Impact of Demonetisation on Indian Economy [Research]

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Impact of Demonetisation on Indian economy

Demonetisation, considered as a mother of all reforms in India, taken by the government has begun to show its positive indications in a very short span of time.

The demonetization moves terminated the legal validity of ₹500 and 1000. As expected, though this reformative action made it a bit difficult for common people to deal with the situation, it will be overcome soon.

The people of this country were willing to take this pain cooperating with the government move and reacting in a mature manner. This is a perfect example of democracy where the government and its people go parallel in building the nation and deciding the policy.

The many-fold impacts of the demonetization move on country and society are detailed as follows:

Attack on Black Money

Black money is cancerous to the economic growth of a country. Acting as a parallel economy, it cripples the foundation of any nation. The total worth of black money is in circulation in India is estimated to be ₹ 3 lakh crore. It is a quite big amount in comparison to the total money in circulation,
which is only ₹17 lakh crore. The demonetization move is a single masterstroke played by the government that will put shackles on black money which will either come to the account book or be destroyed.

Blow to Fake Currency

The Indian Statistical Institute (IS) claims that the total fake currency being circulated in the Indian economy is around ₹400 crore at any given point in time. Around 70 crore fake currencies are also estimated to be injected into India every year.

Impact on Bank Deposits

 It is a widely known fact that the 500 and 1000 currency notes constitute about 86 percent of currency circulation in India. As a result of this move, people deposited the money in the form of ₹500 and 1000 notes into the banks.

The RBI also made a declaration of receiving deposits worth ₹5.12 trillion until 18th November, which can boost Indian GDP by 0.5 to 1.5 percent. The State Bank of India (SB), India’s largest public sector bank, also received cash deposits worth ₹1.27 trillion.

Effect on Lending Rates

 The banks may be able to reduce the cost of funds due to this move because the huge cash deposit base will substitute the high cost of borrowing and cut down the overall costs of funds. The banks are expected to trim the deposit rates by -125 bps over the next six months.

The new Marginal Cost of Funds-based Lending Rate (MCLR) directives will instantly take into account the reduced cost. This will lead to a decline in lending rates that will be effective in boosting the economic activity in the medium term.

Real Estate Cleansing

The real estate industry is alleged to be established on black money. The amount of black money circulating in the sector is quite big. A report says that about 40 percent of the real estate transactions in Delhi NCR are being made through black money. The demonetization move will keep a check on such transactions in the real estate sector.

Attack on Hawala Transactions

 Hawala transactions have also been severely struck because of demonetization. Hawala is a way to channel money without any actual movement of it. Intelligence reports suggest that the Hawala route acts as a medium to ease money laundering and terror financing.

The sudden elimination of black money from the market has brought a stop to the Hawala activities.

Financial Inclusion

 Banks will be inclined to offer subsidized loans and other facilities to Jan Dhan account holders because of cash inflow. The Jan Dhan accounts have a share of below 1 percent in the total deposit base of the Indian banking system.

The demonetization move based on higher denomination notes might thrust cash flow in Jan Dhan accounts. Moreover, the Jan Dhan Account holders will get accustomed to the banking system.

Government Finances

The flow of unaccounted money into the formal channel because of demonetization will increase the income tax collections. This amount produced from income tax will enable the government to cut down the fiscal deficit in the fiscal year 2017.

This will result in the shifting of the economy from the unorganized to the organized sector. The formalization of unaccounted money will also aid in the smooth implementation of the GST scheme.

Bond Market

The call for government bonds will increase in the market due to the ban on currency notes. As the cash flow in the banks will improve, it will eventually generate the demand for a higher statutory liquidity ratio (SLR).

Unrest in Kashmir

The demonetization move has strongly hit the terror operations on Kashmir Valley in a very short time. The four-month-long turmoil in the valley has come to halt due to a lack of monetary supply.

In a recent report from the intelligence agency, it is claimed that ₹1,000 crores are funded annually from Pakistan to separatists through the Hawala route for causing a disturbance in the valley. At present, the separatists are clueless as demonetization entirely blocked Hawala transactions.

The counterfeit Indian currency syndicate running its operations both inside and outside the country has been severely hit. The stone-pelting incidents also decreased in the valley because of demonetization. The separatists are unable to engage young people in the agitation against the
army or the state due to demonetization causing a deadly impact on their funding.

Naxalites and North-East Insurgency

Naxalites and insurgents in North-East also sustain their treacherous motives through black money, which is a lifeline to their operations. They are the worst affected by demonetization
schemes. This made them term this move as Financial Emergency’.

Their annual turnover is estimated to be over R500 crore through terror funding, NGOs, forgery, extortions, and local taxes. This enormous amount of money is used for recruitment, arms, food, medicines, and shelters to spread anti-national activities.

The demonetization move turned all these stashes of money into no more than worthless paper. However, it is discovered that Naxals are using villagers for depositing the money in their accounts. The authority must take this matter seriously and put a stop to any further deposition of such money in their accounts.

The recent data on crime showed that many places like Delhi, Pune, and Mumbai, recorded a dip in the crime rate like theft, snatching, dacoity, etc. after demonetization.

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