In 2014, the citizens of the country elected Narendra Modi as the Prime Minister. They believed in his three promises, i.e. elimination of black money, kickstarting Make-in-India and empowering a digital India. Exactly after two-and-a-half years of governance, Modi has taken the bold step of demonetisation of high-value currency notes of R500 and R1,000. This decision will help fulfil his three major promises as not only would it unearth hoarded cash but would also push people towards digital platforms. Since decades, black money is operating in the Indian markets in the organised as well as in the unorganised sectors. It is prevalent even in the education sector (both primary and higher education), and gets manifested in various ways, for instance, in terms of donation and capitation which is charged by schools and colleges.
Due to demonetisation, the money (currency notes) that was in circulation is now going to the banks, which will eventually lead to a rise in the valuations of banking stocks. Although not directly, but it would also make banks more responsible in managing deposits and loans.
But this cannot happen without the government and RBI initiating stringent banking reforms on credit management, NPA management, etc. In fact, now is the toughest period for banks to manage cash. Banks have started reducing deposit interest rates with immediate effect due to the excess cash collection. Soon, we can expects interest rates on loans going down. The slowdown due to the demonetisation step will exist until the next Budget announcement—February 1, 2017.
No doubt, demonetisation is harming macroeconomic indicators, such as economic growth, GDP and inflation. At present, it is affecting the common man, small business traders and MSMEs, since their daily transactions are almost in cash. However, there is a positive side, it has re-enforced the trust between the buyers and sellers, as sellers who are not using online mechanisms have shifted to age old system of credit extension. Many a seller are ready to sell using cards (point of sale) and e-wallets which is also a step towards Digital India.
Thus in losing its value, the currency has cemented a cooperation between the buyer and seller. This cooperation at a time of cash-crunch is not just limited to buyer and sellers but is also seen among neighbours, employee-employer, relatives etc. There has been little help to the government to implement this bold move either from the corporates or from industry associations like NASSCOM, FICCI, CII etc, or the NGOs.
Moreover, demonetisation is the right move taken by PM Modi at the right time, i.e. at the time when the US Presidential election results were declared. Donald Trump was elected as President with his sole agenda of “America First”. It is a great news for India because it will attract more FDI investment in the long run. Also, most important, the trained human capital as reverse brain-drain will take place due to demonetisation. These will certainly help the country in fulfilling Make-in-India.
But the job is far from complete. If the government wants a positive spillover from the move it would need to kickstart legal and tax reforms. It would do well to create deter auditors to provide tax planning services rather than tax evasion, and also create more awareness on tax planning by explaining the benefits the accrue from taxes. These measures will improve social security and bring down crime rate.
Shekar is ICSSR fellow, and assistant professor and Mishra is director, Institute of Public Enterprise, Hyderabad. Views are personal