Daily Current Affairs – 2nd December, 2016

Daily Current Affairs – 2nd December, 2016

Demonetisation: Impact till now and what next?

Demonetisation has come as a shock for all as it eliminated 86% of the value of the currency with the public. The government called it ‘short term pain for long term gain’. But now it needs to be seen as to what is gained and what pains had to be suffered.

  • The long term objective is to cleanse the system of corruption, tax evasion and the generation of black income.
  • Demonetisation only targets that part of existing black wealth which is held in cash.
  • It does not affect the continuous flow of black income and the corruption/tax evasion which generates it, which in many ways is the core of the corruption problem.

Demonetisation effect so far

  • It has considerably caused inconvenience to people as people with legitimate quantities of old notes of Rs500 and Rs1,000 have to queue up at banks to exchange them into new notes.
  • Tragically, many reports have also surfaced of people standing in queues.
  • Also, the shortage of cash has also disrupted business in the cash-based informal sector, which is where the majority of the population is employed.
  • Farmers, fishermen, vegetable sellers, small shopkeepers without card readers or Paytm, taxi drivers, truckers, etc., have all been affected with loss of livelihood which may be irretrievable in some cases.
  • For example: loss of daily wages for casual labour, or lower sales for vegetable vendors.
  • Real estate sector is expected to be badly affected because it is heavily cash-dependent, having long been a favourite asset for holding black wealth.
  • Other sectors like hotels, restaurants, catering, the fashion garments industry, etc. funded by cash from black income will also be affected.
  • In short run, the downstream income flows in the form of wages to construction labour, purchases of cement and other construction materials will be disrupted.

 

Expected normalcy?

  • It has been reported that given the capacity constraints at the two printing presses which can print the high-value notes, it will take until May 2017 to replace all notes.
  • It will not be possible to replace all notes because:
    1. there will be some switching to digital payments, which is desirable
    2. some of the cash hoards will be cancelled in any case on 30 December

GDP growth

  • The negative impact on the various sectors of the economy is bound to produce lower growth
  • GDP growth estimates for FY17 from financial analysts vary from a low of 3.5% to a range of 5.5-6.5%.
  • More importantly, it will also remain subdued next year. Moreover, much depends on what happens to the investment climate.
  • Since the slowdown will be concentrated in sectors which are more employment-intensive, the impact on low-end employment will be greater than on overall GDP.
  • This raises the issue whether the slowdown should be offset by counter-cyclical additional expenditure on road construction and railways.
  • Though such intervention will breach the fiscal-deficit target but a temporary deviation can be justified in the face of the negative-demand shock of the demonetisation.

 

Better management was needed

  • If the plan was two months old, building up a larger stock of new notes in advance would certainly have avoided some of the inconvenience and the associated cash shortage.
  • Considering the sowing and marriage season, the provisions for weddings and farmers, could have been anticipated.
  • Also, ministry of agriculture’s request regarding an exemption for farmers purchasing seeds and other inputs during the sowing season to avoid disruption in sowing, should also have been addressed promptly, rather than after several days.
  • There should have been flexibility in usage of demonetised notes. old notes are allowed to be used in public-sector hospitals but not private hospitals, and farmers are allowed to use them for purchase of seeds from public-sector agencies but not private agencies.
  • The most important flexibility is to allow cooperative banks to accept old notes. Their presence in rural areas is much larger than that of commercial banks, and they are all regulated entities.

 

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