One year of Demonetization..... Let's analyze

On the same day that Donald Trump was elected as the president of the United States, India also received an unexpected, earth-shattering announcement:  Demonetization.
At 10 pm on November 8, India's Prime Minister Narendra Modi announced that on the stroke of midnight all 500 and 1,000 rupee notes -- 86 per cent of the currency in circulation -- would cease to become legal tender.
Up to that point, upwards of 95 per cent of all transactions in India were conducted in cash and 90 per cent of vendors didn't have the means to accept anything. On top of this, 85 per cent of workers were paid exclusively in cash and almost half of the population didn't even have bank accounts.

Reasons for bringing demonetization, according to PM Modi:

To include digitization and boosting the number of tax payers

To fight corruption

To fight counterfeiting

To remove black money

Impact of Demonetization:

Large companies and bankers, employees and customers, as well as small and medium enterprises have all vented their anger at the demonetisation announced by the government on November 8 last year.

After one month of the announcement of demonetization, in 720 hours, there were 720,000 deaths, as reported by Forbes on December 8, 2016.

In many cities, people recalled the harrowing time they underwent to withdraw their hard-earned money, day after day.

A large number of working men and women lost income as they stood in serpentine queues at banks to exchange the old notes for new ones.

Caught completely off-guard, people did not know how to meet immediate financial commitments like paying house rent, children's school fees and other monthly expenses. But the most immediate need for the common man was to buy his daily needs like groceries and fuel with new currency notes, which were elusive.

After one year, India's former Prime Minister Dr Manmohan Singh gave a speech in the gathering of businessmen in Gujarat's Ahmedabad yesterday. Singh was quoted by ANI as saying: "Tomorrow we mark one year since the disastrous policy was thrust on the people of our country."
He added that the government has not made a fresh assessment of costs and benefits, if any, of the move.
The former prime minister termed November 8 as a 'black day' for the Indian economy and democracy. "I repeat what I said in the parliament, this was organised loot and legalised plunder," he said in his speech.
The biggest blow for PM Modi, who faces re-election in early 2019, is that growth has slowed to levels last seen during his predecessor's administration. India's previous government was criticised for massive corruption scandals and a policy paralysis, helping Modi sweep to power in 2014 with the biggest mandate in three decades.

 One year later, with data now available, it’s time to analyze what demonetization has actually wrought -- the good and the bad.

Positive Outcomes:

1. Formalising Indian economy and ensuring better jobs for the poor: 50 lakhs labourers got their bank accounts active according to Modi's twitter account and 1.03 crore registrations of labourers took place in ESIC (Employee's State Insurance Corporation).
2. Decisive blow to terrorism and naxalism: High value currency of 12 lakh crores in circulation and 75 per cent reduction in vandalism in Kashmir and 20 per cent reduction in Naxalism.
3. Unprecedented growth of imports -- rose by 23 per cent in a year:  Comparing the escalating rise in India's imports from China country's import in first half of 2016-17 stood at Rs 1.96 lakh crore, whereas in 2017-18 it increased to Rs 2.41 lakh crore.
4. All cash withdrawn has been translated into a rise in bank deposits: Soon after the cash ban was announced last year, about a third of the Rs 15.44 lakh crore of bills invalidated wouldn't be deposited into banks.
Economic Affairs Secretary Subhash Garg estimates. "So the potential of storing black money is so much reduced. You are doing the same economic activity with the money in circulation," he said.
5. Reduction in storing the black money and so does the money in circulation: India would have had some Rs 18 lakh crore in high-value bills today -- instead it has Rs 12.5 lakh crore if it wasn't for demonetization.
6.The good news starts with the widening of the tax base: The number of income tax returns filed for 2016-17 year grew by 25%, which is crucial to ease pressure on public finances in a country that has well over 1.25 billion people but less than 30 million file tax returns. 7.Digital transactions have surged: More efficient than paper money, digital money is expected to bring in transparency into the system. The hands-down winners are the mobile wallet players, particularly Alibaba-backed Paytm, which now has 250 million registered users. That's a 105% increase from January 2016.
8.Global Reputation:No matter how much international publications debated the outcome of the entire exercise, Modi established himself as committed towards ‘change’ in the eyes of leading global institutes like World Bank, IMF and European Commission, and has, undoubtedly, put in India on the global map as a serious business ally for those willing to invest. 

Negative outcomes:

On MSMEs:

• Demonetization – a move which was initially seen as a “masterstroke” in Indian political history that would have eliminated a parallel black economy in India, has rendered itself to be a volatile, fruitless and almost fatal for most MSMEs in the country. 
• Demonetization brought many small industries closer to digitalisation, the micro industries had to go through an unstable phase. 
• According to International Labour Organization (ILO) some of the characteristic features of employment in the informal sector are lack of protection in the event of non-payment of wages, compulsory overtime or extra shifts, layoffs without notice or compensation, unsafe working conditions and the absence of social benefits such as pensions, sick pay and health insurance. 
• According to ILO one of the foremost reasons for the informal sector to exist in a country is because of poverty and the limited livelihood opportunities and jobs for the working poor. Low incomes and limited access to public institutions prevent the poor from investing in skills that could boost their employability, productivity and ensure their protection from income shocks and risk.

On Rural economy:

• The negative effect of demonetisation can be seen in terms of big losses to the unorganised sector, farmers and traders
• The hardest-hit were those in rural areas, where access to banking and the internet are quite low
• The Reserve Bank of India (RBI) 2016 report on branch authorization policy classified 93% of rural centres in the country as unbanked, with the population dependent on roving banking correspondents and on distant urban or semi-urban branches
• Access to the internet is equally patchy, with only 3% of households in underdeveloped rural access to internet in a 2016 consumer economy survey
• The liquidity squeeze led to a pile-up at wholesale markets, leading to a sharp decline in the Wholesale Price Index (WPI) of perishables such as fruits and vegetables in the immediate aftermath of demonetization.
• By turning farm markets into buyers’ markets, demonetisation may have also contributed to the decline in prices of pulse
• Rural consumer sentiment too took a hit, with domestic sales of two-wheelers plunging sharply.
• New project announcements declined sharply in the wake of demonetisation, a Centre for Monitoring Indian Economy (CMIE) analysis showed, hurting the capex cycle.

On job creation:

• The varied data sets pointing to the continuing lack of employment opportunities for India’s rising workforce.
• Data from the Centre for Monitoring Indian Economy (CMIE) estimate that about 1.5 million jobs were lost during January-April 2017, even as employment figures of leading listed companies show that a majority of them have been a net decline in their employment.
• Labour Bureau employment survey also reflect a sharp decline in jobs after demonetization.
• This lack of job opportunities is mirrored in the data sets for the government’s flagship skilling scheme, the Pradhan Mantri Kaushal Vikas Yojana (PMKVY).

On Economy:
Data released by the Central Statistics Office (CSO) showed the economy grew 5.7% in April-June, the first quarter of the current fiscal year, slower than the previous quarter’s 6.1%. The first half of the last fiscal year, that is the period prior to demonetisation, recorded a real growth of 7.7%.
Way Forward:

• Government should focus on ensuring growth, job creation and investment. The urgent need is to get the private sector to start investing. One way to avoid winds of deflation is to kick-start private investments.
• Reviving the investment cycle and tackling bad loans will be the key challenges to be tackled on a priority basis in the current fiscal.
• Government has launched a multipronged attack on corruption and black money. Government discretion has been reduced particularly in the allocation of natural resources.
• There is a concerted attempt to improve ease of doing business, and technology is being used to deliver public services without leakages.
• It is far too early to write-off any of these efforts, and demonetisation. There is a future beyond the present.