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Economy to politics, banks to black money: What demonetisation did to nation

black money crackdown Updated: Dec 30, 2016 15:16 IST
Dhruba Jyoti and Abhinav Rajput
Demonetisation

Traders transact at a wholesale vegetable market in Bengaluru.(AP Photo)

On November 8, the government yanked most of its currency from circulation, jolting the economy and leaving millions scrambling for cash.

A fifty-day window for depositing or exchanging the scrapped Rs 1000 and Rs 500 notes will run out on Friday.

The government has warned that people holding on to junked currency after the last date might invite stiff penalties.

Many small businesses have suffered in the absence of cash and the rural economy has crashed with farmers unable to sell their produce because of a slump in demand.

Read | Farmers forced to dump their produce as note ban turns bumper crop worthless

In cities, huge crowds outside banks and ATMs have got shorter as the currency supply has improved but in smaller towns, many still complain of erratic cash flow.

The government has strongly defended its move with Prime Minister Narendra Modi warning that he will come after black money hoarders in the new year with strict checking and tougher laws against registering properties in fake names – a common way to stash illegal income.

He is scheduled to address the nation on New Year’s Eve and announce sops for the poor.

WHAT’S HAPPENING AT THE BANKS?

In Delhi, queues outside banks were shorter than the usual crush of people seen over the past two months.

Officials said most people had already deposited their money, especially after the Reserve Bank of India had capped deposits above Rs 5000 to only one, earlier this month. “Though the decision was revoked but it gave message among people that government may stop accepting old notes anytime,” said a banker.

The situation at ATMS had improved but most vending machines were still running out of cash with an average waiting time of 30 minutes.

Government sources have hinted that restrictions on cash withdrawals from banks and ATMs – Rs 24,000 a week and Rs 2,500 a day respectively – might continue after Friday.

RURAL HARDSHIPS

Villages are said to be the hardest hit by the cash crunch following the government’s demonetisation decision as a vast majority of the rural poor are unbanked and have little access to digital transaction methods.

Small businesses have folded up and farmers across major states have been forced to abandon their produce as wholesale farm prices have crashed. Many say the money they got for their vegetables wasn’t enough to even cover transportation costs.

Read | Post demonetisation, banknotes still call the shots in ‘cashless villages’

Many villages that have earlier been touted as cashless continue to operate mostly in hard currency as ordinary people say they are reliant on banknotes for day-to-day needs.

BRUISED ECONOMY

Most analysts agree that the immediate impact of demonetisation will be seen in the GDP growth figures next quarter. The RBI has shaved half a percentage point from its forecast for this financial year and most other economist and ratings agencies concur that economic growth might slow down by about a percentage point.

In the long run, the economy is likely to see the benefits of a move to cashless transactions as increased transparency and improved tax collections are likely to boost growth.

Read | Demonetisation is immoral, theft of people’s property: Steve Forbes

But some analysts have expressed alarm over the scale of economic and social disruption, especially in India’s large informal sector. Millions of workers have been laid off semi-skilled jobs and labour, or haven’t been paid their salaries in weeks.

Real estate, tourism, transportation and gold and gems have been hit the hardest.

BLACK MONEY CRACKDOWN

The avowed motivation behind the demonetisation drive has been to drain illegal currency from the economy. The government has said that any unusual cash deposit will be scrutinised and Modi has said that he “won’t sleep” after Friday in his attempt to uncover black money.

The government has also brought in a tougher law against “benami” properties that provides for a seven-year jail term for offenders.

A series of income tax raids across the country have recovered large stashes of cash, often in new currency, running into hundreds of crores. The chief secretary of Tamil Nadu was sacked after an IT raid found jewellery and cash disproportionate to his income.

Read | Crackdown on ‘benami’ properties can help clean up real estate sector: Experts

But many analysts have said demonetisation is a poor way to check black money, which is mostly held in real estate and bullion.

RULE CHANGE CHAOS

The government lost some of its public goodwill with a frustrating string of rule changes over the past 50 days that amounted to at least 60 amendments in norms.

The government fiddled around with ATM and bank withdrawal norms many times but drew the most ire when the RBI capped cash deposits. The order was withdrawn in a day but not before widespread anger at what was seen as proof of poor planning. Many former bureaucrats have said the changes have hurt public confidence in trusted institutions, especially the central bank.

Read | RBI changes rule, exempts all KYC accounts from Rs 5000 deposit norms

POLITICS

Demonetisation deadlocked the winter session of Parliament as opposition parties demanded Modi defend the decision. Congress vice-president Rahul Gandhi has said the PM wanted to benefit select industrialists and has leveled personal corruption allegations.

Analysts are divided over how the currency junking is going to influence crucial assembly elections due in about two months. In recent weeks, the BJP has sounded upbeat about its prospects in Uttar Pradesh as top leaders agree that the party is over the hump and the situation was improving. But a number of opposition leaders – such as West Bengal chief minister Mamata Banerjee – have emerged as the face of protests against demonetisation and have predicted that the rural and poor will teach the BJP a lesson.

WHAT THE GOVERNMENT SAYS

Finance minister Arun Jaitley has said one of the goals of the demonetisation drive is to shrink the paper currency in the country and introduce digital currency.

While many local businesses have heeded the government’s call to move towards a digital economy, some industries have ground to a halt and laid off staff, highlighting just how dependent the country currently is on cash.

Read | Note ban effect not adverse, sharp rise in tax collection, says FM Arun Jaitley

Rubbishing critics, Jaitley said on Friday the effects of demonetisation were not as adverse as was predicted and asserted that there has been a sharp jump in tax collections and economic activity including in winter crop sowing.

Ahead of expiry of the 50-day deadline for depositing the junked Rs 500 and Rs 1000 notes, he said the remonetisation process has substantially advanced, significantly without a single incident of unrest anywhere in the country.

With inputs from agencies