ATMs in India are running dry, so why is the government still touting successful demonitisation?
Three months down the line, and India is still sifting through the mess created by Prime Minister Narendra Modi’s sudden announcement that he was pulling currency from the Indian economy. While the government promised that stability would return in 50 days and asked the people to support the authorities, things still seem shaky.
The government has been touting the success of demonetisation as ATM’s run dry and weak economic indicators are being reported. According to the Reserve Bank of India (RBI), money is still being counted and the picture is still a bit hazy as to how much of the returned money was counterfeit. RBI claims that it needs more time to sort through all pieces of returned currency before it can give an official figure.
Part of the new Indian budget indicates that about two thirds of the demonetised currency had been deposited back into banks within the government’s deposit deadline. Out of this, roughly half the amount had come back as deposits of more than 80 lakhs, which means that the depositors were able to defend the source of the money and were able to answer any tax related questions. The government had stipulated that deposits of over two lakhs would have to require an explanation from the depositor and be charged a penalty if they weren’t able to defend the source of the money and tax paid on the amount.
Additionally, RBI and official statistics from the Ministry of Finance indicate that manufacturing has fallen since the announcement of demonetisation. Arun Jaitley, the finance minister, is hopeful even though manufacturing had fallen in December due to the initial shock of demonetisation. He says that numbers should go back up in the following months. The government has remained vague over how or when the economy will regain its footing.
In fact, as Mr Modi and company have taken to the campaign trail, their speeches have indicated towards something much grander in the making. Digital India had been one of the main battle cries during Mr Modi’s election campaign and he seems to have merged the demonetisation narrative with the digitisation of the Indian economy.
As lofty as the claims may be, the Indian government is onto something. The goal of a digital, cashless economy has merit. For starters, it will bring the maximum amount of people into the financial fold, automate how payment transactions are held with the government, and allow for more transparency into the economy. Since demonetisation was broadcasted, one of India’s foremost digital payment firms, Paytm, has announced an uptick in its transactions.
The reasons for India’s massive underground economy and black money are due to the country’s weak rule of law and shaky government policies. Digitisation can serve to bring these sources into the tax bracket and allow for monitoring mechanisms. Furthermore, it can make services faster and more accessible to the common man while making benefactors more accountable for their transactions. In theory, this reduces the need for an informal sector of an economy.
The root of Mr Modi’s dream seems to have been tied with Aadhar. Aadhar is a unique identity number issued to each Indian resident and is based on a finger print and retina scan. The data is collected by the Unique Identification Authority of India (UIDAI). Aadhar was launched by the previous Indian government under Dr Manmohan Singh as well as under the leadership of Nandan Nilekani, co-founder of the Indian Business Process Outsourcing (BPO) giant Wipro. Essentially, the goal was to provide each Indian citizen with their own digital identity.
Within three years of Aadhar having been launched, 270 million accounts were opened that saw deposits of around $10 billion. Critics of Aadhar have argued that most of these accounts remained dormant until demonetisation was announced; however it created an infrastructure to cover the un-banked.
The grand plan, as it is being posed now, is to use one’s Aadhar number for payment transactions. With some technical innovations such as the launch of the India’s very own Unified Payments Interface (UPI), citizens will be allowed use their mobile numbers and Aadhar numbers for authentication and transmit payments to anyone with the UPI app. Not only will this allow for easy payments in lieu of cash, but it will also start building customer profiles and histories that will allow for the tracking of consumer credit.
Apparently, the current government shared its plans for demonetisation with its opposition in the parliament and apparently, the opposition admonished them and stated that the plan was too radical and would fall flat.
Maybe the government jumped into demonetisation too quickly and perhaps they should have started off with a campaign for digital currency before introducing demonetisation. For now, India will have to take their word in believing that this is only temporary and that this move will carry long-term benefits.
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