Model Answer
0 min readIntroduction
Demonetization, the act of removing a currency unit from circulation, was implemented in India on November 8, 2016, with the stated goals of curbing black money, counterfeit currency, and terrorism financing. The move aimed to formalize the economy and boost economic growth. However, the actual impact has been a subject of intense debate. While proponents argue it laid the foundation for a more transparent economy, critics contend that it severely disrupted economic activity, particularly impacting the informal sector, leading to increased unemployment and exacerbating existing inequalities. This answer will analyze whether demonetization accelerated economic growth and explore its consequences for the informal labour market, underemployment, and gender discrimination.
Did Demonetization Accelerate Economic Growth?
The claim that demonetization accelerated economic growth is largely unsubstantiated by evidence. Immediately following the announcement, India experienced a significant economic slowdown. GDP growth in Q3 and Q4 of FY17 declined to 6.1% and 7.1% respectively, compared to 9.1% and 8.3% in the corresponding quarters of the previous year (RBI data, 2017). While growth recovered in subsequent years, it’s debatable whether this recovery was directly attributable to demonetization or other factors like improved monsoon and global economic conditions. Furthermore, the initial shock to the economy led to a decline in consumer demand and investment, impacting various sectors, particularly those reliant on cash transactions.
Informalization of Labour
Demonetization significantly impacted the informal sector, which constitutes a large portion of the Indian economy. The informal sector relies heavily on cash transactions, and the sudden removal of 86% of the currency in circulation created severe liquidity constraints. This led to:
- Job Losses: Many small businesses and enterprises in the informal sector were forced to shut down or reduce operations, resulting in widespread job losses.
- Wage Decline: Workers in the informal sector experienced a decline in wages due to reduced demand for labour.
- Increased Informalization: Paradoxically, demonetization led to *increased* informalization. Workers who lost formal sector jobs were often forced to seek employment in the informal sector, accepting lower wages and lacking social security benefits.
The Economic Survey 2017-18 acknowledged the short-term disruptions caused by demonetization, particularly in the informal sector. The Centre for Monitoring Indian Economy (CMIE) data indicated a significant decline in employment rates in the months following demonetization.
Underemployment
Demonetization exacerbated the problem of underemployment in India. Underemployment refers to a situation where workers are employed but not utilized to their full potential. The disruption caused by demonetization led to:
- Reduced Working Hours: Many businesses reduced working hours for their employees due to decreased demand.
- Lower Productivity: Workers were often engaged in less productive activities due to the economic slowdown.
- Increased Disguised Unemployment: In agriculture, demonetization contributed to disguised unemployment, where more people are employed on a land than are actually required.
The Periodic Labour Force Survey (PLFS) 2017-18 showed an increase in the number of underemployed individuals in both rural and urban areas.
Gender Discrimination
Demonetization disproportionately affected women, exacerbating existing gender inequalities in the labour market. Women are more likely to be employed in the informal sector and are often the first to lose their jobs during economic downturns. Specifically:
- Impact on Women-Owned Businesses: Women-owned micro and small enterprises, which often operate on cash, were severely affected by demonetization.
- Increased Burden of Unpaid Work: With job losses, women often had to shoulder a greater burden of unpaid domestic work.
- Reduced Access to Financial Services: Women generally have lower access to formal financial services, making it harder for them to cope with the cash crunch.
Studies by the National Sample Survey Office (NSSO) have consistently shown that women’s labour force participation rate (LFPR) in India is significantly lower than that of men, and demonetization likely contributed to a further decline in this rate.
| Sector | Impact of Demonetization |
|---|---|
| Informal Sector | Job losses, wage decline, increased informalization |
| Agriculture | Disguised unemployment, reduced demand for agricultural inputs |
| Small & Medium Enterprises (SMEs) | Reduced production, decreased investment, working capital issues |
| Women-Owned Businesses | Severe disruption due to cash dependency |
Conclusion
In conclusion, the evidence suggests that demonetization did not accelerate economic growth in India. Instead, it caused significant short-term disruptions, particularly in the informal sector, leading to job losses, wage decline, and increased informalization of labour. Furthermore, it exacerbated existing inequalities, disproportionately impacting vulnerable groups like women and contributing to underemployment. While the long-term effects are still being debated, the immediate consequences of demonetization were largely negative, highlighting the importance of carefully considering the potential socio-economic impacts of such large-scale policy interventions. A more gradual and well-planned approach to formalization, coupled with robust social safety nets, would have been a more effective strategy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.