Benefits, failures and bad effects of demonetization: conclusion (Objective Evaluation of demonetization: Part II)

     In the first part of this objective evaluation of the big move of Modi government, we had examined its effects over terrorism + naxalism, over black money and over corruption. Now, we have to manly see the other side I.e. the bad effects of it; but before that we need to also mention its many other significant benefits; without them we can’t objectively and impartially weigh the ‘for and against’ balance of this highly debatable topic. Besides, the bad effects we need to mention its major failures too; which were not due to the economic aspect of the move but due to its poor implementation.

Other important benefits of demonetization

These ‘other significant benefits of demonetization’ are those positive outcomes which were not stated in the PM’s speech of November 8 and probably the government was also not assigning sufficient value to them, before implementation and completion of the 50 days’ period. One of them is the benefit which FM Arun Jaitley mentioned just recently, that the revenue through direct taxes received by central govt has increased by 14.4% and through indirect taxes it is sure to increase by even greater extent. Thus, the govt. is confidant that the country is now with much better financial strength. This strength can be utilized in enhancing budget provisions for social sector and welfare schemes.

Not only the central govt. It has also enhanced the revenue of all the state governments and (to even more extent) of the local self governments i.e. municipalities and all sorts of Panchayats. Since, the central government is the biggest beneficiary, the benefits are likely to trickle down too. Means the states will get more support and resources from the center and similarly all the lower level government bodies will get more resources from their higher level bodies. In addition to it, financial health of banks has greatly improved; a lot of money has come into the banking system and banks are having highest ever deposits. Critics have alleged that this situation has been brought to waive off the loans of big defaulters. But, this is baseless and nearly impossible assumption only. Besides, govt. spokespersons, the directors of some major banks have also denied such allegations and stated that, the banks have no such intention.  

Another major benefit, which is not mentioned anywhere till now is that, this move is disclosing and likely to disclose more and more financial crimes and criminals, on daily basis and it is increasing effectiveness and efficiency of our law enforcement agencies. Actually, due to this move, they obtained great tool to catch and to prove the financial crimes. Indirectly, the whole phenomena is increasing morale of honest people and discouraging the dishonesty.

Failures of demonetization

The biggest failure was quite evident that the government, reserve bank and whole banking system failed to make the new notes available to the people in bear-able time span. It was mainly due to mistakes in the preparations and implementation of this massive exercise. Here, we are mentioning just two blunders. One was that, they printed notes of Rs. 2000 denomination more in the beginning and the more desirable notes of Rs. 500 denomination came very late; which caused severe scarcity of smaller denomination currency. Secondly, govt. and RBI allowed unnecessary change in the size of new notes, because of which the notes could not be filled in the ATM’s before some technical reconfiguration of the ATM’s and thus the old notes could not be exchanged through ATM’s causing a big delay in the crucial process of exchanging currency.  

Another big failure was that, govt. could not take sufficient steps to interdict black money holders to get their money deposited in other person’s accounts. The banking system even could not timely check the deposition of fake currency during these 50 days. There exist some measures, which could have avoided these failures. But, we are not mentioning those suggestions here; because it is not the subject matter of this article.

The third failure of the move was also related with the implementation and due to not taking enough steps for making cash and credit available to the real needy people. There were three groups, which were in severe need of cash: 1) Farmers who had to invest for the Rabi crops, 2) MSME industries, which used to pay the wages in cash to the daily wagers, 3) The families which had to arrange for marriage of their young ones during this marriages season in India. The government took few steps to provide some cash to these people but mostly late, insufficient or associated with some cumbersome formalities. Out of these three, the second type of needy i.e. the MSME industries were worst affected and thereby a huge number of poor daily wagers lost their jobs and many of them had to face severe hardship.

The Major Bad Effects of Demonetization:

At first, it should be clear that the bad effects are quite different from the failures. By the term ‘bad effects’ here we means the obvious side effects, which naturally occurs, when the exercise of demonetization is adopted by any country or by any government. These are well known by all good economists and can be managed by proper financial management.

Such side effects are as follows:

Liquidity Crunch or Short Term Deflation Reduction in current employments and consumption; for which govt. has to try hard for changing the composition of both of these, to reduce the effective period of this phenomena Reduction in the growth rate of economy for around 2 years, however, the govt. can maintain the ‘real development rate’, if it would take right actions. Overall depressive feelings or negative mood in many sections of society, mainly in which, people are used to depend on the cash based transaction system.  

Where the balance stands/ Conclusion

So, this highly impact-full step has both sorts of effects (i.e. positive and negative) over the economic as well as social atmosphere of the country. But, as per our impartial evaluation, the conclusion is that, the bad effects would be only short term and the country will regain its growth momentum in one or two years time, depending mainly over the government’s future course of actions. On the other hand, the positive effects will continue to contribute in the improvement of the economy as well as socio-political scenario of the country.       

* Hariprakash ‘Visant’ 

Also read:

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