Did Demonetization Destroy the Indian Industry?

Every nation has its set of economic policies aimed at nurturing and thriving its industries. However, the implementation of these policies often becomes a subject of debate. One such policy that generated significant controversy was demonetization in India in November 2016. This action, aimed at cleansing the economy of black money and counterfeit currency, left many puzzled as to its long-term impact on the Indian industry.

Understanding Demonetization

Demonetization, also known as the ‘drone strike’ on black income, is a policy implemented by the Reserve Bank of India (RBI) in November 2016. The decision was made to replace currency notes of 500 Rs. and 1000 Rs. denominations with new notes of the same value. The move aimed to curb corruption, reduce illicit activities, and enhance transparency and accountability.

Contradictory Views and the Reality

Everyone knows the end result except for a few. The popular narrative has been that demonetization had a devastating impact on the Indian industry, leading to a temporary slowdown. However, the real GDP data paints a different picture. The graph below shows the real GDP in INR (lakh crore) for the fiscal years from 2015-16 to 2019-20:

Real GDP in INR (Lakh Crore)

2015-16113.69

2016-17123.08

2017-18131.75

2018-19139.81

2019-20145.65

If demonetization had indeed destroyed the industry, how can one explain the steady increase in real GDP year after year? In fact, the GDP growth has been consistent, indicating a positive trend despite the initial turbulence caused by the policy.

Impact on Different Sectors

While it is undeniable that demonetization had its challenges, the impact has been varied across different sectors:

Manufacturing Sector

The manufacturing sector, which is crucial for the economy, faced some initial difficulties due to the cash crunch and supply chain disruptions. However, these issues were temporary. The Manpower Public Accounts Committee (MPAC) reported that in the following year, the growth in the manufacturing sector surged, indicating a turnaround and if fact, a stronger economy.

Formal versus Informal Economy

One of the primary goals of demonetization was to reduce the informal economy, which thrives on cash transactions. In this context, the large boost in real GDP is seen as a shift from the informal to the formal economy. This change is a welcome one, as it increases tax revenues, reduces black money, and enhances financial inclusion.

Conclusion

While demonetization brought short-term challenges, it did not destroy the Indian industry in the long term. In fact, the steady growth in real GDP and the burgeoning formal economy suggest that the policy had a positive impact. The long-term benefits of demonetization, such as reduced corruption, increased financial inclusion, and enhanced transparency, are clear evidence that the policy was effective in the broader context of India's economic health.

Therefore, it is crucial to differentiate between short-term difficulties and long-term gains. Demonetization proved to be a pivotal moment in India's economic journey. It paved the way for a more robust and transparent financial system that is better equipped to handle future challenges.