Demonetisation has been one of the most controversial event of Independent India which has been executed by Government. The citizens are divided in their opinion about the final result and impact of the Demonetisation on the economy of our country.
Some people feel that Demonetisation has failed because majority of the old notes came back, the economy slowed down, the event was unplanned, everyone had to face hardship etc. Then there is other section of society which feels that event has been positive because it will move economy towards digital payment, will increase tax collection etc. To add fuel to this debate, we have political parties whose views are always biased. BJP and its supporters are always positive about Demonetisation and they will never accept the failure even if they know from their heart that it was a bad move. Same goes with Congress and other opposition parties who are always ready to oppose every action of Government even if its a good and positive move.
In this article, we have tried to take an unbaised view on Demonetisation and have tried to analyse the impact of Demonetisation on the economy and common man of India. So here is our view:
First thing first, Demonetisation was an unplanned event which created huge hardship for the citizens of India. A better planning could have made things better for everyone. Also, it definitely slowed down the economy which resulted in businesses getting hit and slowdown in job creation process.
Above points highlight the shortcomings of Demonetisation but we feel that the positives of Demonetisation have been so huge that the above stated negatives are too small in comparison. In our view, Demonetisation has been a game changer move which will create huge positive impact for economy and people of India. Some of the positives have already become visible and many more will become visible in days to come.
The huge positives of Demonetisation are as under:
- Change in Behavior and Reduction of Black Economy – One of the biggest issue which India faces is the parallel black economy. People don’t or under report their income and pay less tax. This is more prominent among small and medium business owners. After Demonetisation, people have realised that its difficult to hold or hoard cash and its better to report some income. A visible trend is that, people who were showing very minimal income earlier, have started showing decent income and have started paying good tax.
- Slowdown in Real Estate Market – Earlier, people who used to generate cash through their businesses used to invest the cash in Real Estate. This resulted in huge Real Estate Prices in India. The value of Real Estate was so high in India that buying a house was a distant dream most citizens of India. The per capita Income of India is 30 times lower then America and other Developed Countries but the real estate prices of India is similar to Developed Countries. The high rental of commercial property in India is one of the biggest reason for failure of business in India.
After Demonetisation, the cash generation has reduced which has slowed down investment in real estate and which has further stopped price escalation of Real Estate. The value of Real Estate is not expected to go up now for next many years which will increase the affordability of property in India. Its a huge positive for businesses whose rental cost will come down and also for people who will now be able to buy their own home.
- Increase in Govt Tax Collection – Government needs tax so that they can build better Infrastructure, provide social welfare, take care of security etc. The spending of Government may not be efficient but they still need money to spend because they alone can run the country. Tax revenue to GDP Ratio for India is 17.7% which is among the lowest in world. Unites States has a ratio of 39.3%, France has a ratio of 47.9% and Germany has a ratio of 44.5%. All the developed countries have high tax revenue to GDP Ratio. No wonder, Developed countries have better infrastructure and social welfare schemes. How can India have similar facilities with such a poor tax revenue? Demonetisation will increase tax revenue for Government and hence India will have more money to build better Infrastructure, create world class education institutes and provide better welfare schemes to people of India.
- Reduction of Interest Rates – India has one of the highest Interest Rates in the world which makes it difficult for businesses to borrow money and implement huge projects. With better tax collection, the borrowing of funds by Government will reduce and hence interest rates will come down. Also, with more white money available with people for investment, the funds being invested in Government and Corporate bonds will increase and will further lead to reduction in Interest rates. This will make our businesses more competitive globally and will help in better job creation.
The above stated positives of Demonetisation will become more and more visible as the time passes.
Our final verdict – Demonetisation has been a huge positive game changer for India.
Please share your views and let us know if you agree with us or not.