30 days of demonetisation: Pros and cons of the Modi govt's note ban move

The demonetisation of high value currency denominations featuring Rs 500 and Rs 1,000 notes were banned effective 8 November midnight by Prime Minister Narendra Modi in a televised announcement. Today is exactly one month since the ban on the outlawed notes was imposed, but things on the ground are yet to see any meaningful change in the overall scenario.

 30 days of demonetisation: Pros and cons of the Modi govts note ban move

Representational image. Reuters

While it has been a daily struggle for lakhs and lakhs of people so far to get their money back from the ATMs or bank branches, let's take a look at the positives and the weaknesses the demonetisation of notes could have on the people and the economy at large.

Pros: Since the decision to ban high value currency notes was taken in early November, the government has tried to portray the brighter side of the note ban and its benefits on the economy in the long run. The decision to ban high value notes was taken to weed out black money and counterfeit notes from the system which has been deep-rooted in the economy for the past many decades.

With 86 percent of the total money circulation wiped out from the system, the government plans to keep a tight leash on the corruption front. According to Ambit Capital report, the share of the informal economy in India could shrink from 40 percent to 20 percent and the formal organised sector will gain market share.

The sustained crackdown on black money will also prevent people from parking their savings in physical assets such as gold and real estate, and instead boost the flow of savings into the financial system. With the quantum increase in financial savings, the cost of debt capital in India should fall. Further, as saving rate increases, lending rates are likely to fall in the line. Through the demonetisation exercise, the government has been pressing hard to become a cashless economy and is encouraging more and more people to adopt the digital payments system for their transactions. The government wants people with smartphones to use the United Payments Interface (UPI) app for a cashless transaction. Besides banks, online wallet companies including Paytm, MobiKwik and Free-Charge, too, are promoting their online products and wooing customers to get away from cash-based transactions.

In the aftermath of demonetisation, reports also suggest that housing prices in 42 major cities across India could drop by up to 30 percent over the next 6-12 months.

Cons: Although several advantages of demonetisation rolling into the economy could be far-fetched, there are immediate challenges the economy is already staring at. Following the decision to ban the currency notes, the government's lack of preparedness to deal with cash availability has hit the common man really hard. Despite the government's assurance to improve cash availability on a daily basis, several banks and ATMs across the country continue to dispense little or no cash.

People in villages and semi-urban areas are worst hit as majority of the transactions are done through cash. The government's constant flip-flops on withdrawal and deposit limits at bank branches and ATMs have put people in complete disarray. With one month past the note ban move, the problem doesn't seem to be fully resolved as banks continue to face cash crunch.

The bigger threat arising out of demonetisation is the impact on the country's economic growth. While brokerage Ambit Capital created shock waves by predicting that GDP growth will fall to 5.8 percent in 2017-18 from 7.3 percent estimated earlier, former Prime Minister Manmohan Singh, also an economist, echoed concerns by suggesting that demonetisation could contract the GDP by as much as 2 percent.

According to CPM's Sitaram Yechury, since 8 November, four lakh jobs have vanished, and more than 31.9 million people employed in the textile sector or “government” sectors have not been getting wages. Construction and allied sectors, jewellery, textiles and real estate are some sectors where job losses, if not already happening, are imminent.

Similarly, 20-25 percent of the roughly 2.5 lakh workers in the leather industry have been adversely affected as they are daily wage workers. The industry has been hit particularly hard as 90 percent of the units are small and medium enterprises. In the jewellery sector, 15-20 percent of workers, who are paid daily, too, have been affected.

Economist Pronob Sen has also warned that a virtual shutdown of India’s informal sector could spell doom for employment.

Recently, the July-September growth numbers of 7.3 percent also came below analysts' estimates. A day before, the Reserve Bank of India in its policy statement cut down growth forecast to 7.1 percent from 7.6 percent earlier for the current fiscal year.

Updated Date: Dec 08, 2016 19:20:46 IST