23Nov 2016 IGENUZ demonetisation

Impact of Demonetisation

The demonetisation of Rs. 500 and Rs.1000 currency notes was put to effect on 9 November 2016. Two major factors were revealed as the reasons behind this step. One is to deal with the issue of counterfeit money allegedly used to fund terrorism. Another is to eliminate black money from the country. The intention of the authorities has been received with much appreciation by experts and the public alike. But the implementation of demonetisation is strongly criticised for its many negative implications and its efficiency to serve the proposed purposes has been questioned.

One of the benefits of demonetisation of notes of high denomination is that people are forced to deposit their money in the bank rather than keeping it at home or lending it locally. People from rural areas will be forced to open bank accounts to deposit the demonetised currency. These can really help bank sector liquidity. However, this is likely to be a very short term impact as the introduction of higher denomination notes will encourage people to return to dealing in cash.The increase is revenue collections from tax is another short term positive impact. But this will only be a feature of the transition period.

The step by the government can have a serious negative impact on the real estate market as much of the transactions in this sector occur in cash.The lives of the weaker sections of the society have been disrupted as most of the transactions at this level take place in cash. Small-scale employers have been unable to pay wages to their labourers and hence many businesses have slowed down or temporarily closed. This crisis not only affects the employment of a large section of Indian population, but also, as a result, consumption and investment. Currency in circulation is likely to decline significantly as domestic spending will decline due to limits on withdrawal amounts and the possibility of tax investigations. Many find it less hassle to deposit their money rather than exchange and spend.

Government may choose not to replace all the money that has been in circulation. This can force people to go cashless to a larger extent and rely more on electronic money. Demonetisation is expected to extinguish currency that is unaccounted for and the hope is that this will be largely black money. However, ifthe money thus extinguished includes money used in circulation such as payment for labour in the informal sector, this can lead to unemployment and poverty. This is proving to be the case with many small scale businesses having to close down and some labourers choosing to work without pay until their employers can pay them in valid currency.

The lack of money to spend, and hence a fall in demand for products need not necessarily cause a fall in the prices. This is because retailers are finding it difficult to buy products from wholesalers and many producers have had to reduce their rate of production or close down completely because of their inability to pay wages. People are also increasingly taking supplies on credit. All this can lead to an increase in the prices.The lack of money in cash poses a significant problem to farmers especially those who are cultivating products that are in season for harvest or sowing. Inability to find necessary inputs for sowing can cause a chain reaction affecting the farmers in the coming seasons. The situation can also lead to more farmers relying on credit from the informal sector.

Currently, the instruments used for cashless banking provide options to interact only in very few languages. If the whole population of India is expected to use electronic banking, these media will need to be available in a multitude of languages so that the users can understand the actions they are carrying out. Expert opinions generally point out the lack of research conducted to understand the short-, medium- and long-term impacts of the drastic measure taken by the government, and the absence of planning to deal with the issues rising as a consequence of the demonetisation.

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