NEW DELHI, India — In an historic move, the Indian government proclaimed that 500 and 1000-rupee notes would no longer be considered a legal tender from November 8. Cash is the cornerstone business in India, so the demonetization scheme could result in insurmountable pressure on the economy, and casts uncertainty on nearly 86 percent of the currency currently in circulation.
India’s demonetization has caused a good deal of inconvenience as millions of people are queueing up near ATMs to secure funds. However, it is still a positive signal with regards to alleviating poverty.
Owing to the quick and swift implementation of India’s new demonetization scheme, individuals from poorer socio-economic backgrounds are finding it difficult to cope. The deficiency in banking services in rural areas has particularly aggravated the plight of poor farmers in Maharashtra, where the price of cotton plummetted. Farmers are currently struggling to make basic payments and transactions with their traders and suppliers.
State governments and opposition groups are enraged and have spent the past few weeks professing the negative impacts of the new scheme. However, under the scheme, Indian Prime Minister Narendra Modi plans on efficaciously cracking down on the widespread presence of black money in India.
With only one percent of the population paying income tax, the Indian government has lost out on its aggregate tax revenue annually. High-income owners do not pay the necessary proportions of their incomes, thus exacerbating the income inequality in India. Economic growth is widening the income gap, and over the years, funds have also not been allocated efficiently and effectively. Distribution channels are often influenced by third parties and middlemen.
Moreover, money earned from financing terrorism and other illegal activities constitutes an entire shadow economy that is never declared to the government. This particular category of black money is heavily dependent on the exchange of cash. This policy can, therefore, help curb this manner of shadow economies.
Simultaneously, India’s Central Bank, the Reserve Bank of India (RBI) is cutting interest rates to prevent high inflation. Under India’s new Demonetization scheme, about 60 percent of the demonetized notes have already been accounted for.
In the long run, India’s new demonetization scheme could be a boon for the economy and people. With the revenue gained from the taxation of black money as a result of the scheme, PM Modi aims to establish the Pradhan Manthri Garib Kalyan Yojna (Prime Minister’s Welfare Plan for the Poor).
This new initiative, under the scheme, sends a message of positive cohesion as it gives the public a last chance to declare their incomes and undergo the necessary taxation and payments. Concurrently, supervision and regulation will become very stringent for black money hoarders as they may now face jail time of up to four years.
Consequently, the proceeds from the welfare scheme will be channeled towards spearheading various welfare programs for the poor. This could mean new infrastructure and supply-side policies aimed at promoting social equality and an improved quality of life.
India’s new demonetization scheme heralds the dawn of a new independence from cash in the economy. This includes installing card readers in shops and using more digital services such as Paytm, an e-wallet service. The development of new banking services in rural areas is also a crucial aspect that will be addressed.
ICICI bank, one of India’s largest commercial banks, has resolved to take on the challenge of turning 100 villages digital within 100 days.
Having an economy with a 7.6 percent growth rate forecast comes with its own challenges. Overall, the positive long-term outcomes for India’s new demonetization policy certainly outweigh the short-term problems. Corruption is a major hindrance in the fight against global poverty, and PM Narendra Modi’s strategy addresses both.
– Shivani Ekkanath