The government’s demonetization drive has precipitated financial chaos in the country and experts are still divided on the overall impact of the move on the economy.
While the formal economy is reeling under a cash crunch, with 86% of the currency in circulation no longer legal tender, the pinch is also being felt by those involved in illegal activities funded by cash-transactions, and it’s not just terrorists!
The government has cited combating terrorism as one of the key objectives of demonetisation. The idea is to make fake notes flowing in from Pakistan, mostly in 500 and 1000 rupee denominations, useless so that black money, an important source of terrorist funding, dries up. The government says this plan is succeeding.
Here are some of the silver linings:
Nobel laureate Kailash Satyarthi has come out in support of the measure and says it will check human trafficking and child slavery in the country. Millions of women and children in India are victims of trafficking.
Another illegal business where cash dominates is prostitution. As a fallout of the withdrawal of 500 and 1000 rupee notes, local media outlets are reporting that women offering sex services are asking clients to pay digitally or take a hike.
There is no doubt that the move has put a dampener on weddings this season. Many weddings rely on cash expenditures, with gifts and dowry changing hands. Social activists have reason for cheer that dowry giving, a social ill that places a huge financial burden on the woman’s family, may have become difficult as a result of demonetisation.
Some families of bridegrooms have withdrawn or reduced their dowry demands. Weddings have also become less lavish.
Source: By Yogita (Wedding) [CC BY 3.0], via Wikimedia Commons
Cash transactions also fuel drug dealing so it is no surprise that in the Malda region of West Bengal, which is a hub of the drug trade, demonetisation has delivered a blow. Smugglers cannot pay opium farmers and buyers are short of cash to purchase drugs. Only time will tell if this is a temporary or permanent setback for the drug mafia.
Tax collections by local urban agencies have also registered a huge increase. Data from the Urban Development Ministry shows that the tax collection of 47 local bodies rose by 268% in November 2016 compared to the corresponding period last year. “This is the positive effect of demonetisation. People are clearing up their old dues, paying with Rs. 500 and Rs. 1,000 notes. For the urban local bodies, it has meant substantial mopping up of tax collection,” Urban Development Minister M Venkaiah Naidu told The Hindustan Times.
Mumbai-based brokerage Edelweiss Securities Ltd. forecasts that the government’s move will uncover Rs. 3,00,000 crore in black money. Some more optimistic estimates peg the figure at Rs. 4,60,000 crore.
“This money can now get utilised for various economic reforms’ funding,” Edelweiss analyst Manoj Bahety told Bloomberg. The gains could help India narrow its budget deficit. It is a chance to plough more money into defence and energy spending or increase spending on social services such as education, health and housing, by as much as three times.
If the government does rake in windfall gains, as some economists predict, where should the money be utilised? Leave your suggestions on our Facebook page.