Gains of demonetization and worries over growth

Context: Half a decade since Government announced demonetization.

Significance of formalisation of Indian economy

• Cashless transactions are booming in economy: The count of UPI transfers this year is expected to almost double last year’s 22 billion.
• Provident-fund enrolments have steadily risen amid a job scarcity indicating the formalisation of payrolls.
• Extra bounce seen in GST collection: GST offered input credits as bait for all commercial players to join the tax net.
• Big fiscal benefit: Shift towards board value generation is the prospect of an enlarged tax base needed for India’s development.

Issues associated with formalisation

• Clouded picture due to advent of Covid 19: This makes it hard to draw firm conclusions.
  • UPI boom does not mean paper is being shunned.
  • Cash in circulation has risen above its level before demonetization.
• Significant reduction in informal sector: Recent research work by State Bank of India estimated that the informal sector’s share of India’s output measured by gross value addition had shrunk from over half the total back in 2017-18 to under a fifth.
• Lack of sharp policy indicators: A more abstract gain would be for economic management. Our policy responses can be sharper if we have clearer indicators. 
• Economic slowdown: A slump in private investment along with the chaotic adoption of GST even before small operators could recover from a currency shock was to blame.
• Loss of Jobs: Trail of shutdowns caused due to transition of economy to be blamed. 

Conclusion: The Centre’s bold move five years ago and subsequent steps did hasten the formalization of India’s economy, but regaining a fast-growth trajectory is a challenge yet to be fully tackled.

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