Source:

https://www.businesstoday.in/current/economy-politics/what-has-pm-modi-done-to-fight-black-money-an-explainer/story/280890.html?utm_source=recengine&utm_medium=WEB&referral_sourceid=259476&referral_cat=Economy-Politics

Model Answer:

Introduction:

• Demonetization in simple term is withdrawal of a particular form of currency (Rs. 500 and Rs. 1000 currency notes in Indian context) from circulation. It is the act of stripping a currency unit of its status as legal tender. In this, the current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
• The Government of India has withdrawn Rs. 500 and Rs. 1000 from circulation since November 2016. The move of the government was largely to curtail black money running a shadow economy. Apart from black money the aim was also to counter terror funding, check counterfeit currencies in circulation etc.

Criticism: Failures

• Demonetization was aimed to recover about 10 lakh crore of high value notes in circulation out of about 16 lakh crore. The pre-assumption of the government was that about 6 lakh crore rupees was under black money. But the final disclosure by the RBI in August 2018 says that it has recovered 15.31 lakh crore and only Rs. 16,000 crore was not returned to the RBI. This indicates that much of the money in circulation or either under black deposits was able to get into the banking system making them legal. And thus, in essence, demonetisation has not met the government’s goal of wiping out black money from the Indian economy.
• The move has also reduced the RBI’s profit as central bank spent Rs. 21,000 crore in handling the mechanics of demonetisation, including printing of notes. This resulted into RBI paying lesser dividend to the central government.
• The sudden withdrawal has made adverse impact on business and economy. Instead of growing economy India has become a standstill and no growth economy.
• India is an agriculture based economy. Due to the cash crunch, the farmers especially small and marginal who largely depend on cash to buy seeds, fertilizers and to pay for sowing, borrowing water for irrigation and for other related agriculture equipments remained worst affected and could not complete the crop related activity.
• Since small branches of the banks were also not supplied with adequate cash within time of sowing season of the crop, farmers could not get their crop loans disbursed. This added to the woes of the farmers leading to a weak agriculture production the coming year.
• Real Estate sector came to a standstill and is still gasping for buyers of the constructed and half constructed inventory without buyers. This has resulted in poor cash flow leading to a poor demand.
• Demonetization has made the situation become chaotic. Tempers were running high among the masses as there was a delay in the circulation of new currency.
• Due to the inability to pay cash to poor daily wage workers, the small employers have stopped their business activity.
• Absence of Rs. 100 and Rs. 500 notes in circulation (less available) added more to the woes of the common people with low incomes as they were not able to get changes of Rs. 2000 in return.

Achievements of Demonetization:

• However, demonetisation had some positive impact on the economy as well which reflected through increase in Assets Under Management (AUM) of mutual fund industry.
• As per RBI, seven specific accounts, namely Basic Saving Bank Deposit Accounts, PMJDY Accounts, KCC, dormant or inoperative accounts, co-operative banks’ accounts with scheduled commercial banks, bullion trader/jewelers’ accounts, and loan accounts, witnessed a steep rise in deposits. These deposits further helped banks’ ability to lend to small businesses.
• One of the biggest achievements of demonetization has been seen in the drastic curb of terrorist activities as it has stopped the funding to terrorism which used to get a boost due to inflow of unaccounted cash and fake currency in large volume.
• Demonetization associated with various Acts and Rules helped to some extent in curbing black practices. It has disclosed many unaccounted property in abroad, led to enhanced tax base by the collection of more taxes, led to undisclosed income detection by the IT department etc.
• Demonetization has driven the country towards a cashless society and promoted digitalization. Lakhs of the people even in remote rural areas have started using cashless transactions. The move has promoted banking activities. Now even the small transactions have started going through banking channels and the small savings have turned into a huge national asset.
• Measures like IDS and PMGKY instilled fear in the minds of unscrupulous businessmen, which resulted in the declaration of Rs 70,250 crore undeclared income. This income was taxed at upwards of 45 per cent, raising the government’s revenue.

Conclusion:

• In nut and shell, the demonetization associated with other acts, rules and regulations was to some extent successful, however, the unplanned sudden implementation had led to chaos in market for some time.
• This move has certainly benefitted the economy in terms of increased tax base, bringing many under tax net, disclosure of income etc. at the same time affecting slow growth of national income.