Demonetisation drama, a play in three acts
Venue: India
Time: November 8, 2016. 8pm. The curtain call.
Characters: Prime Minister Narendra Modi and the Indian populace
A month and a half after the Shakespearean monologue-issue announcement of "demonetisation", it remains the hot topic of discussion amidst the winter chill. The banning of Rs 500 and Rs 1,000 notes by the Indian prime minister, who seems to have become the polarising point of an entire nation, has had a colossal and sustained impact on the lives of the Indian people. With serpentine queues outside ATMs and banks eating into work hours and the minds of the nation, a rapidly malfunctioning small and medium enterprises sector interspersed with a glimmer of hope from increased revenues and windfall gains to the Indian treasury, the time has come to make a prediction the Indian economy weathers the storm of demonetisation or not.
Act 1: The announcement and the emotions
In reality, this act is over. Riding on popular support and happiness at the fact that a politician has taken such a tough stance on the issue of black money. The prime minister received wholehearted support from the masses, despite the short-term tribulations.
Economists lamenting the loss of purchasing power and uncertainty over the effect of banning more than 85 per cent percent of the liquid cash supporting the economy, were branded as cynical. So, the ATM queues and deposit doldrums were welcomed as minor hiccups, a bitter pill to be taken for a greater good. One for the country.
Act 2: The disillusionment
The queue is taking its toll, 65 times literally. The mood is not so sunny-side-up anymore, and the recent RBI announcement of constant bank interest rates, against popular expectation of a dip, has been another disappointment. As per an estimate by Ambit capital, a Mumbai-based equity research firm, demonetisation will result in GDP growth crashing to 0.5 per cent in the second half of FY 2016-17.
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| A phased and structural introduction of the digital payments mechanism should be followed in a cash-inclined economy like India. Photo: Reuters |
A strong formalisation effect will be taking place over the next few months, as nearly half of non-tax paying businesses in the informal sector (40 per cent share in GDP) will lose their market share to their organised counterparts. The hardest hit will be the labor force of the unorganised sector, which will generate rampant unemployment. With the limits on withdrawals remaining as they are, sectors such as jewellery and real estate will suffer the most, apart from being constantly on the radar.
The shifting focus of the government from removal of black money to promoting a cashless economy will also give rise to a major problem. The Indian rural economy will come to a standstill as the fundamental requirements for digital payments, that is, internet connectivity and smartphone penetration, are still in their nascent stages.
The government’s flagship project of a Unified Payment Interface (UPI) with USSD enabled phone transaction mechanisms that do not require internet for transfers needs to be actively promoted and adopted to beat the crisis facing the agricultural and rural economy today.
Act 3: The hope of a ‘happy ending’
But there is a silver lining, and a broad one at that. It is estimated that by the end of December, about 10-20 per cent of high-value notes will not have been deposited or exchanged, which will be a massive windfall gain for the RBI in terms of extinguished liability, to the tune of Rs 1.5-3 lakh crore.
There will also be many black money hoarders who might not be able to launder off all their money and end up paying 50 per cent tax on it. This will be a special dividend for the government, giving a boost to public expenditure. With new infrastructure projects, a rise in employment can also be expected.
Furthermore, with the crucial UP elections around the corner, this windfall gain might result in direct deposition of a significant amount of money in the 250 million Jan Dhan accounts that have been opened, giving a boost to the economy as a whole.
The ‘beginning’ of a changed economy
Recently, RBI announced the issuance of a high-volume limited tender regarding the import of 20,000 tonnes of currency paper from various foreign firms to meet the liquidity crisis facing the country currently.
Though there has not been a dearth of efforts, the Indian government needs to start taking a stock of the situation urgently for the post December 31 period to ensure it has a stronger and a much more systematic implementation of rules than the one preceding it.
The government needs to fill up its coffers, increase liquidity and enhance daily as well as weekly withdrawal limits to meet the transactional demands of the nation. Furthermore, a phased and structural introduction of the digital payments mechanism should be followed in a cash-inclined, conventionally-run economy such as India.
With Christmas and New Year celebrations around the corner, it remains to be seen whether "demonetisation" emerges as the Santa or the Shylock, and whether New Year resolutions comprise holiday plans or strategies to beat the ATM queue this 2017.