Essay on Impact of Demonetization on India’s GDP and Economic Growth

Free 830 words essay on impact of demonetization on India’s GDP and economic growth for school and college students.

On 8th November 2016, India was shaken from its post-workday relaxation by an announcement, straight from the Prime Minister’s office, declaring that from midnight that day, 500 and 1000 rupee notes will no longer be in circulation. The country was given two months to exchange all existing notes with the bank, with banking hours being extended almost indefinitely. The news immediately met with much flak, mostly on account of the harassment the general public was subjected to immediately after the announcement. Large queues formed outside banks and ATMs as people hurried to get the maximum amount they could extract to tide over the coming days. To make matters worse, the replacement 500 and 2000 rupee notes were coming to the banks in small batches, and the daily withdrawal limit shrunk monumentally.

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The government assured the public that the unprecedented move was made to clamp down on the inordinate amount of black money hoarded by individuals, and promised a better economic system in the near future, with over 80% of the unaccounted money wiped off from the system. 6 months later, let us see how far the promises have held up.

Cash economy is hit

The country’ GDP took a massive hit as cash flow became scarce immediately after the demonetization. India is one of those countries where cash accounts for most of the transactions; a large sector of the population is still not well-versed with using a credit or debit card in stores, let alone using the internet for online shopping through netbanking. Most of the stores do not accept cash payments either. As a result, with cash flow dwindling to a trickle, people of the nation cut down on their spending. Various economic sectors took a huge hit as a consequence. Farmers were greatly affected as they could not be paid for their crops, and they lacked the money to buy equipment and fertilizers. Smaller stores saw a great reduction in sales, as did transportation of goods; in short, all sectors that depend on cash transactions.

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Informal sector is badly hit

A large portion of India’s population works in the informal sector, that is, they are casual workers or are self-employed. This sector comprises of around two-thirds of the investable funds, along with around 40% of capital formation. The population in the informal sector is largely dependent on cash transactions, and with the availability of cash flow being severely hit, they have faced a setback in their incomes, which may actually translate to a major part of the revenue being gone forever, having a negative impact on India’s GDP.

GDP growth rate hit a low

In the fourth quarter of the financial year 2016-17, India’s GDP fell to a 6.1 percent growth, which is lower than it has ever gone in the last half century. In financial year 2017, the GDP growth rate improved, but only a little, at 7.1 percent, the lowest it has gone in the last three years. The Gross  Value Added, which is the difference between indirect taxes and GDP, grew a measly 3.8 percent, as opposed to the 8.1 percent increase in the first quarter of financial year 2016-17. As a result, India lost its position of being the fastest growing economy in the world to China.

 Black money crackdown

In his speech declaring the demonetization move, and thereafter while supporting the move in numerous addresses, Prime Minister Narendra Modi could not stress enough upon the great effect the note ban would have on the black money hoarded by individuals in the country. Six months later, it is difficult to make a real estimate of how much black money has actually been seized. However, if the news reports are to be believed, Income Tax raids have successfully unearthed vast amounts from wealthy professionals and businessmen across the country. Government measures to uncover unaccounted money, such as tax declaration and donations government schemes, have also helped recover a certain amount.

 

More money in the treasury

Recovery of black money basically helps in injecting a lot of funds in sectors where it is most needed, and drying up the wellspring of funds where it is most undesirable. Illegal money is often used to fund terrorist activities, bribing officials, and unlawful businesses, and, with this money gone from the system, there is lesser chance of money being circulated underground. And, more money in the hands of the government means that there will be bigger scope for funding hospitals and schools and building better infrastructure for the betterment of the country.

Demonetization was a huge blow to the Indian economy, something that the country is still steadying itself from. The real effects, however, are projected to be seen slowly, in the coming years. While Finance Minister Arun Jaitley and PM Narendra Modi are confident that the note ban will have only positive effects in the long run, economists like Amartya Sen are skeptical. But one thing is true, it is still too early to pass a verdict.

 

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