Demonetization – The Saving Grace for a Hopeful Economy Long since has the stage been set, beginning with the Jan-Dhan Yojana to bring over 255 million individuals1 under the banking system, the Gold Monetization Scheme as an alternative to hold physical gold, the Income Declaration Scheme meant to provide a single window for people to declare their unaccounted wealth and now, the masterstroke of demonetization. With these measures, the government aims to fight the evil of black money, combat corruption, bridge the financial gap prevalent in the country. Fifteen days since the move was made and has left apprehensions in the minds of many. The way forward requires the government to set stricter laws which is essential to ensure that the evil of unaccounted wealth is prevented from reappearing. Moves such as a stricter tax regime, both, direct and indirect, not just in terms of simplification, but also, in accounting and payment. Specifically, wholesale traders who even today use cash to transact do so to avoid a paper trail of actual income earned. While the Direct Tax Code simplifies the payment mechanism, elimination of cash as a means to transact and usage of digital money will ensure accountability for actual tax dues. One can expect that the Government comes down with a serious clamp on the hard cash available for use in the economy or a ceiling limit on the transaction amount to be done in cash. With the surge in liquidity that banks will experience as a result of the clampdown on hard cash, investors expect interest rates to fall, making sources of funds cheaper in the economy. Indeed, a good mechanism to propel investments within the economy. The Government has also moved the printing of notes from overseas to new plants set up in Mysuru and Hoshanabad which has allowed heightened security features and safety of movement of notes from the mills to the banking system with clear accountability. Demonetization will eliminate counterfeit notes, but the production of new notes in-house will be a better promise to keep such counterfeits out of our economy for a longer time. If this is proven successful, we can expect withdrawal and replacement of other denominations to increase security in paper money altogether. If old notes are not converted in time, the RBI can write-off its liability in-part on the foregone currency notes. The government doesn’t have a clear picture on how much will not be converted, but no matter what the amount, the reduction in liability will help the RBI and the government to repay some of its foreign debt which will help clean the balance sheet of the nation and reduce the country risk premium international investors demand. Moreover, initiatives like Make in India, Digital India and Start-up India will receive their push to propel the economy at a faster pace. Lastly, demonetization will bring about a behavioral change in people with respect to the digital medium for transacting through the use of digital wallets, payment banking and plastic money. Sankeerth Bondugula & Anoop Prakash Finance Club, IIM Shillong
1 http://www.pmjdy.gov.in/account