The four-year anniversary of demonetisation in India was recently marked on November 8, 2020. The governmental move in 2016 saw Rs. 500 and Rs. 1,000 notes withdrawn from the system, an act known as demonetisation. This article delves into the objectives, effects, and current trends following this drastic financial move.
Understanding Demonetisation
Demonetisation is the process of stripping a currency unit of its legal tender status. This action usually occurs when there is a change of national currency, leading to the current form of money being pulled from circulation to be replaced with new notes or coins.
Objectives of Demonetisation
The Indian government pursued demonetisation with specific goals in mind. It aimed to discourage the use of high-denomination notes for illegal transactions and hence curb black money’s widespread use. Additionally, it wanted to encourage the digitisation of commercial transactions, formalise the economy, and thereby boost government tax revenues. Formalisation of the economy involves subjecting companies to government regulations relating to manufacturing and income tax.
Operation Clean Money
Following demonetisation, the Income Tax Department (CBDT) launched ‘Operation Clean Money.’ This programme ran from November 9th to December 30th, 2016, and aimed at e-verifying large cash deposits made during this period. Officially launched on January 31st, 2017, the operation entered its second phase in May 2017. It sought to verify the cash transaction status of taxpayers during the demonetisation period and take tax enforcement action if transactions did not match the tax status.
Impact of Demonetisation
Demonetisation significantly impacted the Indian economy. The currency held by the public stood at Rs. 17.97 lakh crore on November 4th, 2016, but declined to Rs. 7.8 lakh crore in January 2017 following demonetisation. This led to a decline in demands, businesses facing crises, and the Gross Domestic Product (GDP) growth declining nearly 1.5%. Even more, it resulted in many small units and shops shutting down and created a liquidity shortage.
Current Trends Post Demonetisation
As of October 23rd, 2020, the currency held by the public stood at a record high of Rs. 26.19 lakh crore, up 45.7% from November 2016. Despite efforts from the government and the Reserve Bank of India (RBI) for a less-cash society and digitisation of payments, the cash in the system has steadily risen, especially during March to May amidst COVID-19 lockdowns.
The Rise of Digitisation
An RBI study on digital payments showed gradual growth in digital payments’ value and volume in recent years. Despite this, the circulation to GDP ratio has grown in line with overall economic growth, showing an increased dependence on physical cash.
Tax Revenues and Regulatory Changes
Demonetisation, coupled with the introduction of various acts like the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), Real Estate (Regulation and Development) Act 2016, and Benami Transactions (Prohibition) Amendment Act 2016, encouraged compliance. As a result, the number of income tax returns and filers grew significantly in 2017 and 2018.
Counterfeit Currency and Terrorism
The number of fake notes in circulation reduced significantly post-demonetisation. However, terrorism activities, which were expected to decrease due to high-value currency’s restriction, saw a rise. Casualties in such activities increased between 2016 and 2018, contrary to expectations.
Future of Demonetisation
Demonetisation was a bold move towards countering black money and the parallel economy. Despite its mixed success, it had a visible impact on how India’s economic policies are perceived internationally. This move signalled India’s readiness to take drastic actions to curb illicit financial activities and formalise its economy, an essential step in its ongoing growth story.
