Demonetization: the good and the bad

On 8th November, the Prime Minister of India – Narendra Modi, announced that all notes in denominations of Rs 500 and Rs 1,000 will cease to be legal tender from midnight. The PM said that the decision was taken in the light of tackling corruption, black money and fake currency that often finances terror. The announcement led to panic with long queues outside banks and ATMs. Here’s the neutral view of the move.

The good

  • This move clearly penalizes the black money hoarders (because anyone who has unaccounted for cash, that is mostly hoarded in 500 and 1000 currency notes, is either forced to declare it or give up on it). And that’s good. About Rs 1.5 lakh crore in deposits were collected by banks just a week after the announcement. (Source). Having said that, some Indians have already devised jugaad ways and means to beat the system. People are making payments showing backdated invoices (Source). But though some might be able to save some black money, not everyone can do much about all of it.
  • As per some estimates, there will be long-term benefits for GDP growth as a result of the move—we are heading for a 9% GDP growth by FY2018-19. (Source)
  • Jan Dhan accounts have recorded a stellar growth as a result of this move. This move should also be able to inculcate banking habits among the large unbanked population of the country. (Source)
  • Nobel laureate Kailash Satyarthi has supported demonetization saying that it will check human trafficking and child slavery in the country. (Source) Other notorious businesses like prostitution and the drug mafia are also likely to suffer.
  • Reduced dowry demands by some families of bridegrooms (though obviously it’s a shame that such demands even exist in the first place). (Source)

The bad

  • In the short-term, the informal economy has taken a huge hit as a result of the move, as everyone is cash-strapped. Several businesses in India rely heavily on cash for day-to-day operations, and small and medium-size businesses are finding it difficult to pay daily wages and raw material costs. (Source)
  • The long queues are not encouraging. Suicides, murders and other fatalities have already been reported aplenty due to all the chaos and confusion. (Source)
  • Not all black money is stored as cash (no one has a clear data on this). A lot of it is in the form of foreign currency, property and gold (though there is no clear data on this). A lot of it is even stored abroad. (Source)
  • Why come up with a new note of an even higher denomination (Rs 2,000) if the government believes that black money is held predominantly in the form of notes of large denominations (Rs 500 and Rs 1,000)? This will only make it easier for people to hoard black money in the future. (Source)
  • Critics say that measures should have been in place to handle the deposits and withdrawals that were expected following the announcement. (Source)
  • Noted economist Amartya Sen has called the government “authoritarian” for causing misery to millions of its innocent people who are being subjected to suffering, inconvenience and indignity in trying to get their own money. (Source) It’s akin to punishing a whole class of students because of a handful of trouble-makers.
  • Another Nobel Prize-winning economist – Paul Krugman, has said that this move is only a one-time effort to flush out hoarded money, and not to eliminate the denominations forever. In his words “I hardly see significant long-run gains, but there certainly are significant, although temporary, costs”. (source)
  • Many are questioning the timing of the move, alleging political motivations with key states preparing for elections. (Source)
  • In the short term, the move could lead to a potential crash in real estate prices. This could cause an economic shock, and lead to a recession. (Source)
  • There is another theory that the Indian economy is at the risk of getting destabilized, and may cause citizens to lose confidence in their currency. Unless the flow of money is restored quickly, the economy could suffer a substantial downswing. (Source)
  • And last but not the least, at least some weddings are getting postponed as bills for halls, florists and caterers are typically paid in cash. (Source)

We at Neutral News are neither for nor against demonetization. We simply want to present both sides of the story and leave it to you to decide your own point of view.

Post by Neha Kirpal, edited by Amrit Vatsa

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