Success & failures of Demonetisation – one year after

One year after the Demonetisation of Rs.500 and Rs.1000 currency notes, the gains and disruptions in Indian Economy have been significant. Different sectors have felt the impact of Demonetization while India has marched on the path of digital transactions at a much faster pace. In fact in the past one year, demonetisation has been a buzzword across all Indian industries.

The demonetization was announced by Mr Narendra Modi, the Prime Minister of India, on November 8, 2016 in a sudden and unscheduled live television address at 8PM. In the days following the demonetisation, the country faced severe cash shortages. The use of Rs.500 and Rs.1000 banknotes was made invalid past midnight of November 8. Instead new Rs.500 and Rs.2000 banknotes of the Mahatma Gandhi new series were introduced.

The objective of demonetization as claimed by Government of India was to curtail the black money running as shadow economy and to stop the use of counterfeit cash to fund illegal activity and terrorism. The demonetization move was criticized as not well planned and unfair, and was met with protests, litigation, and strikes. After one year of its implementation, demonetization has created mixed reaction on the risky policy of Government of India and its impact on Indian Economy.

 

Important link
Demonetization 2016 in India will adversely impact Indian Economy

 

Points describing success of Demonetization

Rate of Inflation goes down
Prices of commonly consumed commodities like Pulses, fruits, vegetables had gone down substantially post demonetization. Accordingly it brought down the rate of inflation during the months that followed demonetization. The chart below represents the impact of demonization on the commodities

India moves to cashless economy
One of the key effects of Demonetization 2016 has been that more people have made digital payments part of their lives moving towards a cashless economy. The details of growth of such digital transactions since January 2016 to August 2017 reflect that NEFT transactions that involved Rs. 7086 bn increased to Rs.12500 bn; Debit cards transactions increased from Rs.2328 bn to Rs. 2700 bn; credit cards from Rs. 214 bn to Rs.366bn and the IMPS transaction which was not used by the people, got a share of Rs.651 bn. The Data shared by Reserve Bank of India reflect the trend:

Stock Market gets bullish
After demonetization stock market in India got bullish. While BSE index which was 27, 459 on November 7, 2016 rose to 33680.92 on November 6, 2017, the NSE rose from 8497 to 10,443. The data shared by Bloomberg reflect the trend.

Banks’ lending increases for small businesses
Banks’ finance to small business was going down in pre-demonetization period. There was a negative growth even in short period of months. As on November 25, 2016, a negative growth of -7.71% was recorded in Banks’ lending to small business. It went to -8.16% as on December 23, 2016. However, as on September 29, 2017 the Reserve Bank of India has reported a positive growth of 1.65% in lending to small business by the Banks.

Automobile sales picked up
Sale of 2 wheelers and 4 wheelers was showing a negative growth in 2016. In 2017 it went up substantially and recovered from the impact of negative growth to high positive growth as reflected in the report.

More people use Mobile wallets than cas
Instead of using cash, more people have started using Mobile wallets for making payments for their regular needs. Even less educated people have learned and switched over to mobile transactions. The volume of transactions which was Rs.22.14 bn in January 2016, had gone up to Rs. 83.53bn in January 2017.

Failures of Demonetization

Economic Growth slows down
Post demonetization growth of Indian Economy slowed down from 9.1% to 5.7% in less than one year. Month-wise GDP growth chart for the period March 2016 to September 2017 as shared by Bloomberg emphasizes this fact as detailed below:

Realty sector bears the brunt
The triple decisions of demonetisation, RERA and GST resulted in a deceleration of new property launches. The supply of new housing units in the top-6 cities in India during the first three quarters of 2017 was down by around 60 per cent, compared with the corresponding period of 2016.

 

With respect to property sales, the secondary market was obviously highly susceptible to demonetisation as compared to the primary market. Property transactions in the secondary sales and luxury housing segments tended to have significant cash components, and such sales have been hampered significantly due to demonetization.

However, the shadow of Demonetization now appears to be fading in reality sector. The prevailing attractive home loan rates, flexible payment plans and other attractive offers by developers, coupled with restricted new supply addition, has led to a steady decline in the unsold inventory.

 

As of Q3 2017, only 6,38,500 units remained unsold in the top-6 cities, registering a 9 per cent decline from Q4 2016 levels. The demand for affordable and mid-segment housing has been on a rise.

 

Initiatives such as interest waivers on home loans, the government’s push for affordable housing through Pradhan Mantri Awas Yojana (PMAY) and the ‘Housing for all by 2022’ mission have come to the forefront over the past one year. Various policy initiatives, amendments and reforms were all aimed at making the real estate sector more transparent, organised and fundamentally stronger. Demonetisation played a significant role in this process.

 

In the long term, the real estate sector is likely to regain a faster growth trajectory and is estimated to contribute around 13 per cent to India’s gross domestic product by 2028. This optimistic forecast is very much attainable because the various reforms now redefining the realty landscape in India will not only incrementally boost consumer sentiment but also improve investment inflows from foreign and domestic institutional investors.

 

The Finance Minister Arun Jaitley on November 7, 2017 came out with a spirited defence of demonetisation announcement on November 8, 2016 calling it a “watershed moment for the Indian economy”. According to him the demonetization has not only changed the agenda but also made corruption difficult. Thus, in his opinion, it was not only a “morally and ethically correct” step but also “politically correct”.

 

Which way to go in GD: Expert advice
You may get not more than 1 minute while speaking for or against or taking a balanced view on demonetization and its impact on economy. The only thing is that you should be well aware about the topic and only this can lead you to speak the way you think is right. Besides, once someone else is speaking you may carefully listen to him and later try to get in and speak out your view point. Please remember do not criss-cross your own stand.