No major economic policy decision in recent memory has disrupted the system as extensively as the demonetisation. The 50-day time-frame, set by Prime Minister Narendra Modi while announcing the dramatic move on November 8, ends today. However, it would be imprudent to expect that the government has a magic wand to remove all the hardships that the scrapping of high-value currency notes has brought in. A reform that is as drastic, sweeping and disruptive as demonetisation is bound to send shock waves that will be felt for a reasonably long time. The country is passing through challenging times after an all-out war on black money and corruption was launched. What is required now is extraordinary resilience and dogged determination to win the war. Despite severe inconvenience due to cash crunch, after nearly 86 percent of the cash was sucked out of the system, the people across the country have been displaying enormous patience and fortitude, hoping for long term benefits. Despite the frustratingly long queues at banks and ATM centres, the fears of street violence and riots have not come true. While economists are divided over the efficacy of demonetisation as a tool to eliminate black money, the intent of the government is not in doubt. It is a perfectly valid argument that the execution could have been better and logistics of cash replacement and other implementation issues could have been handled with foresight and proper planning to ensure that hardships for the common man in a cash-dependent informal economy are minimised. However, in a country like India where a shadow economy reliant on high-value cash transactions, such as real estate purchases and gold, has led to huge accumulation of tainted wealth and avoidance of tax, a surgical strike on black money was inevitable.
The pain of demonetisation is expected to last a couple of quarters, leading to contraction of economy, hitting small traders and farmers hard and affecting agricultural productivity and GDP growth rate. However, the long term benefits include ushering in a more transparent digital economy with a vast majority of population being brought under the formal banking system, greater tax compliance, more funds for social sector spending, reduction of interest rates, correction in the real estate sector and, more importantly, elimination of counterfeit currency and terror funding. The sooner the country adopts the digital mode of transactions the better it will be for its economic growth. The Telangana government has shown the way by giving a concerted push to online transactions. Invalidating high-value notes alone is not enough to eliminate black money and corruption. The war has to be fought on multiple fronts targeting the roots of black money.