In recent days there is noise by opponents of the “demonetisation” that the aim of curbing money by canceling existing ₹500 and ₹1000 notes would be nullified by printing ₹2000 notes. It appears that the opponents have not read between lines of Prime Minister Modi’s historic speech on 8th November evening. Besides the publicised efforts of the NDA government over the past 2 and a half years, the Government had been bringing out the problems faced by the amount of cash in circulation. This has been causing inflationary trends and many of the government efforts and schemes failed to have desired impacts. Even RBI monitory policy announcements were losing grip over the economy. In this microblog, some thoughts in this regard are shared.
Apart from curbing black money, fake notes and corruption one additional aim of demonetisation is to bring the cash to GDP ratio in acceptable limits. India’s cash to GDP ratio is one of the highest at 12.42% in 2014. This has been consistently on a higher side. Many developing economies have a much lower ratio e.g. Brazil at 4%. The desirable ratio according to economists is around 5% and though the Government has not declared it as such, it could be one of the objectives of demonetisation. Before the announcement on 8th November, ₹17,54,000 crore worth currency was in circulation, of which 86% was in higher denomination notes. Assuming GDP growth rate of 6% p.a., with the above aim, Govt will have to print around ₹775,000 crores in currency (0.05 X 1.06 X 1754000/0.12)in order to reach the above target ratio. Thus, currency notes worth around ₹979,000 crore would be extinguished. Hence, it is very much likely that printing ₹2000 notes will not add to black money as has been portrayed by the opponents of demonetisation. Moreover, by printing a new denomination, the government has killed all possibilities of what’s referred to as “peak theory” or theory of the rotation of the same money. And after all, now the Government can take this decision again anytime if fake note makers come back.
This removal of cash from the economy will push more and more people to the cashless economy by taking to e-payments, mobile wallets and what have you. All these forms would be above board and accountable. The emergence of many app-based services like Paytm and their acceptance at grocery shops and malls has helped greatly.
The demonetisation by the Government is one of the greatest impacts of making disruptions which was essential. So far everyone was convinced that more recoverable black money is held within the country but no government had the will to take hard decisions. It is surprising that so-called anti-corruption crusading parties are also opposing the move and joining hands with old parties! The only issue with demonetisation is the logistics problem of moving new currency notes and hopefully it will be addressed soon!