Has India's GDP Growth Returned to the Track After Demonetization? An Analysis
GDP growth is a critical metric for any economy, indicating its health and vitality. The demonetization drive in India in 2016 aimed to reform this metric even as it faced significant challenges. This article delves into whether demonetization contributed to a resurgence in GDP growth, examining its objectives, methodology, and results through a critical lens.
The Demonetization Drive: Objectives and Methodology
The primary objectives of demonetization in India were manifold.
Objectives
To stop the use of money for immediate political gains, especially in regional assemblies. To unearth black/unaccounted money within the economic system and bring it into the mainstream to contribute to national development. To stop the circulation of counterfeit currency circulating in the country. To stop funding to terrorists, extremists, Maoists, and stone-throwers. To uncover the quantum of unaccounted money by compelling people to deposit old currency.The methodology involved exchanging old currency at bank counters, encouraging people to deposit it in bank accounts. However, the effectiveness of this strategy was hampered by several factors, including lack of proper planning and implementation.
Impact on GDP Growth
The formula for GDP growth calculation is:
Growth rate (Current year's quantity - Last year's quantity) / Last year's quantity
The demonetization of a significant portion of the country's currency in 2016 shifted the 'last year's quantity' drastically, leading to a temporary spike in growth rates in the subsequent year. While this appears to provide a favorable outlook, it is crucial to evaluate the long-term impact of such measures.
One key aim was to have the growth rate touch around 10%. Despite the initial positive indicators, the overall impact was less pronounced than expected, and the growth rates did not reach the desired level post-demonetization.
Analysis and Observations
Based on the objectives and methodology, the demonetization drive faced several challenges:
Challenges
Harsh Implementation: A large number of people died while exchanging old currency for new currency, indicating a poorly managed transition. Corruption: Due to corrupt bank officials exchanging old currency for new currency for gratification, a significant portion of the floating cash was reintroduced into the system. Lack of Proper Planning: The government did not account for the inertia and scale of the Indian economy, which takes time to respond to such abrupt changes.However, the indirect effects of demonetization have started to show in the form of:
Increase in the number of income tax assesses. Increase in the number of filings of revised income tax returns. Increase in the declaration of tax by numerous assesses. Increased scrutiny by the income tax department regarding large cash deposits.These signs indicate that demonetization may have been partly successful in some aspects, though the complete results are expected only by 2020.
Conclusion
The demonetization drive in India aimed to convert undeclared and unaccounted money into formal records. While there were initial spikes in growth rates due to the immediate impact of demonetization, the long-term effects have been tempered by several challenges. The government must continue to address these issues to ensure the sustainability of economic reforms and growth.