(Written jointly by Krishna M and Akshat Mechu)
Amidst thousands of people lined up for new currency in front of banks and ATM machines, Mr. Jitendra, a farmer from Sikar district of Rajasthan, who borrowed about Rs 3 lakh for his daughter’s marriage just 2 days before the announcement of demonetization, has been totally hacked off since the NDA government’s decision to demonetize Rs 500 and Rs 1000 currency notes, which together constitute a significant share of currency in circulation. Like Jitendra, there are millions of such people, mainly the casual wage workers and self-employed, who consist of 85 per cent of the total workforce in India, are still in a state of shock, hoping that they would be able to recuperate from the ongoing economic turmoil in a couple of shakes. Those who are suffering from health issues and are in need of timely medical care are the worst victims of the demonetization. The government has assured that a return to normalcy would take at least three weeks, it appears that a stable economic condition is a long way away from their expectation. The fact is that, notwithstanding several initiatives to make an inclusive society, a substantial share of the Indian workforce, mainly in the unorganised segment, is poor and financially excluded. Obviously, if this state of turmoil is expected to continue for three weeks, this is going to make a dent in their means of livelihood by knocking down the entire supply chain. Moreover, a part of the economy is at a complete standstill due to the rapid diminishing and disappearance of both higher and smaller denominations of notes.
The main rationale behind the demonetization is to mitigate the transactions that take place outside the formal system along with stamping out the rampant circulation of counterfeit notes, which not only affect the lives of common people, but also pose a serious threat to the national security. Although there is no precise estimation regarding the exact quantum of such transactions in the economy, it is believed that about 20-25 per cent of the Gross Domestic Product revolve around the underground economy. Going by reports, assessing the actual circulation of counterfeit notes is far beyond our control, the seizure of around 27 lakh counterfeit notes valued 168 crores during 2011-15 shows how susceptible our economy is. The existence of parallel economy not only hampers the fundamental rights of the people to live with dignity but also paves the way for a great deal of inequality in the society. It is quite unjustifiable that a country with 1.2 billion population and $2 trillion GDP, only 1.3 % of them pay income tax. It was a proud moment for those who genuinely pay income taxes. Without doubt, the government’s decision to demonetize high denomination currencies is quite bold and appreciable and shows the commitment to put an end to the burgeoning black economy.
Having said, the success of the laborious task undertaken will, presumably, meet with little success due to the following five obstacles. (a) Unaccounted cash accounts for a meager portion of black economy and those who have a stash of money will devise several strategies to overcome these institutional impediments. The rich are not fatuous and the poor suffer in straitened circumstances. (b) A substantial share of business activities, particularly small business units and enterprises predominantly depend on cash for their operating activities including acquiring inventories. The demonetization will put pressure on them to be incompetent and inefficient, at least in the short-run. (c) The RBI plea to people to use digital transactions will exclude large segments of the people, particularly from rural India, since more than three-fifth of the total value of transactions are taken place in cash. The fact is that only two-fifth of the account holders are reported to have a debit or ATM card. (d) The growth major services sectors like retail, tourism, real estate activities and transport will be severely hampered by the sudden contraction of money supply and thereby leads to deflation and unemployment in the future. Since these sectors are primarily driven by cash, sales will plummet drastically. (e) The sales of fast moving consumer goods may be plunged into darkness in the short run due to the lack of effective demand. In brief, much of the problems faced by common man would have, to some extent, been solved had banks widely circulated lower denominations of currency notes before the announcement. Moreover, there is no guarantee that the demonetization will limit the hoarding of cash and counterfeit notes in the future.
