Demonetization is not a new concept to the Indian economy. Reserve bank of India has earlier printed a note of Rs. 10,000. It was in the year 1938 & 1954 that these notes were introduced. These notes got demonetized in 1946 and 1978 respectively. Source of Data is RBI.
As we all waited early November for results of US Presidential elections, our very own Prime Minister, Shri Narendra Modiji came up with his own master stroke. It was a stroke with the sole objective of curbing corruption, black money, fake currency and terrorist financing. An announcement to demonetize INR 500 & INR 1000 & to completely cease usage of these notes.
Under the Reserve Bank of India Act, 1934, an additional denomination of INR 2,000 is introduced. Further redesigned series of INR 500, INR 1000, INR 100 & INR 50 are expected in coming months. The demonetization in 1946 & 1978 impacted only 5% of India’s population as very few people had access to Rs. 10,000 note.
But currently the demonetization has impacted the entire country. Curbing corruption is the primary focus of this decision. No doubt, that the common man is facing hardship in this entire process. There is a possibility that the economy may get affected for the coming two quarters. But this decision is with a vision for long term benefit of the country and will show positive results in the long run.
Pros & Cons of Demonetization:
- Biggest benefit of demonetization is that drastically affect corrupt practices in the country.
- People with huge reserves of black money won’t be able to channelize it to official sources with the fear of huge penalties and prosecutions by the Government and officials.
- National threats by our enemies of counterfeiting currencies and terrorism financing will be stopped atleast for a while.
- Smuggling activities, terrorist activities will drastically reduce due to record keeping of every amount.
- The nation will now move towards cashless transactions which automatically improves the banking systems.
- A cashless society will increase financial inclusiveness and increase credit access too. White money will remain in banks then it can be put on loan generating interest. Interest rates appear to fall further reducing inflation.
- Banking systems will receive a boost from 7-8 lakh crore base money i.e. the new money introduced in the system. This further would be governed by cash withdrawals when the withdrawal limits are released.
- People who do not show their old money to the government will automatically act as a reduction in government liability. The old currency becoming worthless.
- Overall risk of handling cash gets reduced as soft money starts penetrating in the system.
- Government expects that approximate 5 lakh crore will come to the government in the form of RBI liability, taxes and penalties. This amount will suffice taking care of India’s entire fiscal deficit for one year or even more.
- Loan transactions, real estate transactions, jewellery transactions will be under authorities radar. Malpractices will be curbed by government authorities.
- It is expected that income tax collections would rise through compliance and it would reduce rates of loans in the long run. This will help increase disposable income. Consumption levels will increase in the economy creating demand in the long run.
- The cons being affecting transactions in sectors like jewellery, hotels, real estate, retail, logistics as the level of cash transactions here have been huge. There will be a short term instability in Small & medium enterprises due to short fall of lending options.
- Companies having debts may face defaults
- Operating costs increases due to implementation of new systems of introducing new currency. Operating costs of banks have gone up due to continuous refill of currency.
- Implementation of cashless society is a difficult tasks as 50% of India’s population are not accustomed to card usages.
- Liquidity crunch makes cash transaction of higher amounts get restricted for few more months.
This entire initiative of our Prime Minister is a result of an informed decision making process for a longer period and a meticulous plan exercised. A true surgical strike to fight corruption, terrorism, black money and counterfeit currency.
Let’s as all share these short term troubles to envisage the great vision of our PM in the long run.
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