What are the long-term benefits of demonetization?
long-term benefits of demonetization

The demonetization programme has been evaluated in the context of its short-term costs and long term gains. Short term losses include loss of welfare for the low-income people and decline in GDP growth. On the long-term gain side, a large number of benefits are identified which will appear with time. Spread of cashless transaction culture, growth of the formal economy, registration of new income tax payers, linking or accounting physical asset investment to PAN, cleansing of the real estate sector, conscience about avoiding black income transactions, etc., are supposed to be the major long term gain. All of these necessitates additional or supportive policy measures by the government as well.

1. Rise of the cashless economy: Spread of the digital payment culture will start the ‘formalisaton’ process in the economy. It will reduce the use of physical cash as well. Once bulk of the economic transactions are digitalized it will result in revealing the expenditure made by individuals to the tax authorities especially big transactions.

2. Growth of the formal economy will be another associated long term gain. If additional measures like cleansing the real estate sector and bringing all traders under the digital payment system, the unorganised sector transaction will be made accountable. Even if it is a slow process, bringing the informal sector into the formal economy will reduce black money.

3. Social shake up: Black money can be eliminated only if we eliminate the deep rooted social mentality that dealing with black money is economically rewarding and legally feasible. Demonetization may bring a social shake up in the country by destroying this mentality. It will spread an attitude against black money. People will be averse to deal with black money if they know that they are easily traceable and harder legal steps are initiated against them. Such an awareness and conscience can reduce the area available for the activation of black money.

4. Demonetization will reduce the circumference available for the activities of parallel economy: Demonetization is not an isolate arm or not the only one against black money. It may be complemented by several other steps. One such supportive step is making PAN compulsory for high value transactions up to Rs 10000. Similarly, PAN documentation should be made compulsory against all investment in physical assets like gold, land etc. If these happens, parallel economic activities can be reduced substantially.

5. Large number of new tax payers may appear with demonetization. This is because demonetized money will reveal their income size and tax officials may check them in future, compelling to pay tax.

6. Cleaning of the real estate sector will be associated long term gain of demonetization. Modification of stamp duty structure is badly needed to provide energy to the sector at the same time, making it accountable.

7. Rise in financial savings: At present, more than 50% of household savings are in physical savings like gold and land. Significant portion of these are in black money. Now with the low reward in the real estate and gold holdings, people may tempt to save in financial forms like bank deposits, mutual funds etc.

As Krugman suggested, demonetization is a highly disruptive way to fight black money and it is only a one-time effort to flush out hoarded money. We can’t do it always. Similarly, only a fraction of black money is stored in liquid cash. All these indicate that fight against black money will be successful in the long term only if the other measures suggested here are adopted.

Above all, the legal system should be prudent to prevent people to invent new ways of hoarding and dealing with black income.


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