Updated September 05, 2019 | 02:23 IST | Devi Prasad
The step by the central government of India of striping a currency unit, the 500- and 1000- rupee notes, of its status as legal tender on 8 November 2016 became a prime debate in electronic as well as printed media for several days. Various newspapers also reported how the decision of ‘demonetization’ had effected mostly to unorganized rural retailers harshly because their customers belong mainly to ‘middle’ / ‘lower’ class background such as farmers and daily-wedge labourers. The justification for ‘demonetization’ was to eradicate counterfeit currency, fight tax evasion, eliminate black money gotten from money laundering as well as terrorist financing activities, and promote a ‘less-cash society’ with sense to the cashless economy as a whole, but the facts of current economic scenarios tell different stories.
The ongoing economic crisis that has seen the gross development product (GDP) dip to 5%, the lowest in the last six years could be attributed to clearly demonetization and few other decisions taken by the central government since 2016. The economy of any country is run by the cyclic process of demand and supply, selling, and purchasing. The decision of demonetization by Narendra Modi-led central government made people cashless. Even after the issuance of new currency denomination notes by the Reserve Bank of India (RBI) in large numbers, banks, the small and medium industries, unorganized sectors, faced a massive dearth of cash that affected their businesses.
The decision that shocked the entire nation and made news globally created a huge cash crunch in the market as people were unable to encash their own money from the banks. The banned denomination notes of Rs. 500 and Rs. 1000 constituted 86 percent of the total currency circulating in the Indian economy (Business standard, 2016). As a result of this, when these notes were withdrawn from the market, it not only affected the everyday lives of the ordinary people, the small and medium industries that operated mostly on cash were among the worst-hit.
The demand and supply of the goods and services in the market is the backbone of any economy. The demonetization struck the balance of demand and supply as people were unable to purchase goods and services at their will thanks to the acute shortage of cash in their hands as well as the banks. The move had hit the Indian economy so hard that it is still struggling to get back on track as highlighted by several reports. And these repercussions of the demonetization were indicated by several economists and scholars including Raghuram Rajan the former Governor of RBI. In the immediate aftermath of the GST and the demonetization, the industries had started to shut down, and people lost jobs. RBI’s failure in replacing the old currency with the new ones at the required pace affected the banking sector too as people were unable to withdraw and deposit money as per their requirements. There were limits put on the amount of money that people could draw from their bank accounts. The long queues that people had to stand in for hours to get cash for essential needs were entirely uncalled for. There were news reports of people dying due to their failure to arrange money for medical treatments and committing suicides for not being able to get cash for solemnizing marriages of their children.
Similarly, the haste with which the goods and services tax (GST) was implemented in the country only added to the plights of the small scale and medium industries which were yet to recover from the blow of demonetization. Several economists questioned the ways in which these two economically significant decisions were taken and implemented. When big companies like Parle and Tata Motors are seeing a steep decline in their businesses threatening job-cuts in thousands, one can only imagine the state of small and medium entrepreneurs.
As if these vast economic moves were not enough, the government had also cut the funds of the social security schemes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which is the second-largest expenditure for planned rural development from Rs. 63,641 crore in 2017-18 to Rs. 51,510 crore in the year 2018-19.
The cumulative effects of all these decisions affected the cyclical nature of India’s economic state of affairs that saw a sharp drop in the demand for goods and services. The cash crunch owing to demonetization, GST causing impediments for small businesses, deductions in the funds on social welfare schemes, failure to generate employment and constant instability in the economy led to dwindling in the purchasing power of the common men. When the government of the world’s largest democracy starts taking arbitrary decisions without seriously considering their short-term and long-term consequences on its economic state, such downfall are bound to be seen. The Bharatiya Janata Party (BJP)-led central government ultimately seems to have discounted the importance of over one billion lower and middle-class population of the nation that plays a crucial role in maintaining the good health of the country’s economy. It needs to realize the basic principle of an economy that it is interdependent on a variety of actors ranging from the individual consumers to retailers, small businesses and medium scale industries to big corporate companies of different sectors. If one faces challenges in performing its role in the day to day economic state of affairs, the others will not remain unaffected.
The declining trend of GDP in the Indian economy today is nothing but the culmination of all the effects caused by the decisions like demonetization and GST implementation without giving severe thoughts on the probable consequences in the day-to-day affair of the country’s economy. These could be addressed only with the government honestly accepting the reality and making sincere efforts to address the crisis-like situation. Its attempts to distract people’s attention from these realities which will anyways keep surfacing from time to time will only amplify the crisis. Serious thinking and sincere endeavours could only be the way out of such situations.