Demonetization, in simple words, means the process of invalidating a specific currency unit and replacing it with a new currency.
How many demonetizations did India face in history?
India faced demonetization three times before 2023 which were; in 1946 before independence; in 1978 with the demonetization of bank notes of denominations ₹1,000, ₹5,000, and ₹10,000 notes; and in 2016 with ₹1000 and ₹500 notes.
And this time, on May 19, 2023, the Central Government and RBI announced the demonetization of ₹2000 banknotes. The process starts on May 23, 2023, and will last until September 30, 2023. It will be conducted at all the bank branches and 19 Regional Offices of the RBI.
Now, as with every other variant, it also has both sides - pros and cons.
So let's see what impact the most recent demonetization (i.e., 2016) created on the Indian economy and relate it to the current situations:
The immediate aftermath of demonetization led to significant disruptions in economic activity. With around 86% of the currency in circulation being rendered invalid overnight, there was a cash crunch that affected various sectors. Small businesses, agriculture, and the informal sector, which heavily relied on cash transactions, were particularly hit.
- Short-Term Economic Disruption:
But this case is different, as only 10.8% of ₹2000 notes are in circulation. So, the impact desired is way lower than that of 2016, but still, we can presume a slowdown in business and banking transactions due to extra work.
The Indian economy witnessed a slowdown in GDP growth following demonetization. The growth rate for the quarter following demonetization (October-December 2016) dropped to 6.1%, significantly lower compared to the precedThe manufacturing and construction sectors, in particular, experienced a decline in growth.
The projected growth rate of the Indian economy was 7-8% which has now declined to 6%. But this demonetization would impact expenditure and, ultimately, GDP.
Demonetization had an adverse impact on employment, especially in labor-intensive sectors. The disruption in economic activity and cash crunch led to
layoffs, reduced wages, and job losses.
According to a report by the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in India increased to 7.2% in February 2017, compared to 5% before demonetization.
India's unemployment rate inched up in April to 8.11% from 7.8% in March 2023. Demonetization, in addition to existing layoffs and Post COVID recession conditions, may impact employment conditions on the worse side.
Several sectors faced a slowdown as a result of demonetization. The real estate sector, which had a significant cash component in transactions, witnessed declining demand and sales. The consumer goods industry, including automobiles and FMCG (fast-moving consumer goods), also experienced a temporary decline in sales.
The major expected impacts are in sectors including real estate, wholesale FMCG, tourism, and automobiles. It is because ₹2000 note was used most in the big transactions, which generally take place in the above-mentioned sectors.
One of the intended objectives of demonetization was to promote digital transactions and reduce cash-based transactions. Following demonetization, there was a surge in digital payments, mobile wallets, and online transactions. The volume of digital transactions increased significantly, indicating a shift towards a more digital economy.
- Increase in Digital Transactions:
UPI recorded its highest-ever number of transactions at 8.7 billion in March 2023. India has already shifted to online transactions up to a certain level, and this demonetization is going to push statistics more strongly.
Proponents of demonetization argue that it helped curb black money, reduce counterfeit currency, and promote financial inclusion. The government claimed that the move led to an increase in tax compliance, with more people entering the formal banking system.
During the period November 2016 to March 2017, the Income-tax Department conducted search and seizure actions in 900 groups leading to the seizure of ₹900 crores, including cash of ₹636 crore and admission of undisclosed income of about ₹7,961 crores.
"This move under Clean Note Policy, 1988 is going to help reduce black money and counterfeit currency from the economy,” as per the RBI. It is a very fair statement as it is easy to store a large amount of money in ₹2000 notes.
This demonetization, unlike 2016’s or any past ones, is in the favor of the public, as there is proper planning and enough time (4 months for 10% of the total currency printed) if used to its most efficiency.
It's important to note that while demonetization aimed to address issues like black money and corruption, its overall impact on the Indian economy remains a subject of debate, with differing viewpoints and analyses. What impacts of the above move do you see on the elections coming? What’s your take on demonetization in 2023? And what impacts do you see from this demonetization?