Impact of Demonetisation on Indian Economy: Short-Term Costs and Long-Term Benefits

 

Heena Goel

Ph. D Scholar, Department of Economics, Lovely Professional University, Phagwara, Punjab  India  -144411

 

ABSTRACT:

On November 8, 2016, government of India had demonetized the two high denomination currency notes of Rs. 500 and Rs. 1000 to curb the black money, corruption and terrorism in the economy. As in India people are more comfortable with cash transactions. But, sometimes such transactions are misused by the society and people with accounted money also start using high amount of transaction in form of cash that again generates black money, corruption counterfeit currency and terror financing. Thus, government’s move towards demonetisation of currency will definitely address the above mentioned issues and also help the economy become more digitize. In this regard, the present study shows the impact of demonetisation on Indian economy in view of short term costs and long term benefits.

 

 

 

INTRODUCTION:

Over the last few years, India is facing problem of corruption in its both public as well as private sectors. Corruption has been identified as the major hindrance to economic and social development. It may emerge with the emergence of political elite that believes in interest-oriented programmes than the nation oriented; complex laws and procedures deter common people from seeking help from the government; due to lack of job opportunities at will, there are many people who like to go for corruption mode to get the job offer; and most of the employees in public sector are paid low wages and salaries. Hence they revert to corruption for more financial benefits. Corruption also flourishes in areas in which resources are scarce, and the competition for them may lead some to become corrupt in either obtaining more of them or policing the distribution of them. It highly generates black money in the economy which is destroying our democratic system. It is earned through illegal means such as drug trafficking, weapons trading,

 

terrorism, selling counterfeit or stolen goods etc; by corruption which includes bribe given to and by public officers; hiding income through legal activities i.e. not reported to public authorities or we say to the government for the purpose to evade taxes; even commercial classes generate black money through trade; and the existence of demonstration effect in the economy i.e. the way to live a life with others’ perspectives (Saxena, 2015). Indians are very much affected by the lifestyles of other people of the society who are maintaining considerable high status and in turn they want to be like them. For this, they want to generate money by any means and to fulfil these desires or to maintain their status in society they force themselves to generate and use black money (Rajak, 2013).

 

Therefore, the government has taken several measures to effectively deal with the issue of black money. Recently, Indian government has demonetized the two high denomination currency notes i.e. Rs. 500 and Rs. 1000. It is a process by which demonetized currency will not acceptable as valid currency. The same thing happened with these two denominations. All the currency notes of denominations Rs. 500 and Rs. 1000 had been to lose legal sanction. And the government decided to introduce technologically advanced currency notes of denomination Rs. 500 and Rs. 2000 in limited numbers. However, all notes in lower denomination remained unaffected. The objective of the government was to curb black money, corruption and terrorism. As in India people are more comfortable with cash transactions. But, sometimes such transactions are misused by the society. This resulted in people with accounted money also started using high amount of transaction in form of cash that again generates black money, corruption counterfeit currency and terror financing. These issues hampered growth and development of the economy. With the demonetisation of Rs 500 and Rs 1,000 currency notes as a master stroke, it will address the above mentioned issues and also help the economy become more digitize (Kumar and Sharmila, 2016). The move will either unearth the black money slashed in the form of cash or forces to destroy those unaccounted currencies. Demonetisation will curb the menace of black money and will help check stashing of funds to a large extent. Similarly it has major impact on corruption that exists in India and also on financing of terror activities in India. Hence it was considered as courageous step in the fight against unaccounted money.

 

OBJECTIVE:

To study the short term costs and long term benefits of demonetisation in Indian economy.

 

IMPACT OF DEMONETISATION ON INDIAN ECONOMY:

Demonetisation is being seen as a major step taken by the Indian government with long term benefits. With the effect of this policy, however, there was a sharp decline in money supply in the economy, but it will be recovered in the longer period. This policy will help India to become corruption free. Those who take bribe will desist from corrupt practices as it will be hard for them to keep their unaccounted money. Thus, this move will help the government to track the black money. Those individuals who have unaccounted cash are now required to show income and submit their PAN cards for any valid financial transactions. Now the government can get income tax return for the income on which tax has not been paid. The move will stop funding to the illegal activities which were flourishing due to unaccounted cash flow. Banning high value denomination will also control the criminal activities like terrorism and will curb the menace of money laundering. Now such activities can easily be tracked and income tax department can catch such people who are in the business of money laundering. It will stop the circulation of fake currency in the economy as most of the fake currency was in the form of high value notes.

