discuss the immpact of demonetization on the indian economy
Answers
Answer:
Withdrawal of highest currency notes reduces the growth rate of the economy. Demonetisation reduces consumption pattern, income, investment etc. This may bring a slowdown in India's growth rate as the liquidity crisis itself may last three-four months.
Impact of demonetisation on Indian Economy: Positives and Negatives
Positives:
Black money:
Prime Minister Narendra Modi on a single stroke has choked the black money. Out of total currency which is Rs 17 lakh crore, Rs 3 lakh crore is estimated as black money. Operators of black money run a parallel economy which weakens the base of the country’s economy. Modi’s demonetisation decision resulted in the collection of huge deposits with the bank, all unaccounted money has either been deposited into the banks with the heavy penalty or been simply destroyed.
Economy:
This demonetisation has proved to be a turning point for the economy by cleaning-up the black money which in turn has brought more borrowings to the treasury, improved inflation outlook and increased GDP of India.
Investment opportunities have also been revived and gave a boost to infrastructure and the manufacturing sector. A huge amount of money deposited in banks which in turn helped reduces interest rates and lower income tax rate.
Real estate:
It is said that real estate is an industry prospers on black money. The amount of illegal money involved in this sector is huge. An estimate tells us that in Delhi-NCR at least 40 percent of real estate deals are in black. Modi’s
demonetisation move reduced the flow of unaccounted money into the real estate sector. This will help in curtailing the use of black money in real estate sector which in turn result in the reduction in the prices of land and property.
Hawala transactions:
Demonetisation was a big thrash to the hawala racketers. In Hawala money is transferred without its actual movement. Hawala had become the route to facilitate money laundering and terror funding. Hawala rackets run on black money. The sudden withdrawal of black money out of the economy was a surgical strike to hawala
operations. Destruction of currency notes by hawala operators have also been reported.
Counterfeit currency:
Demonetisation was a mighty blow to the counterfeit Indian currency. Currency with syndicate operator operating both inside and outside the country has been wasted. Counterfeit currency is one of the main reasons
behind the devaluation of the real worth of Indian currency. Indian Statistical Institute reported that at any given point of time fake currency notes amounting to Rs 400 crore were in circulation in the economy and around Rs
70 crore fake currency notes are pushed into the country every year. But the real number could be much larger. With Prime Minister Modi’s demonetisation decision to ban old currency notes of Rs 500 and Rs 1,000 notes
and replacing them with new one completely sucked the circulation of fake currency. As new currency notes have come with highly advanced security features which are barely possible to replicate.
Negatives:
Liquidity crisis:
Demonetisation gave rise to liquidity problem as people found it difficult to get sufficient amount of cash to fulfil their basic needs. Marginal section of the society mainly depends on cash to meet their daily transactions. Out of total currency in circulation 500 rupee notes constituted nearly 49% in terms of value. More the time is required to resupply Rs 500 notes, the more will be will be the duration of the liquidity crisis.
Loss of well-being:
Most of the population who constitute the lower middle and lower class uses currency to meet their daily transactions. Such class of the society such as daily wage labourers, small traders and other marginal section of the society use cash more often. These sections of the society have lost their income in the scarcity of cash.
Cash crunch made firms to cut their labour cost and thus reduces the income of the lower middle class.
Consumption:
Cash shortage adversely affected the consumption behaviour of the people in India. The sales of consumer durables likely to be hampered in short-term, especially sales through unorganised channels are cash purchases.
Most of the purchases by retailers are through cash which brought down their volume of trade.