Costly error

While it is still early to weigh the full impact of demonetisation, it is obvious that the objective behind the note ban and the approach to tackle the issue has proved futile.

Author Published: 17th Jan 2017   12:00 am Updated: 16th Jan 2017   9:31 pm

The Indian economy has been witnessing a sea change since the demonetisation decision. Though the note ban move needed secrecy at high levels to address terror funding, counterfeits and black money menace, there is enough evidence that the mechanism to pump in the required cash flows into the system needed better preparation. Moreover, with only Rs 54,000 crore of banned notes remaining to be returned, the whole exercise takes a beating as the RBI itself admits that Rs 14.90 lakh crore, or 96.5 per cent of the original amount, is back.

On November 8, there were 17,165 million pieces of Rs 500 notes and 6,858 million pieces of Rs 1,000 notes in circulation. This amounted to a total of Rs 15.44 lakh crore or 86 per cent of the total currencies in circulation valued at Rs 17.95 lakh crore. Prime Minister Narendra Modi has justified the move from the beginning and Governor Urjit Patel time and again defended the Centre’s decision calling it a planned step. The government pitched that the move was inevitable to clean up corruption. Amid all this, cash-based businesses have been severely impacted while small merchants and traders had to either shut shop or shift to digital transactions to keep the activity going.

Demonetisation is an extreme step that the government has resorted to. Such action is taken usually when an economy is in chaos or when values of currency plummet. With a negligible amount remaining outside the banking system, the Centre has clearly failed in its attempt to curb black money and corruption. The RBI too has lost its credibility, which it has earned over the years, by not sharing the correct picture.

While it is still early to weigh the full impact of demonetisation, it is obvious that the objective behind the note ban and the approach to tackle the issue has proved futile. The implementation of the whole exercise also brought to light the weaknesses in the Indian banking system. The worst hit are the rural people – they have been deprived of their own money.

The move has affected projections of all major economic indicators from manufacturing to the GDP. If the common man suffered due to cash-crunch post the demonetisation move, banks, which are already burdened with increasing bad loans, are facing a host of new challenges now. After several years of slowdown, the banking sector was pinning its hopes on some recovery but demonetisation has reversed the prospects as two crucial months have gone in accepting deposits, for which interest has to be paid now. The move could prove a costly mistake for an economy that was showing enough signs of stability and growth.