 

 

 

The demonetisation policy has also created interest among the people who had opened Jan Dhan accounts under the Prime Minister’s Jan Dhan Yojana as now they can deposit their cash under this scheme and this money will be used for the developmental activities in the economy. The ultimate objective was to make India a cashless economy. All the monetary transaction will be done online and individuals will have to be accountable for each penny they possess. It is a giant step towards the dream of making a digital India as this is the key to channeling more saving channeled through the formal financial system and improving tax compliance. In India, people make cash payments as it is convenient, accepted everywhere, and its use is costless for ordinary people, though not of course for society at large. Cash transactions are also anonymous, helping to preserve privacy, which is an asset as long as the transactions are not illicit or designed to evade taxation. But in the wake of demonetisation, government has taken a number of steps to facilitate the move to a digital economy. They launched an app for smartphones i.e. BHIM (Bharat Interface for Money). Now people can make simple and quick payments online through their smartphones. Also, demonetisation could have impacted on the real estate sector. In the past, people used black money on property sales to evade taxes. But with the demonetisation, black money is reduced and financial transactions increasingly take place through digital means and this type of tax evasion will also diminish. An equilibrium fall in real estate prices is desirable as it will lead to affordable housing for the middle class families. It will also facilitate labour mobility across India currently impeded by high and unaffordable rents. Despite its long term potential, the policy will impose short term costs on the economy.

 

It has impacted negatively on Agriculture sector in the economy. Cash is the primary source of transaction in Indian agriculture sector. The stress in this sector has been raised due to demonetisation. Notable, when government announced this policy, it was a time of harvesting kharif crops and started period of sowing rabi crops. But the farmers were barred from exchange-deposit of demonetized currency. The currency exchange limit was also very less. This sector was impacted through the input-output channels as well as price and output feedback effects. Sale, transportation, marketing and distribution of ready produce to wholesale centres or mandis, is dominantly cash-dependent. Breaks in the supply chains, fall in sales, lower revenues and increased wastage of perishables inversely affected this sector. The input side is equally affected as many payments and purchases of seeds, fertilizers, implements and tools, are outright in cash (Paramahamsa, 2016-17). Borrowing-financing operations of larger farmers and organized producers are also cut off or severely clipped. The impact was visible in various sub-sectors. Winter crops such as wheat, mustard are still due for sowing in a fortnight. Wheat prices were already up due to shortage of stocks and shortfall in output. Plantation crops such as rubber, tea, jute, cardamom are seeing no wages paid to workers. Small-medium tea growers have few buyers now. Raw jute trade is has been stopped as paucity of funds affects procurement-delivery by traders.

 

It has also impacted negatively on growth rate of the economy. With the impact of demonetisation, an aggregate demand reduced sharply in the economy as there was no cash in public hands. Demonetisation of high denomination notes has put over currency out of circulation. This has resulted in short-term disruptions in transactions in all the sectors, small establishments, households and among professionals. Since injection of liquidity was slow, incomes in both formal and informal sectors have been affected with the intensity of adverse impact being greater for the informal sector. Since self-employed and casual workers dominated in the overall economy, their incomes might suffer a setback. While some might viewed it as deferring expenditure and income, a part of it may actually be revenue and income forgone forever. This has also reduced aggregate supply, because the producers have no money for purchasing raw material. It led to fall in investment and growth of the economy (Singh, P. and Singh, V., 2016). India’s economic growth was slowed down in the fiscal last quarter because of the government’s disruptive move to ban cash. This would be reasonable to conclude that real GDP and economic activity has been affected adversely, but temporarily, by demonetisation.

 

CONCLUSION:

The study shows that initially the effect of demonetisation on Indian market was painful. It created some short term costs in the economy as it reduced the purchasing power of customers as well as producers in the economy. It also reduced supply of money in the economy. In terms of that, it adversely impacted on aggregate demand and aggregate supply which led to heavy fall in investment and trade activities. The growth rate of India also declined with the effect of demonetization. But, this also prompts the producers and consumers to adopt cashless transactions through paytm, debit card, internet banking etc. for dealing in the market. By adopting these sources, economy will be sound in coming time and Indian economy will get benefits of early and hassle free transactions. Impact of demonetisation will be positive in coming future on Indian Economy. Use of cashless transaction will definitely be helpful in controlling black money and corruption in the economy and now government can get income tax return for the income on which tax has not been paid. It will also control the criminal activities like terrorism and will curb the menace of money laundering. Hence, it has also opened up mammoth opportunities for the ecommerce industry and it will prove huge benefits for digital payment market.

 

REFERENCES:

1.     Kumar, N., and Sharmila (2016). Demonetisation and Its Impact on Indian Economy. International Journal of Humanities, Arts, Medicine and Sciences, 4(12).

2.     Paramahamsa, R. (2016-17). Demonetisation: To Deify or Demonize? Economic Survey, 2016-17.

3.     Rajak, J. S. (2013). Corruption in India: Nature, causes, Consequences and Cure. IOSR Journal of Humanities and Social Sciennce, 18(5).

4.     Saxena, A. (2015). An Overview of Corruption in India. Abhinav National Monthly Refereed Journal of Research in Commerce and Management, 4(3).

5.     Singh, P., and Singh, V. (2016). Impact of Demonetization on Indian Economy. International Journal of Science Technology and Management, 5(12).

 

 

 

 

 

Accepted on 25.04.2017                © A&V Publications all right reserved