On Demonetisation, Take The Long View

The Indian Express     9th November 2020     Save    

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.