DEMONETIZATION-
A MAJOR BANKING SECTOR REFORM POST INDEPENDENCE
Dr. Mahammad
Rafee.B1 &
Dr.A.Hidhayathulla2
1Director,
Bangalore College of Management Studies, Bangalore
2Associate
Professor of Economics, Jamal Mohamed College, Tiruchirappalli, India
Abstract
This paper gives the note on major banking sector
reform post independence its impact on the economy and views of an author which
could make the readers a in depth understanding of the phenomena.
Demonetization is the act of stripping a currency unit of its status of legal
tender or scrapping high value denomination currency unit in the country. The
government reasoned that this process would strength the hands of common
citizens in the fight against corruption and black money and counterfeit notes
which used to fund terror attacks, he viewed that how the magnitude of cash in
to circulation is linked to inflation and how inflation situation has worsened
due to the cash deployed through corrupt means which widened the gap between
have’s and have not’s and brought huge inequalities in income distribution. He
reiterated that despite India’s very good growth trajectory on the world
average it ranked 130th position by the World Bank in the list of
189 countries. With this all measures the rulers of the country expected
transparency in tax compliance, realization of assets and people of the country
at some extent. Unplanned and sudden move had brought a big impact on the
common man and the livelihood of daily wage earners, artisans had been affected
badly. We get to see serpentine lanes before the banks and ATM’s to convert old
currency notes for new currency and withdrawal of cash. Government had failed to
maintain enough new currency stock at the chest of banks to remonetise which
brought the economy to grinding halt for some time and the country’s growth
rate has been affected. The government could have done the process of
demonetization in a phased manner without affecting the common man. Hence, the
very purpose of demonetization is to weed out corruption from the system which
it had failed to address.
Key Words:
Goods and Service Tax, Reserve Bank of India, Micro,
Small and Medium Enterprise
1.1.Introduction
Demonetization is the act of stripping a currency
unit of its status of legal tender or scrapping high value denomination
currency unit in the country. On Tuesday, November 8th 2016 the
prime minister of India addressing the nation announced that the ₹500 and ₹
1000 notes will no longer be legal tender from the midnight of November 8th
2016 and a new series of ₹2000 and ₹500 notes will be issued by Reserve Bank of
India (RBI). The ₹500 and ₹ 1000 notes were about 86% of the total value of
currencies in circulation estimates of RBI till October 2016.
The
Prime minster of India reasoned that government would strength the hands of
common citizens in the fight against corruption and black money and counterfeit
notes which used to fund terror attacks, he viewed that how the magnitude of
cash in to circulation is linked to inflation and how inflation situation has
worsened due to the cash deployed through corrupt means which widened the gap
between have’s and have not’s and brought huge inequalities in income
distribution. He reiterated that despite India’s very good growth trajectory on
the world average it ranked 130th position by the World Bank in the
list of 189 countries.
To
ease the process of demonetization few efforts are being taken by government
from past 3 years which include formation of Special Investigation Team (SIT)
on black money, law passed in 2015 on disclosure of foreign bank accounts, levy
of strict rules to curtail benami transactions in 2016 and voluntary disclosure
schemes like Income declaration scheme IDS 2016 have been resulted in unearthing
more than ₹ 1.25 trillion worth of black money from the system.
To
supplement the surgical strike on black money the earlier steps being taken by
the Government to move towards a cash less economy like Jandhan yogana, Payment
banks, Digital India, Unified Payment Interface (UPI). The first part of the
article is about the introduction of the titles, second part is about the brief
history and the third part discusses the impact of demonetization and fourth
part offers concluding comments.
1.2.History of Demonetization
Demonetization
is not new phenomena , in the past twice it has been affected but failed to
bring desired results, firstly in before independence the then British
Government in 1946 had demonetized the
high value currencies in circulation like 10,000 , 5,000, 2,000 denomination
currency notes. Secondly when Janata party assumed power in 1977 post emergency
period again on January 1978 announced demonetization of high value currencies
of 10,000 and 5,000 currency notes. Hence, it failed bring desired results due
to huge corruption from the ground level.
Need
for demonetization: Usually countries resort to invalid the high value
denomination currencies to tackle the issue of counterfeit currency notes, to
effectively nullify black money hoarded in cash and to curb funding of
terrorism with fake notes.
As
per RBI, the counterfeit currency detected in banking system has increased from
₹1.25 lakh notes to 6.33 lakh notes in 2006 and 2016 respectively. As per the
IMF report, the estimated size of India’s shadow economy grew from 23.6 of GDP
in 2002 to 25.6 percent in 2007. It is estimated shadow economy would be
approximately 30 percent of the GDP by 2016.
India
ranked 3rd in illicit financial outflows after china and Russia in
2013 almost US $ 83billion of illicit money was siphoned out of India- by
Global financial Integrity.
In
the common parlance demonetization expected to benefit the country in the long
run like GDP growth and realization of Assets, increase in the revenues of
government by better tax compliance, fall of prices of commodities in the short
run due to reduction in the purchasing power of people in the short run. Since demonetization was announced on November 8, how much old 500 and 1000 rupee
notes will not come back into the banking system has been a subject of intense
speculation. The economic research department of SBI expects Rs. 2.5 lakh
crore not to come into the banking system. According to SBI's estimates, Rs. 13 lakh crore worth of banned notes
might be deposited in the banking system out of the total value of high
denomination currency in circulation (before November 8) worth Rs. 15.5 lakh crore. This means that
around Rs. 2.5 lakh crore might not be coming
back into the system, the bank said in a report. Of the total Rs. 2.5 lakh crore not coming into the
banking system, the amount not coming back altogether due to unlawful
activities, for example, could be around Rs. 1.5 lakh
crore this amount assumed to be not going to disclosed by the individuals.
