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  HOME | Business & Economy (Click here for more)

Indian Demonetization’s Results Still Unconvincing after One Year

NEW DELHI – As the shock that India was withdrawing its high denomination banknotes – 86 percent of total currency circulation –reached on Wednesday its first anniversary, the measure has failed to convince people of its success given that economic growth has slowed down since.

It was late on Nov. 8, 2016, that Prime Minister Narendra Modi made a sudden appearance on television to announce that, within a few hours, all high-denomination notes would become worthless unless deposited in banks to redeem their value.

The government justified the step by saying it was aimed at combating a black economy, fake currency and the funding of terror.

Some 99 percent of the currency was returned to the banking system, the Reserve Bank of India reported in its annual report published late August, a fact confirmed by Finance Minister Arun Jaitley.

However, the economy has lost momentum, growing at a rate of 5.7 percent last quarter, compared to the 7.3 percent growth in the quarter before demonetization was announced.

The informal sector – which adds up to more than 45 percent of the Indian economy if agriculture is included – had been hit hard, experts told EFE.

The digitalization of payments, which shot up initially, has also declined, while the impact of an increased number of taxpayers was still uncertain.

Martin Patrick, chief economist at the Center for Public Policy Research, told EFE that digital transactions had reduced to 107 trillion rupees ($1.6 billion) after peaking at $2.29 billion in March, and might even return to pre-demonetization levels.

Patrick said that demonetization had failed in all three of its objectives: fighting black money, counterfeiting of currency and terrorism.

“These were the three important objectives, later they added that these were not the main concerns, the main concern was a cashless economy,” the economist said, adding that the three main objectives were not translated into reality.

“That shows the failure of demonetization,” Patrick said.

Although he acknowledged the step had widened the tax net and led to a slight increase in digital payments, he said that the short-term cost outweighed the long-term benefits.

Pronab Sen, India director of the International Growth Centre, said to EFE that it was still too soon to understand the real impact of demonetization.

“It is a measure designed to change the mindset, to change the way people thought about corruption, the way people thought about the payment of taxes and so on,” Sen said, adding that as an economic measure demonetization was not worth it.

Questions remain open about demonetization’s contribution to the growth rate slowing down, in which the imposition of the new Goods and Services Tax (GST) – which replaces 17 direct and indirect taxes – in July is also seen as a major factor.

Sen said that it was foreseen that GST would have an adverse impact, but the announcement of demonetization might have complicated its launch.


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