Review on The Political and Economical Situation in India

It was certainly a bolt from blue, when the Prime minister of India, Mr. Narendra Modi announced the demonetization of Rs: 500 and 1000 notes on November 8th, with immediate effect. This proclamation sent shock waves across the country as well as millions of Indians residing in different parts of the globe. The primary objective of this move, as cited by the Prime Minister is to curb black money, which needs to be appreciated and taken for face value.

Almost more than forty days have elapsed ever since the decision was implemented, and we could see that whilst the objective is good, there has been a tragic flaw in terms of implementation, which eventually lead to, the common man bearing the bearing the brunt of such a major policy change. Back in 1978, the then Government had done a similar demonetization exercise, which didn’t give the desired results. At that point in time, the high denomination currencies constituted barely 2.5% of the total currencies in circulation, unlike now, wherein the percentage of high denomination currency is 86%. In such a scenario, pulling out these currencies is bound to have repercussions across all cross-sections of our society. As per the Reserve Bank of India estimates, the approximate value of the total currency in circulation is 16 lakh crores of notes out of which the high denomination notes amount to 14 lakh crores approximately. Replacing these notes with an equivalent amount of new Rs:500 and Rs:2000 notes is not an easy task, as it would ideally take at least four to five months to print these currencies, taking into consideration the current note printing capacity.

The challenge here is, to ensure that the replacement is expedited on a war footing basis, in order to minimize the hardship faced by the public. It would also be interesting to take a keen look at the probable outcomes of this exercise in the long run. As per the World Bank estimate, in 2007 the black money or the parallel economy in India was 23.2% and as of now, this could be somewhere around 25%. With a GDP of $ 2 trillion and a parallel economy estimated at 25%, there would certainly be $:500 billion which has evaded tax. Visualizing a scenario that, a 16% tax is imposed on $:500 billion, $:80 billion would have come into the government exchequer, which could propel the economic growth further. Here again, the prime concern is, that a major part of this $:500 billion, which is supposed to be black money is perceived to be in the form of land, property, gold, stocks and likewise. What portion of this is in the form of cash is something which we cannot come to an inference at this point in time. The apparent windfall as far as the government is concerned is the rupees 12 lakh crores that have been deposited into the banks after 8th November till date. This has increased the bank's liquidity, thereby leading to more supply of Indian rupees and less demand. This has, in turn, lead to a depreciation of the currency which has started to benefit the expatriates in the GCC and other parts of the globe, who get a very lucrative exchange rate versus the US dollar and other Gulf currencies. This should ideally boost remittance, but the flip side of the coin is that there has been a tangible drop in remittances due to the constraints in cash availability across the banks and non-banking financial entities in India.

An immediate transition from a cash-based economy to a cashless economy is another objective that is perceived to be met through this act of demonetization. Looking at the size of the world’s major economies and their cash constituent it remains to be seen whether we can march forward at an unprecedented pace to reach this goal. The US, the world’s largest economy with a GDP of $:20 trillion has 9% cash economy. China follows suit with 13% cash, in an economy with a GDP of $:14 trillion. Japan, with an economy of $:4.5 trillion has a cash constituent of 11%. As far as India is concerned, the GDP is $:2.25 trillion and the cash element is at 22%, which is much higher than the other major countries. Moreover, for a country with a population of 1.3 billion and a vast geography, we still have a long way to go in terms of banking penetration and acquiring digital expertise, which are the key levers to a cashless economy.

Sweden is the only country which is by and large a cashless economy, wherein the population is a meager 9 million plus, coupled with state of the art digital payments technology. In view of the above facts, the government needs to initiate stringent measures to alleviate the pain of the people by ensuring cash availability, and also bring in concrete tax measures to supplement the efforts to curb black money. Taking learnings from those countries like Zimbwave and Soviet Union which did demonetization of their currencies, in 2015 and 1991 would have been ideal to assess the repercussions in the Indian context. This would have definitely given valuable insights and a more consultative approach on the part of the government would have certainly helped to implement this decision in a better manner.