On Demonetisation, Take The Long View

Context: After four years of demonetization, there are many benefits that are already visible and much more is expected to come in the long term.

Defined objectives of demonetization:

• Curbing black money.
• Digitization of commercial transactions.
• Formalization of  the economy.
• Increase government tax revenues.

Positive outcomes of demonetization:

• Identified discrepancies in cash transactions and tax profile of a person: Identified 17.92 lakh persons in the first phase.

• Increase indirect tax collections: by 17.9 % and 13.5 % respectively in the financial years 2017-18 and 2018-19.  

• Improvements despite the sustained tightness in financial conditions: like the collapse of Infrastructure Leasing & Finance Services (ILFS) and the consequent liquidity crunch in banks.

• Adoption of compliance culture by the public: which has been a long-term trend that looks irreversible.

• Catalyst for digitalization of financial transaction:

• Volume of financial transactions done through the Unified Payment Interface (UPI) jumped from 5,353.4 million in 2018-19 and 12,518.6 million in 2019-20. 

• Benefits of digitization of financial transactions include: increase in transaction volume, fast and safe payments and helps in tracking consumer behaviour.

Some offshoots of demonetization:  It pushed the government towards greater formalization of the economy.

• Took action on the discounting and factoring of trade receivables will ensure timely payments.

• Re-classification of MSME enterprises was done: to address reluctance to grow.

• De-criminalisation of violations of penal provisions under the Companies Act, 2013: has eased the compliance burden.

Conclusion: Judgement of epochal policy decisions cannot be rendered instantaneously or in real-time. Hence, the benefits of demonetization will be realized in the long term.