It has been three years since demonization, and the country doesn’t seem to have been much benefited from the government of India’s poorly planned ‘Note Bandi’ agenda. India is suffering from the worst economic crisis that occurred in the last 20 years. Here is a brief overview of the aftermath of the demonetization.

As per a study by Centrum Brokerage firm, the demonetization incited an economic slowdown in the country because of unprecedented outcomes on both rural and urban demand. Their study suggests that the economic crisis will continue until mid-2021 before we hit a growth rebound.

Centrum’ report has highlighted three major events which resulted in the poor economic health of India. First, the poorly-planned demonetization, secondly the poor implementation of GST & third, NBFC crisis.

Source: Livemint

While the slowdown has been in the account since 2011, the country’s GDP growth for the 2nd Qtr of FY 2019-20 is rated at 5%, slightly lower than the previous quarter’s 5.8%. Many financial experts have been estimating that the annual GDP growth for FY 2019-20 will be below 6%, which is not that good a figure.

A report by Economic Times contributors suggests that the private consumption expenditure growth rate has crashed from 11% to 3% in just last two quarters. While the manufacturing the industry is stagnant, the automobile industry is exhibiting poor performance, accompanied by Construction and real estate businesses.

The Periodic Labour Force Survey (PLFS) estimated India’s unemployment rate in 2017-18 to be 6.1%, which is over double that in 2011-12 when the unemployment rate was 2.7%. The labour force participation rate is also abysmally low at 37%.

While addressing the Hero Mindmine Summit 2019, Niti Aayog Vice-Chairman Rajiv Kumar marked the ongoing financial crisis in India as “unprecedented”. Rajiv highlighted that the current economic crisis is the aftermath of implementing initiatives like demonetization, Goods and Service Tax and Insolvency and Bankruptcy Code. According to him, these events have changed the rules of the game and that the current liquidity crisis had led to a complex situation.

Demonetization was done to eradicate trillion-dollar black money economy which was being abducted by businessmen, majorly in the form of Rs. 500 & Rs. 1000 note. Because of an announcement, that came on around 8.30 pm on 8th November 2016, by PM Modi, around 86% of the Indian Currency Notes rendered worthless from that mid-night. 

While the government expected a lot of black money to get eradicated through demonetization, a report by RBI in August 2017 told that around 99% of all the Rs. 500 & Rs. 1000 notes were re-deposited to the bank accounts in the moratorium period of 50 days. It concluded demonetization as a failed attempt of the Government and RBI to fight black money. 

A heavy cash-crunch followed in the country where the businessmen could not arrange working capital. While everyone was learning ways to survive their businesses, the government surprised them with a poorly phased implementation of GST.

The new tax system was hard to understand for everyone as not only did the procedure for billing, filing returns, selling products etc changed but they were made more stringent than any Indirect Tax laws. This lead to a poor tax follow-up on government’s and taxpayers’ end.

With demonetisation completing merely a year, GST coming to application and lack of liquidity, many businesses in the country started to take the hit and shut down.

“The earlier period where you had 35% cash sloshing around has become much less now. These entire puts together is a fairly complex situation. There is no easy answer,” Rajiv said.

The country is facing a liquidity crunch where the lenders had stopped funding businesses, resulting in the business houses to seek to cash-based capital. He emphasizes that the country is facing such an economic downturn for the first time in 70 years. “This is an unprecedented situation for the government of India. In the last 70 years, nobody had faced this sort of situation where the entire financial system is under threat and nobody trusts anybody else. Within the private sector, nobody is ready to lend, everyone is sitting on cash,” said Kumar, addressing the Hero Mindmine summit on Thursday.

The three major consecutive plans of government were not only poorly planned but also poorly implemented. While the government is promoting the agenda of ‘Make in India’ & ‘Digital India’, corporates, manufacturers cannot find money to fund their businesses. The country is suffering a liquidity crunch which is limiting the consumption expenditure of the consumer and thus leading to poor operation of businesses.

For the government to fight the economic crisis, liquidity shall be increased and rules relating to taxation, businesses, import-export etc needs to be liberalized for a while, at least until we reach normalization.