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Whataretheimpactsof

DemonetisationonIndianEconomy?
Demonetizationisagenerationsmemorableexperienceandisgoingtobeoneoftheeconomiceventsofourtime.Itsimpactis
feltbyeveryIndiancitizen.Demonetizationaffectstheeconomythroughtheliquidityside.Itseffectwillbeatellingonebecause
nearly86%ofcurrencyvalueincirculationwaswithdrawnwithoutreplacingbulkofit.AsaresultofthewithdrawalofRs500and
Rs1000notes,thereoccurredhugegapinthecurrencycompositionasafterRs100Rs2000istheonlydenomination.
AbsenceofintermediatedenominationslikeRs500andRs1000willreducetheutilityofRs2000.Effectively,thiswillmakeRs
2000lessusefulasatransactioncurrencythoughitcanbeastorevaluedenomination.
Demonetizationtechnicallyisaliquidityshockasuddenstopintermsofcurrencyavailability.Itcreatesasituationwherelackof
currencies jams consumption, investment, production, employment etc. In this context, the exercise may produce following short term/long term/,
consumption/investment, welfare/growth impacts on Indian economy. The intensity of demonetization effects clearly depends upon the duration of the liquidity
shocks.Followingarethemainimpacts.
1.Demonetizationisnotabigdisasterlikeglobalbankingsectorcrisisof2007butatthesametime,itwillactasaliquidityshockthatdisturbseconomicactivities.
2.Liquidity crunch (short term effect):liquidity shock means people are not able to get sufficient volume of popular denomination especially Rs 500. This
currencyunitisthefavourabledenominationindailylife.Itconstitutedtonearly49%ofthepreviouscurrencysupplyintermsofvalue.Higherthetimerequired
toresupplyRs500notes,higherwillbethedurationoftheliquiditycrunch.Currentreportsindicatethatallsecurityprintingpresscanprintonly2000million
unitsofRS500notesbytheendofthisyear.Nearly16000mnRs500noteswereincirculationasonendMarch2016.Someportionofthiswerefilledbythe
newRs2000notes.TowardsendofMarchapproximately10000mnunitswillbeprintedandreplaced.Alltheseindicatethatcurrencycrunchwillbeinour
economyforthenextfourmonths.
3.Welfarelossforthecurrencyusingpopulation:Mostactivesegmentsofthepopulationwhoconstitutethebaseofthepyramidusescurrencytomeettheir
transactions.Thedailywageearners,otherlabourers,smalltradersetc.whoresideoutoftheformaleconomyusescashfrequently.Thesesectionswilllose
incomeintheabsenceofliquidcash.Cashstringencywillcompelfirmstoreducelabourcostandthusreducesincometothepoorworkingclass.
Therewillbeatrickleupeffectoftheliquiditychaostothehigherincomepeoplewithtime.
4.Consumptionwillbehit:Whenliquidityshortagestrikes,itisconsumptionthatisgoingtobeadverselyaffectedfirst.

ConsumptionProductionEmploymentGrowthTaxrevenue

5.LossofGrowthmomentumIndiarisksitspositionofbeingthefastestgrowinglargesteconomy:reducedconsumption,income,investmentetc.may
reduceIndiasGDPgrowthastheliquidityimpactitselfmaylastthreefourmonths.
6.Impactonbankdepositsandinterestrate:Depositintheshorttermmayrise,butinthelongterm,itseffectwillcomedown.Thesavingswiththebanks
areactuallyliquidcashpeoplestored.Itisdifficulttoassumethatsuchreadycashoncestoredintheirhandswillbeputintosavingsforalongterm.Theysaved
thismoneyintobanksjusttoconverttheoldnotesintonewnotes.Thesearenotvoluntarysavingsaimedtogetinterest.Itwillbeconvertedintoactiveliquidityby
thesaverswhenfullfledgednewcurrencysupplytakeplace.Thismeansthatnewsavingswithbanksisonlytransitoryorshorttermdeposit.Itmaybeencashed
by the savers at the appropriate time. It is not necessary that demonetization will produce big savings in the banking system in the medium term. Most of the
savingsareobtainedbybiggiepublicsectorbanksliketheSBI.Theymayreduceinterestrateintheshort/mediumterm.Buttheycan'tfollowitinthelongterm.
7.Impactonblackmoney:Onlyasmallportionofblackmoneyisactuallystoredintheformofcash.Usually,blackincomeiskeptintheformofphysicalassets
likegold,land,buildingsetc.Hencetheamountofblackmoneycounteredbydemonetizationdependupontheamountofblackmoneyheldintheformofcash
anditwillbesmallerthanexpected.Butmorethananythingelse,demonetizationhasabigpropagandaeffect.Peoplearenowmuchconvincedabouttheneedto
fightblackincome.suchanationwideawarenessandurgewillencouragegovernmenttocomeoutwithevenstrongmeasures.
8.Impactoncounterfeitcurrency:therealimpactwillbeoncounterfeit/fakecurrencyasitscirculationwillbecheckedafterthisexercise.
Demonetizationasacleaningexercisemayproduceseveralgoodthingsintheeconomy.Atthesametime,itcreatesunavoidableincomeandwelfarelossesto
thepoorsectionsofthesocietywhogetsincomebasedontheirdailyworkandthosewhodoesnthavethedigitaltransactionculture.Overalleconomicactivieswill
bedampenedintheshortterm.Buttheunmeasurablebenefitsofhavingmoretransparencyandreducedvolumeofblackmoneyactivitiescanbepointedaslong
termbenefits.