Demonetization is an established practice in monetary policy to tackle black money. DV Seshu Kumar, Sr. General Manager-IT Head, Orient Cement Limited, CK Birla Group
Demonetization announced that rupee notes in the denomination of 500 and 1000 would cease to be the legal tenders fromthe midnight of
Nov 8, 2016; the whole country was stunned. This decision caused sensation in the entire country. Social media was flooded with comments. People started counting the money they had accumulated for many years.
As per analysis, India has the highest level of currencies in circulation in the world at 12.1 percent of GDP. Of this cash, 87 percent is in the form of 500 and 1000 notes or roughly worth 14 lakh crore.
Likely impact on the economy. If a substantial portion of cash is either reported or is consumed in the economy then money gets accounted for and more taxes are collected; government might be tempted to reduce tax rates going forward. Higher deposit growth and continuing weak credit growth of banks would create opportunities for lending rate cuts and investment activities to pick up. Demonetization comes at an important juncture as the country heads to a new tax regime with the implementation of GST. Demonetization would increase the tax net, and along with GST result in reduction of un-accounted money generation. Along with GST, demonetization will lead to a higher tax and GDP ratio (as per analysis).
Farmers, sellers, merchants, daily wage laborers, and traders generally deal in cash and India is largely a cash economy. The cash transactions in this economy are far more than the total number of electronic transactions done on a daily basis. Farmers, small sellers, etc., are suffering because of lack of small-denomination currency in the market or in the ATMs. There was need for recalibration of ATM machines and pile up enough 100-rupee notes and other smaller denomination notes in the market before taking this step.
Significant impact on e-commerce sales. The cash crunch has impacted business of several industries and can have a significant impact on the cash-on-delivery (COD) model of e-commerce companies in India. Reduction in CoD may be having short-term pain but it has long-term gain. COD is considered as a negative impact in the Indian e-commerce market. While it boosts sales of online companies, it obstructs their cash flows and makes it difficult to scale performance. There are several additional costs involved with this payment method and the risk is very high with this form of payment. The recent government push toward a cashless economy will encourage more online payments and reduce the total share of COD in e-commerce sales from the current high of nearly 80 percent-plus of total transactions. This should help e-commerce companies to reduce overhead costs and other risks associated with the COD model. However, in a region where a small section of the population owns credit or debit cards (12 to 14 percent as per analysis), a shift toward digital payments will be difficult and can impact revenues significantly in the short term.
Demonetization and GST impact on industries. Business houses are an integral constituent of the country's economy. While medium and large-scale business is unaffected, most of the industries are operating cashless transactions – as RTGS/NEFT/cheque payments with the suppliers as well as dealers or distributors. Industries still operating through cash transactions will convert into cashless transactions with this government move. GST will push industries or business units to convert the data into digital format for uploading into GST site. This will enable many industries to establish proper network, and communication is set to grow exponentially.
The vision document of Digital India says that India would become a world leader in digital banking by 2019. To make Digital India a success, good connectivity is a basic requirement. That is why the government is targeting to set up a countrywide optical fiber cable network to connect village panchayats. This transformation is also going to boost the start-up segment that can now take cashless transactions and shopping-related experience to new levels of comfort with their innovative ideas.
One should look at the bigger picture; demonetization will definitely fetch positive results in the long term.