Journal : People's Daily (Chinese) Date : Author : Yuan Jirong Page No. : 22

India's demonetization policy caught in dilemma

While positive effects are obvious, “accidental injury” to economy sets off controversy

People’s Daily correspondent in India: Yuan Jirong
According to a front page report in Hindustan Times on February 8, Indian Prime Minister Narendra Modi once again defended himself, saying demonetization policy has been successful, and it was the right decision taken at the right time. Another report said that Indian bank officials said that due to a large number of people withdrawing cash, it is estimated that presently 1/4 of the ATM machines in the country one again are remaining cashless. Cash shortage is likely to restart countrywide discussions on the effectiveness of demonetization.

These two reports just reflect the real plight of the Modi’s demonetization policy. On the one hand, Modi and the government give publicity to the benefits of demonetization towards the long-term economic development and fight against corruption. On the other hand, continuous cash shortage among the people has forced the government to admit recently that the policy has hurt the Indian economy.

More than three months after the implementation of demonetization, it has brought about certain positive effects. According to a recent report in The Times of India, at present, there is a substantial reduction in human trafficking in India, billions of rupees were seized from militants, and the underground banks having tie ups with Kashmir region and the terrorists have suffered heavy losses. India’s Delhi University economics Professor Mr. Lal told this reporter that demonetization has somewhat improved the transparency of India’s economic activities, and the shrinking of shadow economy will help increase the state tax revenues; reduction in interest rates and inflation will also have a positive effect on India’s macro economy. Prof. Lal believes that the demonetization has caused a substantial increase in bank deposits. In early January, all the major banks in India have one after another cut interest rates, helping in the increase of credit.

Demonetization has also benefitted the lower middle class people. Recently during the annual budget, India’s Finance Minister Arun Jaitley reduced the rate of taxation from the existing 10 per cent to 5 per cent for individual assesses between income of Rs 2.5 lakh to Rs 5 lakh (One dollar is approximately 68 Rupees). In addition, demonetization has also contributed to the development of digital India, increasing the central government revenue.

However, in the short term, the negative impact of demonetization is far greater than the positive impact. A recent report by the Reserve Bank of India shows that due to miscalculation of the actual situation, the newly printed currency is not even 1/10th of the actual requirement by the people. Indian Council for Research on International Economic Relations researcher Mr. Reddy told this reporter that the cash shortage in the physical economy has inhibited production and demand, and suppressed the procurement activities of enterprises. The comprehensive purchasing managers index (PMI) for India announced by Nikkei / Markit in December reported 47.6, a record low since 2013; manufacturing PMI reported 49.6, a record low since December 2015. These figures have fallen below 50 for the first time in the year, suggesting a risk of shrinkage in the Indian manufacturing industry. In early February, the Central Statistics Office of India issued an “Economic Survey Report” which considers measures like demonetization did slow down India’s economic growth, and has caused “accidental injury” to the Indian economy. India’s Economic Times reported that economic growth during the current fiscal year has been fixed at 6.5%.

At present, there is still a wide gap between the effects of demonetization and its expected goals, and its economic and political significance also remains to be seen. Mr. Reddy believes that demonetization has promoted the electronic means of payment, but in order to fully realize the goal of digital India, economic development and other aspects should also match, and India does not yet have such conditions. Reserve Bank of India says that presently 97% of the demonetized currency has been recovered; initially it was expected that there would be at least 500 billion US dollars in illegal income, but as on now it seems only 6 billion US dollars, which is only a drop in the bucket of economic development. More importantly, the follow-up measures after the demonetization have been weak, and presently it seems the idea of reshaping India’s economic and political pattern with the aid of demonetization is easier said than done.
(People’s Daily, New Delhi, February 8)

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