Three Side-Effects of Demonetisation And A Rectification

The sum of debates on demonetisation is that it has caused great damage, while gains have been few and far between.

(Photo: The Quint)

Video Editor: Purnendu Pritam & Vishal Kumar
Producer: Hera Khan

Demonetisation has elicited a wide range of responses, and the sum of all that has been: It has caused great damage, while the gains have been few and far between.

The discussion was revived after the publication of RBI's annual report.

So let us look at some of the side-effects of demonetisation that can be gleaned from the report.

Biggest Side-Effect

People have started saving in cash, meaning that a major part of domestic savings is now in cash.

The amount of household savings in cash is almost equal to the amount deposited in banks, and the proportion of cash is more than twice the average of the last five years.

To get a sense of the impact this will have, please read a few words of the RBI report report. It says that household savings constitute a major source of investment. If the savings are not reaching the banking system, this means that the investment source is drying up.

And if this is the case, then it means that businesses will not grow and employment opportunities will stagnate.

Second Side-Effect

The second side-effect has been the sluggish performance of the manufacturing sector.

The RBI report says:

The weighted contribution of industry to overall GVA growth declined from 33.5 percent in 2015-16 to 20.0 percent in 2017-18. Also, the cyclical component of growth turned negative in 2017-18 and capacity utilisation in the manufacturing sub-sector remained below the 10-year average.

The Third Side-Effect

The third side-effect of demonisation is seen in credit growth.

Weeks after demonetisation, credit growth touched a historic low. The recovery since then has been muted. According to the Reserve Bank's data, the growth in the loans given to the industry is less than 1 percent even in 2018.

This includes the loans given to small and medium enterprises. Due to this, growth in business will slow down, which will also hit employment opportunities.

These have been the three major side-effects of demonetisation. On the credit side, some argue, there has been surge in direct tax collection.

On average, between 2008-14, tax collection was increasing at the rate at which the country's GDP was growing.

During the first two years of the NDA rule, this growth saw a fall.

If the nominal GDP growth was 10 percent, tax collection grew by, let us say, 6 to 8 percent. That situation changed somewhat in two subsequent years.

But can that be considered a miraculous change after demonetisation?