Explainer: Demonetization in India

 

                                            Demonetization in India

What has actually happened?

A country which has been suffering from corruption and black money for decades now witnessed the very first ‘bold’ step taken by Prime Minister Narendra Modi. This came as a surprise to the nation and a blow to  few. Prime Minister Narendra Modi addressed the nation and announced with immediate effect from midnight of 8th November, Rs.500 (GBP 5.90) and Rs.1000 (GBP 11.81) notes would be invalid and the new notes for Rs.500 and Rs.2000 will be generated.  People could exchange their currency at banks and post offices carrying proof of identification. The twist didn’t lay within the ban but the main reason and the rules attached. India has been known for its black money where people have stacks of undisclosed income as a result the tax paying percentage in India is very low. People can only exchange Rs.4500 (GBP 53.14) a day until 30th December which would be tracked back and compared with their income tax details. India still is an economy mainly based on paper currency where people usually keep a few thousands stacked at home. The main reason behind this move is to get black money holders to come in the limelight and put an end to it.

This move was welcomed by all and turned out to politically be a master stroke for Prime Minister Narendra Modi as people had been waiting for his promised “acche din” i.e. ”good days”. Modi gave an emotional speech saying that he has given up on a lot to serve his nation and appealed all Indians to cooperate with him for 50 days. People have supported this move but are also facing a lot of problems when it comes to exchanging currency at the banks. There have been long queues outside the banks and ATMs, frustrating people as they need to get back to work. Another problem is that not a lot of people have bank accounts which further is creating a chaos especially in rural areas

Will it be successful?

When it comes to the question of whether this “masterstroke” will be successful in eliminating the problem of black money is still debatable. The political parties in the opposition have united against this move and have appealed people to “not fall in the political trap set by the government”.  The question of its success is debatable because black money is a consequence of corruption and not the main reason behind it. The government needs to eliminate corruption from its roots to stop black money from flowing in the economy. Apart from dealing with the roots of corruption it’ll be interesting to see if the vision of Modi to make India a cashless economy will be achieved or not.  There is a need to streamline the tax system in the long run: for sure this move will benefit Indian economy in terms of tax revenue and growth in GDP. The main sector of black money like Real Estate may face some blow in the short run: it will be interesting to see how they manage the situation in the long run. Despite facing problems, people are trying to overlook the hurdles and concentrate on the positive aspect.

This move should definitely be looked in the positive side but it definitely has some flaws and shortcomings that need to be dealt with such as the fear of higher inflation which has become a concern with the release of Rs.2000 (GBP 23.62) note. Another problem is the devaluation of smaller currency notes. The real success of this plan lies within the implementation and the governments swift actions to handle all sectors of the economy. In the end we can only hope that India faces positive results and the Modi government is able to provide India with the “good days” as promised.

Text: Palakh Dutta

Image: Guardian, Sanjeev Gupta/EPA.

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