Soumya Kanti Ghosh, the author of the report and group Chief Economic Adviser at SBI, told NDTV Profit that the extinguished currency liability is among the things "that the RBI and the government need to work out." Out of the Rs. 2.5 lakh crore, Rs. 1 lakh crore could be disclosed under the recent self-declaration of undisclosed income scheme, the report said. Under the scheme, taxpayers may declare undisclosed income by paying around 50 per cent tax. "This means there will be an immediate short term benefit to the government will be Rs. 500 billion (Rs. 50,000 crore)," the report said.
Soumya Kanti Ghosh, the author of the report and group Chief Economic Adviser at SBI, told NDTV Profit that the extinguished currency liability is among the things "that the RBI and the government need to work out." Out of the Rs. 2.5 lakh crore, Rs. 1 lakh crore could be disclosed under the recent self-declaration of undisclosed income scheme, the report said. Under the scheme, taxpayers may declare undisclosed income by paying around 50 per cent tax. "This means there will be an immediate short term benefit to the government will be Rs. 500 billion (Rs. 50,000 crore)," the report said.
It is believed that
taxes collected will be beneficial to the government rather than currency
getting extinguished as such taxes could be immediately factored in next year
budget for welfare needs,"
This means on the RBI's balance sheet, the liability in the form of notes issued gets extinguished to the extent the banned notes are not deposited. Mr Ghosh said that at this juncture it is too early to talk about how fast the Indian economy would rebound from the anticipated slowdown caused by demonetization.
This means on the RBI's balance sheet, the liability in the form of notes issued gets extinguished to the extent the banned notes are not deposited. Mr Ghosh said that at this juncture it is too early to talk about how fast the Indian economy would rebound from the anticipated slowdown caused by demonetization.
An example of demonetization for trade purposes occurred
when the nations of the European
Union
officially began to use the euro as their everyday currencies in 2002. When
the physical euro bills and coins were introduced, the old national
currencies, such as the German
mark, the French franc and the Italian lira were demonetized. However, these
varied currencies remained convertible into Euros at fixed
exchange rates for a while to assure a smooth
transition.
In 2015, the Zimbabwean government demonetized its dollar as
a way to combat the country’s hyperinflation, which was recorded at
231,000,000%. The three-month process involved expunging the Zimbabwean dollar
from the country’s financial system and solidifying the U.S.
dollar, the Botswana
pula and the South
African rand as the country’s legal tender
in a bid to stabilize the economy.
1.3.Impact of Demonetization
The
immediate effect on the general cash market transactions until the current value
denominations have been replaced with new notes. On the other hand high
denomination notes are the preferred payment mechanism of carrying illicit
activities (hawala transactions, betting, gambling etc). The announcement to
remove the current high denomination notes out of the system was sudden without
any prior intimation provided with little and no opportunity for entities to
convert their black money in to white. This sudden overnight shocking move has
halted all type of illegal activities.
In
the short run, the large part of the informal sector that engages only in cash transactions
will face disruption. Various sectors tobe impacted are retail, transportation,
metal scrap and dealing in agriculture land. In the long run, this initiative
along with Goods and Service Tax (GST) will push the informal sector to become
more organized and transparent. GST and its supporting bills have passed
recently in the both houses of parliament on 29th March 2016 and got
a assent from the President of India will get in to force from 1st
July, 2017.
There
is a logic as the money supply in the economy reduces (reduction in purchasing
power of the people) would reduce the interest rates, prices will fall and
inflation will ease in the short run, with the increase in the declaration of
income and income sources, the revenue collection of the government will
increase for the current fiscal year and help in further reducing the fiscal
deficit. Economic growth of a country is expected to fall for the next few
quarters due to fall in the manufacturing activities and allied operations. The
MSME (Micro, Small and Medium Enterprises) comprise almost 51 million units in
the country and 93% of them are unregistered. Small traders and business in the
rural areas and semi-urban parts of the country had affected badly because
their existence is on only cash transactions. Small and medium size business across the country are likely to be
struggling to cope with lower consumer demand, fewer supplies and pending salaries
in the short run. For a short term perspective, demand slowdown is expected to
be seen in certain sectors such as real estate, high ticket consumer durables,
luxury brands etc.
1.4.Conclusion
With
this all measures the rulers of the country expected transparency in tax
compliance, realization of assets and people of the country at some extent.
Unplanned and sudden move had brought a big impact on the common man and the
livelihood of daily wage earners, artisans had been affected badly. We get to
see serpentine lanes before the banks and ATM’s to convert old currency notes
for new currency and withdrawal of cash. Government had failed to maintain
enough new currency stock at the chest of banks to remonetise which brought the
economy to grinding halt for some time and the country’s growth rate has been
affected. The government could have done the process of demonetization in a
phased manner without affecting the common man. Hence,
the very purpose of demonetization is to weed out corruption from the system
which it had failed to address.
References
3.
DNB_India-economy@DNB.com
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