The Big Picture- What Will Be the Indicator to Judge the Success of Demonetization Drive?
While the Government continues to convince the people and the opposition on its demonetization move, there is a clear divide among economists who are still in the process of tabulating the pros and cons, the short term and the long term impact on the economy. Finance Minister in his recent statement said that the Prime Minister has created a new normal for white transaction and this would lead to a jump in public spending and welfare activities.
At this point of time, it is quite uncertain whether the new normal will be on the positive side or on the negative side in the short run. The kind of impact this demonetization is going to have on the macro economy is very substantial. The economy will be on the higher trajectory in the coming time provided the cash transactions are reduced and there is a growth in economy. How the transactions are checked in the real estate sector, political line etc is important.
Looking only at the economy, the country will move towards low interest regime as a result of rise in the money supply due to high deposits. This will lead to increase in investments both domestic and foreign. If foreign investors feel comfortable investing in India because of reduced corruption to some extent, this would indicate success of the demonetization move. The system will get cleaned up especially in the political spectrum and bureaucracy as well.
There is nothing in this move that controls the process to generate black money. Black money is not a stock. It is a process and is generated by whole range of activities that are not disclosed to the income tax authorities. One should strike at the root of this problem by having a more efficient tax system, proper circle tax rate, curbing benami property transactions by insisting on the use of Adhaar Number in property dealing, transactions in imports and exports and by penalizing those who evade tax in one way or the other. Substantial amount of money through participatory notes are used to fund illegal activities. Somewhere, the system provides for black money to be converted into white.
What is evident here is the fact that the cash economy of the country has suffered a lot. Government needed to act quickly to restore the necessary requisite cash back into circulation which did not happen. This entire process has also generated a sort of black economy because poors who are unable to get new currency from banks are getting them exchanged for lesser money in return. Lakhs and crores of people who are employing other people in the informal or unorganized sector, micro or small industries, cash lubricates their business. If cash supply chain is broken, people will lose job.
The fact that money is coming into the banks right now should not be exaggerated because after demonetization it obvious that money will come into the banking system because the cash holdings have been rendered illegal. But, once these currencies come into the banking system, it has to be seen that whether the banks are prepared to issue new currency or not. The stock of new currency was not ready to cater to the needs of majority of people. How this money is used for health, education, waiving off farmer loans, public welfare activities and other social programmes has to be seen.
It is being said that the government’s approach has been that of trial and error because of the new guidelines coming up everyday. The GDP is likely to fall especially in the next couple of quarters because of the fact that many markets have not been functioning. Probably, somewhere the Government could not anticipate some of the social issues like the timing in terms of marriage season.
Till now, the reactions seem to be mixed from people. If there is enough cash to flow in the economy and Government can avert the crisis that poor people are actually facing then only this structural change can be deemed to be successful in the long run. Till then, it can be said that it’s a work in progress.