On the 8th of November, the Prime Minister of India, Narendra Modi held a surprise press release and withdrew the tender of Rs 1000 and Rs 500 currency notes with a motive to eradicate black money (non-declared / taxed wealth) and fake currency. This move however led to the scrapping of 85% of the available cash in an economy which is almost 90% reliant on it.
This bold and audacious move against corruption and black money aimed at spurring the economy to heightened growth in turn rendered millions of people in India effectively unable to engage in day-to-day transactions and hampering businesses and individuals who hadn’t yet evolved digitally to pay and receive payments for their goods or services. The situation had remained grim post two months of this move - instead of booming business or large new investments, the images that had reflected India’s current economic story included snaking lines outside bank branches / ATM’s (now largely normalized as cash has been made available and withdrawal limits enhanced), distressed workers migrating back to their villages, and tax raids on jewelers and officials caught with hordes of allegedly illicit cash.
While the intent was lauded widely, the policy’s below expectation implementation—through an avalanche of amendments, rollbacks and patchwork fixes—undercuts the government’s reputation around efficiency and also damaged the credibility of India’s central bank that was caught unprepared.
From a business standpoint, the larger corporate houses have remained largely immune on account of lesser dealing in cash be it for wages or payments or receivables. However, the worst hit seems to be daily traders, vendors and small scale industries. Rural India which has low penetration of the banking system witnessed the worst impact with the inability to pay for daily needs and proper cash distributing infrastructure causing widespread stress.
From a sector standpoint, the following tables would explain the impact:
While the decision has inflicted pain to the economy in the short run owing to its poor implementation, it has helped the liquidity situation which will mean lower interest rates in a scenario where commercial and personal lending is expensive. The central bank is keeping a hawk eye on inflation which has eased off and is expected to go down further in the medium to long term.
Demonetization has also helped with bringing the larger population under the banking remit. With grant of Payment and Small Finance Bank Licenses, the Government and Central Bank have made it very clear on the go forward strategy. Also there is a constant push to use the larger available technology platform for transactions over the conventional brick and mortar set ups of branches. There are also few “Christmas Schemes” announced by the Government to push digital / app based payments where there will be cash back / sops provided to the user on transacting through these channels. And with tax declaration schemes being lapped up by people, the tax receipts are likely to be substantially higher.
While the current estimates indicate a 0.5-1% hit on the GDP over the next few months, the benefits of demonetization will be visible with greater financial inclusion, lower inflation, a healthier GDP to Tax ratio and a cashless economy in the long run.
Source: Economic Times, Firstpost.com, Hindustan Times / Mint