 6, 2017, nearly 50% of Rs 17.74 lakh crore on November 4, 2016.
The currency in value terms has soared from Rs 17.74 lakh crore on November 4, 2016, to Rs 32.42 lakh crore on December 23, 2022. Currency in circulation, which was Rs 18.04 lakh crore at end-March 2018, jumped to Rs 31.34-lakh crore at end-March 2022 and further to Rs 32.42-lakh crore as on December 23, 2022.

Reaping the benefits?

The question now is as to whether India has reaped the benefits of demonetisation measures subsequently. It appears that it has not happened, which is unfortunate.
Due to such high currency circulation level at present, the use of unaccounted money (mainly cash) has now soared. Recently, record seizures amounting Rs 6.6 crore in cash were made in one single assembly constituency in Telangana. Almost every day, news Is appearing in the media that Enforcement Directorate and Income s Tax authorities have been conducting raids and seizing huge amount of cash from the black money holders. Some people think that seizure of such black money is only a tip of the iceberg.
With such large currency circulation, parallel economy is now in full flow in the country, accompanied by corruption in government departments and business dealings. Real estate deals are now increasingly being done by cash transaction using black money.
The country seems to be back to square one at present, with parallel economy happening and increasing at alarming level.

Justification

The Government of India has not so far provided any credible explanation for increasing the currency in circulation multifold, which is much against the objective pronounced by the Prime Minister at the time of announcing demonetisation.
Some economists justify such huge cash in circulation by stating that it is necessary, as the national economy is growing at a very impressive rate and people and business houses need cash to meet their requirements. Another argument that is advanced in favour of increase in currency circulation is that so long as people pay tax properly directly or indirectly , total amount of cash in circulation is not a matter of concern. 
Increase in tax collection by government is nowhere in proportion to the huge increase in the cash circulation
To support this view, it is pointed out that the GST (Goods and Services Tax) collection has been increasing steadily. Further, it is argued that even as cash in circulation is increasing multi fold , the digital transaction has also been increasing significantly.
There appears to be some fundamental flaw in the above argument and there should be a better way of fiscal management than printing currency notes in a developing country like India, unlike USA.
In fact, in the last few years, the Government of India has been spending huge money by way of subsidy support , extending cash benefits to the farmers and welfare measures and distributing free vaccine to the countrymen, particularly to reduce to the sufferings to the people during the COVID period.
With the significant increase in currency circulation by the Reserve Bank of India, the Government of India collects the money from the people in variety of ways by issuing bonds etc. and several state governments also do so.

Benefits undone

This strategy of the Government of India amounts to finding a short-term remedy for a long term problem, which is bound to be counter productive in the long run.
The net impact of the overall Rs 32.12 lakh crore currency in circulation at present is that the benefit of demonetisation has been undone, resulting in disturbing level of growth of parallel economy and corruption in the country.
It is necessary to note that increase in tax collection by the government is nowhere in proportion to the huge increase in the cash circulation in the country.
Finally, the increase in currency circulation has resulted in steep increase in the price of goods and services, creating huge burden on the family budget of those living in lower and middle income group, pensioners and those belonging to unorganised class in the country.
---
Trustee, Nandini Voice For The Deprived, Chennai

Comments

TRENDING

Importance of Bangladesh for India amidst 'growing might' of China in South Asia

By Samara Ashrat*  The basic key factor behind the geopolitical importance of Bangladesh is its geographical location. The country shares land borders with Myanmar and India. Due to its geographical position, Bangladesh is a natural link between South Asia and Southeast Asia.  The country is also a vital geopolitical ally to India, in that it has the potential to facilitate greater integration between Northeast India and Mainland India. Not only that, due to its open access to the Bay of Bengal, Bangladesh has become significant to both China and the US.

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Regional political dynamics 'leading to' institutional violence in SAARC University

By Sandeep Pandey*  South Asian University is a university set up in Delhi by member countries of South Asian Association for Regional Cooperation – India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, Afghanistan and Maldives – which is open to students from all these countries. However, as SAARC is receiving little attention these days because of regional political dynamics, it appears as if SAU has lost significance too. Because of the hiatus in peace process between India and Pakistan, the Board of Governors of this University is dysfunctional.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

'BBC film shows only tip of iceberg': Sanjiv Bhatt's daughter speaks at top US press club

By Our Representative   The United States' premier journalists' organisation, the National Press Club (NPC), has come down heavily on Prime Minister Narendra Modi for recent "attacks on journalists in India." Speaking at the screening of an episode of the BBC documentary “India: The Modi Question,” banned in India, in the club premises, NPC President Eileen O’Reilly said, “Since Modi came to power we have watched with frustration and disappointment as his regime has suppressed the rights of its citizens to a free and independent news media."

A Hindu alternative to Valentine's Day? 'Shiv-Parvati was first love marriage in Universe'

By Rajiv Shah*   The other day, I was searching on Google a quote on Maha Shivratri which I wanted to send to someone, a confirmed Shiv Bhakt, quite close to me -- with an underlying message to act positively instead of being negative. On top of the search, I chanced upon an article in, imagine!, a Nashik Corporation site which offered me something very unusual. 

Natural farming: Hamirpur leads the way to 'huge improvement' in nutrition, livelihood

By Bharat Dogra*  Santosh is a dedicated farmer who along with his wife Chunni Devi worked very hard in recent months to convert a small patch of unproductive land into a lush green, multi-layer vegetable garden. This has ensured year-round supply of organically grown vegetables to his family as well as fetched several thousand rupees in cash sales.

Over-stressed? As Naveen Patnaik turns frail, Odisha 'moves closer' to leadership crisis

By Sudhansu R Das  Not a single leader in Odisha is visible in the horizon who can replace Chief Minister Naveen Patnaik. He has ruled Odisha for nearly two and half decades. His father, Biju Patnaik, had built Odisha; he was a daring pilot who saved the life of Indonesia’s Prime Minister Sjahrir and President Sukarno when the Dutch army blocked their exit.

Anti-Valentine's Day push: Sectarian move to 'restrict, constrict' India's cultural milieu

By Ram Puniyani*  Indian culture is diverse and plural. It has been enriching itself by accepting the diversity irrespective of religion or geographical boundaries. This gets reflected in all aspects of our life, be it food habits, clothes, art, architecture, social occasions, customs and religious traditions. This is the natural grain of any open and thriving society. With the rise of sectarianism the effort is to restrict and constrict our culture in particular. 

Hillary Clinton, Al Gore, Ban Ki-moon, others ask Bangladesh PM to 'protect' Yunus

Counterview Desk  A campaign has been launched to support Bangladesh-based economist, micro-finance guru and Nobel laureate Muhammad Yunus, seeking signatures from citizens across the globe in order to “protect” his work, life and safety.