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Demonetization and its impact on Indian Economy

It gave a shocking blow to Unorganized Share Market, Haphazard Trades, Unstructured Real Estate, and came like a boon to counteract.

Demonetization has generated tremendous impact on Indian economy

Ensure effectiveness and the illegal activities such as generation of black money and corruption should not be channeled back into the economy.

Ensure effectiveness and the illegal activities such as generation of black money and corruption should not be channeled back into the economy.

Demonetization and its impact on Indian economy

A day after 8th November, 2016 midnight, demonetization came into force, when INR 1000 and INR 500 currency notes ceased as legal tenders, and the days of curiosity, inquisitiveness, and surprises engulfed the entire Indian population. While the Indian PM Narendra Modi won the hearts, bringing freedom from further worry and a perfect peace of mind to a billion people of sense, and simultaneously took away the serenity and financial security of those who possessed a huge undisclosed wealth. Perhaps, this major step implemented was to invalidate 86% of Indian currency, specifically to demolish the network of FICN - Fake Indian Counterfeit Notes, curtail circulation of undisclosed cash, restrain the large scale funding of the Naxalite hit states; J & K terror network, and North-eastern state terror activities, as it entirely upset the political, social, and economic dimensions of the second largest global democratic country emerging markets.

Demonetization means divesting money, and it came like an unexpected Surgical Strike, without warning, on all kinds of notorious activities and illegal games people played in India. 1000 and 500 Rupee were the two prime notes, formed 80% of circulating legal tender and were denominated and trapped every corner of the Indian economy, and related activities like Cross Country Terrorism, Unaccounted Accumulation of Funds, Counterfeit Currency Flow. It gave a shocking blow to Unorganized Share Market, Haphazard Trades, Unstructured Real Estate, and further it came like a boon to counteract various kinds of Crimes, Inflation, and Corruption in the booming Indian economy, assist and improve structured Trade, coherent, and consistent cash reliant Economy.

Although this sensational news of demonetization shook the entire country, the decision of the PM was an immense step forward to save the country from the accumulation of excessive black money, and unrestricted access to illegal activities. Let us evaluate the applications, implications, and impact of Demonetization on Indian Economy.

The conception of demonetization was a clear indication of transforming the Indian Economy to promote by moving towards a knowledge economy, consistently making digital transactions, and payments ecosystem, converting Indian Societies digitally strong and empowered so as to build and make the Government and Banking Financial system capabilities and strength robust. Until now, the Financial insertion and inclusion criteria have been the highest goal and object to India.

The RBI allotted Committee of Nachiket Mor Report of December, 2013, concluded that in spite of significant improvements in the banking payment system, a huge gap remained in its essential payment system and service procedure for low-income families, communities, and small businesses and industrial groups. Today, digital transaction methods are imperative for the Indian societies, because such system will help and promote the economically deprived middle class societies, traders, business groups, will generate multiple benefits in capital efficiency, with higher tracking ability, transparency of money transactions, law enforcing capacity and significantly improve and maintain tax revenue generation for all types of social welfares.

In February, 2016 the government instituted NITI Aayog high profile Committee and assigned the Chairman Shri R. P. Watal, to evaluate and transform Indian payment procedures and to promote and encourage digital payment system. Thereafter, the Committee suggested relevant facts.

(a) To form payment regulations, autonomous from central banking functions;

(b) To update Settlement and Payment System Act of 2007;

(c) To promote digital transactions and payment system in the entire economy;

(d) To generate more funds by enlarging the scope of digital payments;

(e) To upgrade the existing system of payments;

(f) To enable ease of inter-operational payment capability.

Reasons for demonetization

The two denomination currency notes were drawn back from the Indian economy, were completely retired, and stopped from further circulation after 8th November, 2016.

The Observable phenomena, and the objective facts as stated by the government concerning the big move like demonetization strategy were to:

  1. Convert into corruption free country;
  2. Restrain inflation;
  3. Eradicate formation of unaccounted money;
  4. Hold down the circulation of black money;
  5. Bring down crimes and corruption, stopping the circulation of fake currency;
  6. Curtail funding of illegal, criminal activities;
  7. Cleanup funding to Terrorist activities and the Naxalites;
  8. Struggle against inflation resulting in a progressive rise in prices;
  9. Control tax evasion activities;
  10. Moreover, generate, promote and encourage, a Cashless Digital Economy and Transaction Methods in India; and
  11. Another vital reason of the demonetization strategy was to push the Indian economy towards the digitized system.

Impact on Inflation and Prices:

  1. There was agricultural output squeeze due to shortage of cash circulation. Prices of commodity increased due to depreciation of the currency exchange rate. However, the Demonetization process produced long term, permanent benefits.
  2. As per Hasmukh Addhia, the Finance, Revenue Secretary, the Indirect Net Tax flow increased by 16.8% in comparison with the previous year, while the net collection growth rate in January, 2017 of Central Excise, Customs, and Service Tax were 26.5%; 10.3%; and 9.45% respectively. Whereas, the Direct Net Tax collected until January, 2017 were INR 5.85 Lakh Crore, 10.89% higher than the net overall collections made in the corresponding previous year 2016.
  3. Between 8 November and 30 December of 2016, the overall bank deposits were increased from INR 2.5 Lakh to INR 81 Lakh in around 10.95 million bank accounts indicating the average amount of deposit INR 5.13 Lakh. While, above INR 81 Lakh Deposits were processed in 1.58 Lakh bank accounts showing an average amount of INR 3.32 Crore deposit. Such mining of data helped the government profusely to enlarge the net tax and increase the revenue amount, which happened to be the prime Aim and Purpose of processing Demonetization.
  4. Total revenue collections of net tax grew by 19.5%, the highest figure in the previous 5 years.
  5. After processing Demonetization, the unaccounted, black money unearthed cash between November, 2016 and January, 2017 was rupees 515 Crore.
    1. Many challenges a common man had to face because of Demonetization: 1) Shortage of cash in ATMs; 2) Currency in exchange was not available; 3) Forced to open E-Wallets; 4) Banks were unable to meet customer needs; 5) Many old people lost their lives waiting in an ATM queue for too long, and went without money; 6) Data from RBI indicated that in March 2016, currency notes 632,896 in number were found, considered as FINC - Fake Indian Notes of Currency;
    2. Impact on Primary Sector: Indian, 75% people depends on labor oriented agrarian agricultural economy, and they contribute 55% of GDP, where cash business deals function in the society of agriculture. Due to Demonetization, they had to suffer;
    3. There was a drastic impact on Perishable fruits and vegetable Commodities, which operate on cash transactions;
    4. As per CRISIL report, due to Cash crunch, the normal and daily transportation system suffered heavily, resulting in a 40% reduction in fertilizer, seeds and equipment sales, that had an impact on daily wages of workers;
    5. Farmers do not understand the format of E-Payments;
    6. Demonetization Impact was also drastic on Manufacturing and Industrial sectors;
    7. Similarly, FMCG, Real Estates, Textile Industries had to suffer for almost 5 months due to cash and banking problems;

Demonetization also Impacted Tertiary Service Sector companies, contractors, agents.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2021 Shyam Gokarn

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