Cochin Herald

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Demonetisation proves it was best for the economy

It has been a year since the demonetisation typhoon hit the Indian economy bringing in much chaos for everybody. A lot of the issues that we saw surfacing were due to the withdrawal of the Rs 500 and Rs 1,000 banknotes on November 8, 2016. Justified as an attempt to single-handedly bring out the black money in the system, this announcement received mixed review from all sectors of economy.

Even though the Narendra Modi government took much criticism for the epic move, the reform was intended to have a long-term positive impact on the society. Those short cited criticism that surfaced lacked the vision to see to this and were only based on the immediate effects the resolution had on others.

Even though good results were expected by this move what came after it was more than anybody had hoped for. During the months which followed 17.73 lakh suspicious cases were identified that did not match the existing filed tax profiles. Deposits worth Rs. 3.68 lakh crore came into the light and were noted to be related to suspicious transactions. About 2.24 lakh shell companies were exposed as a result. Another major achievement that came along was that the incidents in Kashmir and in general came down by 75% when compared to the previous years.

Revealing black money

While the demonetisation was widely criticised it did help in shining some light on more than a few shadow firms that were under the radar. The change of currency notes made many companies and firms to come forward to deposit and withdraw currency on the double. More than 17,000 crore was deposited and withdrawn post-demonetisation; by around 35,000 companies.

In a report by Registrar of Companies the officials said that they were able to strike–off about 2.24 lakh companies which had remained inactive over a period of two years. The number of tax returns filed by individuals shot up to 25.3 % and 9.1 million taxpayers have been added to the tax net. It also brought forward the individuals who had evaded tax so far. 17.92 lakh individuals were found out to have incoherent tax documentations when compared to the cash deposits they made.

Boost to digital economy

The immediate unavailability of currency notes of 500 and 1000 did make the life of everybody a little difficult. What came afterwards was the shifting towards the digital transactions. Post demonetisation, about 86% of the total currency in circulation had turned invalid. This prompted people to depend more on digital payment methods.

Taking this as an opportunity to realise the vision of a cashless economy, the government also announced various measures to encourage digital transactions through banking channels. At the right time various charges that usually burdened the common people were lifted off making the digital transactions easier and much cheaper than before. As a result digital payment industry witnessed a growth of 40-70 percent as compared to 20-50 percent growth before demonetisation and has now reached a substantially noticeable volume. The recent number of digital transactions for October 2017 alone is about Rs 50,000 crore.

The shift to digital economy has brought in a new market and new employment opportunities. With the reduced interest rates the banks were able to offer new loans for multiple purposes, development projects and business activities at much cheaper rates than before.

Changing investment patterns

Traditionally, a large fraction the wealth is saved in physical assets like jewellery, fixed deposits and real estate. On an average, about 80 % of the savings are in these and the amount is increased as years pass by. Demonetisation witnessed a large-scale cash deposits in bank accounts of individuals. However as bank deposits offered nominal returns the investors have turned to explore alternative investment methods.

Equities and mutual funds emerged as preferred investment options for a good number of such people. While the shares of financial assets like bank deposits, company shares, government securities, mutual funds, etc. has been low for decades, post-demonetisation we see an increase in such deposits.

The mobilisation of equity-oriented schemes during April-August 2017 was higher at Rs 61,400 crore as compared to Rs 18,500 crore during the corresponding period last year. Retail investors gradually started moving away from low yield assets like FDs and are flocking towards MFs with around Rs 5,000 crore worth of SIPs every month. Likewise, life insurance sector witnessed a surge of 113 percent in premium collection post-demonetisation.

Rising stock markets

When the announcement for demonetisation cam the stock markets did slunk a bit, but it was just a momentary lapse. Within a year of demonetisation the stock markets scaled new heights and are performing much better than before. On November 7, 2016, the BSE’s Sensex was at 27,458.99 and a year later it is at 33,731.19 (as on November 6, 2017), a 23% rise.

A lot of this increase is being attributed to the money that was deposited in banks and thereafter found its way in to the stock market. With investors diverting their surplus cash to equities and equity mutual funds many were exploring new avenues to invest. This, along with the implementation of Goods and Services Tax (GST) in July 2017 will be expected to marginalize the economy.

Source: Internet


Cochin Herald

All stories by: Cochin Herald