The after effects of PM Modi’s demonetisation drive

As featured on MoneyControl: https://www.moneycontrol.com/news/sme/the-after-effectspm-modi%E2%80%99s-demonetisation-drive_8222381.html

It’s been almost two months since PM Modi announced demonetisation as a move to tackle black money. The verdict is still divided and valid arguments have been made by both sides – those in favour and those who do not support the move. Interestingly, a significant percentage of ordinary citizens have supported the move and believe this was a painful yet necessary step to eradicate the menace of black money. The decision seems to be born out of a clear vision and has the potential to help India attain a certain level of financial inclusion similar to that of a developed nation.

Nobody can deny the difficulties faced by the citizens in the past two months. Some call it a failure based on moral grounds alone. On the other hand, many are hailing Demonetising to be amongst the three most important economic reforms in India’s history, along with Delicensing and GST.

While PM Modi’s government continues to face political backlash and challenging questions by renowned economists for the poor execution of demonetisation, an ordinary and law abiding Indian citizen can only hope that things will change for the better. Coincidentally, hope is also a strong sentiment currently in the USA, post Donald Trump’s victory in the Presidential election, which unravelled on the same night of November 8th 2016.

Let’s take an objective look at some of the down effects of demonetisation so far:

Chaotic execution

From the sudden ruling that resulted in empty ATMs, long queues and insufficient new currency, it is evident that the execution of this bold move was very poor. While the PM very candidly asked his countrymen to bear with him for a few weeks, he was ill advised on the implications of demonetising 86 percent of currency in circulation, overnight. The current move has paralysed the informal economy completely, which had little to do with black money but more to do with different mode of transactions. The unbanked were left high and dry because although opening an account was approved on paper, nobody was there to help them with it. Those caught in medical emergencies faced a traumatic time with private hospitals not accepting demonetized cash as expected. Farmers have been facing a hard time buying seeds with the sowing season upon them.

Cost of demonetisation

According to The Centre for Monitoring Indian Economy (CMIE), the estimated cost of demonetisation for the first 50 days is a whopping Rs 1.28 trillion with almost half of it (about Rs 615 billion) to be borne by enterprises which depend on cash transactions. Banks, whose employees will be devoting all their time for the additional work like opening accounts, collecting money, giving out cash and recalibrating ATMs will bear an estimated loss of Rs 351 billion.

Amount of cash recovered

With the threat to investigate cash deposits over Rs 2.5 lakh, the government was hoping to reduce the value of the black money in circulation. The optimistic assumption was that a significant portion of cash held as black money will not be returned and would reduce RBI’s liability. However, thanks to the many loopholes and the omnipresent Indian jugaad at play, bankers now estimate almost 90-95 percent cash has been returned. The benefit of reduced liability thus stands to be heavily diluted and overshadowed by money laundering instead. Analysing all the suspected transactions is going to be a costly and time consuming affair for the IT department.

Immediate challenges for the Indian economy

The GDP forecasts by Goldman Sachs, HDFC Bank and other rating agencies have all been revised for this fiscal year from +7 percent to somewhere around 6.5 percent. Although this slow growth is strongly believed to be temporary before the economy starts performing as before. Consumer spending will be guarded and may take some months before it starts seeing growth. The vastly unbanked rural economy will take much longer to get back on track due to poor infrastructure and access to modern facilities. Similarly, agricultural sector will be badly affected and may take very long to stabilise. To help the farmers, RBI has directed banks to ensure cash availability for the farmers and give them crop loans on priority. More such measures are needed to reduce the hardships being faced by a vast majority of rural Indians.

Now let’s look at some of the positive effects of demonetisation:

Digital economy

Digitisation will be a clear winner and will influence how businesses will be conducted henceforth. Deposits in Jan Dhan accounts have more than doubled to Rs 87,000 crore in 45 days post demonetisation. E-Wallets and payment gateways like Paytm, FreeCharge, MobiKwik and RuPay have seen an exponential rise in the number of users and transactions in this past month. The cashless trend will get stronger in the years to come. Paytm has also introduced a toll free number for making payments without internet access. Similar innovative solutions are underway thanks to the booming Fintech segment.

Real Estate

Real estate properties will undergo a price correction and will see a clear shift in the way transactions are closed. With less access to unaccounted cash, first time buyers will find it easier to close deals with white money.

Stronger Currency

With the lowering of interest rates, loans will become cheaper and in turn make the economy stronger. Inflation will also get under control and the position of the Rupee over the Dollar will get stronger.

Fake Currency

The menace of fake currency in circulation has been tackled completely. While the new currency will still be counterfeited, it may not scale to the extent as before. Funding for terrorism and Naxalite activities have been stalled and will play a big role in securing the borders.

Demonetisation promises to be a mixed bag as the implications are revealed gradually. Is it a visionary move by a foresighted leader, or an economic blunder by an autocrat? While we continue to ponder, the human mind will find a solution to any situation if one's livelihood depends on it. Cabs and auto rickshaw drivers have started accepted payments through Paytm. The Government has relaxed its 2 factor authentication requirement for transfers below Rs 2000 in a move to make it easy for these drivers and other small vendors. The challenges are mounting and India looks ready to up its game to emerge stronger.

Digital India could be much closer thanks to demonetisation.