Demonetization means withdrawing a particular form of currency from circulation. The announcement made by our Honorable Prime minister Narendra Modi, in an extraordinary, unscheduled telecast, which stopped the use of all 500 and 1000 rupees notes of Mahatma Gandhi series as a form of legal tender in India from 9th November is one of the daring and courageous moves made in the financial sector in recent times. This move has earned him a lot of support as well as criticisms.
Demonetization – Is it the first time?
There has been two previous occasions of demonetization. The Government announced that Rs. 500, Rs. 1000, and Rs. 10,000 will not be legal tender from Jan 12th, 1946 on the Jan 11th. It was made with an aim to curb Black market. It was followed by instances, where people died of shock, a large number of people queued up in front of the banks and the middle classes were hit.
Notes of Rs 1000 and Rs 500 and Rs. 10,000 were demonetised again in January 1978 by the ruling party then- Janata Dal to curb black money transactions. They gave a week-time for the people possessing those notes to exchange in the Bank.
This time Narendra Modi led BJP Government has declared the Rs 500 and Rs 1000 notes of the Mahatma Gandhi series as invalid from midnight on November 8th in a televised address to the nation, which meant that 86 percent of the cash in circulation was to be withdrawn and he also announced the issuance of Rs 500 and Rs 2000 banknotes of the Mahatma Gandhi New series in exchange for old notes in the banks. He claims that it was planned six months ahead and was done not only to bring out black money, but also to curtail forged cash and funding of terrorist activities with this forged cash.
Impact on Economy
- The Demonetization linked cash crisis is definitely going to affect the economic activity in the short-term. Long-term gains would depend on the follow-up measures.
- Nearly half of the non- tax paying businesses in the informal sector, which account for 40% of the GDP are likely to become unviable and yield market share to the organized sector which is likely to crimp the GDP.
- The inflow of money into banks could reduce the interest rates offered by the banks which can stimulate economic growth.
- The budget deficit can be reduced as more amount of black money gets taxed, which will result in lowering inflation rates, which is beneficial.
- Indian Equity investors are set to gain.
- It checks misuse of money during elections and selling of tickets for money and clean up the political system.
- The value of the Indian rupee is set to record an all-time low, but it may be reversed due to transparent business practices in the long run.
Impact on Citizens
- Cash crunch has forced the citizens to learn about net banking and other methods of legal transactions,however, at present it has led to large queues in front of the banks for long hours to receive their hard earned money from the bank.
- Breadwinners for the family on daily wages are forced to lose their wages for the day and stand in the queue either to exchange or draw money from the bank as the announcement was sudden.
- Small time merchants, small shops and transport service providers such as autos are likely to lose business until they adopt Cash – less style of functioning.
- The limits set for withdrawal are low and will stress up people who have planned weddings or people who need money for emergency reasons.
- Though the Prime minister has announced that these notes can be accepted in the petrol bunks and government offices in practice, these people are skeptical about accepting them
- The need to alter many ATMs to deliver the new notes, has posed hardships to ATM users.
- The Banks are grossly understaffed and are unable to handle this heavy crowd.
It is very difficult to predict the effect of this move on the economy and the citizens. The effects mentioned above may or may not happen in the actual system. It can only be assumed and cannot be determined beforehand due to the complexity. The hardships in the short term may yield benefits in the long term. Let us hope for the best.