demonetization is boosting for Indian economy debateagainst the topic
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Last few days have been the days of surprises and inquisitiveness for the country. Earlier the removal of Tata Son’s chairman was sweeping the whole market and the eyes were on the legal scenarios involved in the case. Then the whole world was looking forward to the US Presidential elections where either a world history was going to be made with the election of the first woman US president or Donald Trumph would have been sweeping the elections. Amidst all the curiosities, Prime Minister Narendra Modi’s speech on 8thNovember on one hand won millions of hearts and on the other hand took away the peace of minds of many. On 8thNovember, demonetization was announced and Rs 500 and Rs. 1000 noted ceased to be a part of legal tender from the very same midnight. Although the news came out as a shock for the whole country but certainly the decision is a big step towards “Acche Din” for the country. Let’s understand Demonetization in detail and its far reaching effect on the economy:
Impact On Indian Economy
Positive Impact
1. A big attack on Corrupt Practices, Counterfeit Currencies and terrorism
One of the biggest benefits of this move is that it is going to drastically affect the corrupt practices.
People who are holding black money in cash will not be able to exchange much as they would be in a fear of getting prosecuted by the authorities.Enemies of the country who are involved in counterfeit currency and terrorism will not be able to continue it further.The smuggling of arms and dealing with the terrorist will not sustain further as all of the money will be on record now.
2. Banking System will improve
A good economy is always said to be an economy with a sound banking system. Banking System in India will get a boost, as around Rs 7-8 lakh crores base money (new legal money) will enter the system, which will further create around 3-4 times more money due to re-circulation.
3. Reduction in Government Liability
Since every note is a liability to the government, the old currency will become worthless for the people who choose to not disclose their income and thus worthless will benefit the Government by extinguishing its liability. It is expected approx Rs 5 lakh crores will be coming to the government in the form of extinguished RBI liability and taxes and penalties.
4. Positive Impact on Government revenues
As per CRISIL there will be a direct positive impact on government’s tax revenue collections, its ability to spend on infrastructure investments and resultant impact on growth. Since government investments will increase and so will the supply capacity, there will be a positive impact on the GDP in the long run.
5. Neutral impact on Inflation
Inflation is expected to fall sharply in the current scenario due to reduction in cash transactions but in the long run since government spending will rise, employment and income will push up and demand will be revived. Therefore, there will be neutral impact on inflation in long run.
6. Positive impact on Retail Industry
Although in the short term, retailers may feel a pinch as consumers are facing the problem of liquidity but the movement towards a cashless society would be positive for organized retailers as demand would shift towards them.
7. Tax rate may come down
As per CRISIL report onDemonetization- Significant Structural Benefits on Cards for India, higher income tax collections arising from better compliance would offer scope to reduce tax rates over long term, which would increase disposable income. This can give a positive impact on consumption demand in long term.
Negative Impact
1. Negative Impact on GDP in short run
GDP growth is expected to be negative for around 6 months. As consumption and demand will face a dent in the short run, the cash based economy will face a crunch. But in case the government chooses to reduce tax rates, with the increase in net disposable income in the hands of consumers, there will be a net positive impact on GDP in the long run.
2. Highly negative impact on sectors with high proportion of cash transactions
The liquidity squeeze caused by demonetization will be negative across sectors with high level of cash transactions. Real estate, jewelry, retailing, restaurants, logistics, consumer durables and luxury brands, cements and some segments in retail/SME lending space will be facing short term instability.
3. Added replacement cost of currency
The move will give birth to an extra added cost
Impact On Indian Economy
Positive Impact
1. A big attack on Corrupt Practices, Counterfeit Currencies and terrorism
One of the biggest benefits of this move is that it is going to drastically affect the corrupt practices.
People who are holding black money in cash will not be able to exchange much as they would be in a fear of getting prosecuted by the authorities.Enemies of the country who are involved in counterfeit currency and terrorism will not be able to continue it further.The smuggling of arms and dealing with the terrorist will not sustain further as all of the money will be on record now.
2. Banking System will improve
A good economy is always said to be an economy with a sound banking system. Banking System in India will get a boost, as around Rs 7-8 lakh crores base money (new legal money) will enter the system, which will further create around 3-4 times more money due to re-circulation.
3. Reduction in Government Liability
Since every note is a liability to the government, the old currency will become worthless for the people who choose to not disclose their income and thus worthless will benefit the Government by extinguishing its liability. It is expected approx Rs 5 lakh crores will be coming to the government in the form of extinguished RBI liability and taxes and penalties.
4. Positive Impact on Government revenues
As per CRISIL there will be a direct positive impact on government’s tax revenue collections, its ability to spend on infrastructure investments and resultant impact on growth. Since government investments will increase and so will the supply capacity, there will be a positive impact on the GDP in the long run.
5. Neutral impact on Inflation
Inflation is expected to fall sharply in the current scenario due to reduction in cash transactions but in the long run since government spending will rise, employment and income will push up and demand will be revived. Therefore, there will be neutral impact on inflation in long run.
6. Positive impact on Retail Industry
Although in the short term, retailers may feel a pinch as consumers are facing the problem of liquidity but the movement towards a cashless society would be positive for organized retailers as demand would shift towards them.
7. Tax rate may come down
As per CRISIL report onDemonetization- Significant Structural Benefits on Cards for India, higher income tax collections arising from better compliance would offer scope to reduce tax rates over long term, which would increase disposable income. This can give a positive impact on consumption demand in long term.
Negative Impact
1. Negative Impact on GDP in short run
GDP growth is expected to be negative for around 6 months. As consumption and demand will face a dent in the short run, the cash based economy will face a crunch. But in case the government chooses to reduce tax rates, with the increase in net disposable income in the hands of consumers, there will be a net positive impact on GDP in the long run.
2. Highly negative impact on sectors with high proportion of cash transactions
The liquidity squeeze caused by demonetization will be negative across sectors with high level of cash transactions. Real estate, jewelry, retailing, restaurants, logistics, consumer durables and luxury brands, cements and some segments in retail/SME lending space will be facing short term instability.
3. Added replacement cost of currency
The move will give birth to an extra added cost
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AGAINST
The biggest disadvantage of demonetisation has been the chaos and frenzy it created among common people initially. Everyone was rushing to get rid of demonetisation while inedequate supply of new notes affected the day to day budgets of citizens. Banks and ATMs witnessed long queues while small businesses suffered temporary financial losses. The situation was even worse in rural India where people struggled to exchange and withdraw cash due to lack of enough number of banks and ATMs in their vicinity.Another disadvantage is that destruction of old currency units and printing of new currency units involve costs which has to be borne by the government and if the costs are higher than benefits then there is no use of demonetisation.Another problem is that this move was targeted towards black money but many people who had not kept cash as their black money and rotated or used that money in other asset classes like real estate, gold and so on were not affected by demonetisationSimilar questions