Effects of Demonetization in India

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By TBN Staff

On 08 November 2016, Indian Prime Minster, Mr. Narendra Modi announced the demonetization of Rs.500 and Rs.1000 currency notes with effect from that midnight. These two denominations account for 86% of money circulation in India and hence this revolutionary step of demonetization led to various positive and negative effects in the country.

National effects of Demonetization in India:

a) The circulation of fake currency has stopped.
b) Black money stored in cash has become void.
c) Terrorists funding from within the country has slowed down, nearly stopped for time being.
d) Extortionists, kidnapping, and other such crimes are also decelerated.
e) Liquidity has risen up significantly in Banks.
f) Mobile ATMs have been started all over the country.
g) Advanced taxes have been deposited.
h) Municipalities’ tax collection rose from 3000 crores to 13000 crores approximately.
i) People, who haven’t paid electricity and telephone payments from 10 years, have now cleared all pending dues.
j) Small and big businesses have been impacted badly. Some companies have even started reducing their manpower. This may result to low GDP rate in near future.
k) Cash crush in the country due to less printing of new higher denomination notes of Rs.500 and Rs.2000.

Demonetization Effects on Indian Citizens:

As higher denominations – Rs.500 and Rs.1000 notes – are no longer a legal tender in the country, all the different categories of the citizens are posed to a suffering of cash exchange, deposits and withdrawals limits in Bank Accounts, in addition to daily distress of long queues outside banks. Let’s see how each category is impacted:

1) Poor: People who are below poverty line or slightly above like farmers and labour class are facing adverse effects on immediate period since many of these people neither have direct bank accounts nor can use debit or credit cards.

Basically they store money at their homes and if hoarded money is in higher denomination, they are bound to face the challenge of standing in the long queues and get the denomination exchanged.
They also have to take leave from work for exchanging cash. This hampers not only the work, but also deduct their daily wages.

But this is a temporary effect. In a long term, Poor may make better use of Bank Accounts and use virtual payment methods in future. This may make their life better and secured and they may also make more money via interest return on their deposits.
In future, we may also expect transparency in government schemes which are malpractice by corrupt people. The corrupt people exploit poor by documenting Rs.8000/- per month salary of labours but pay them only Rs.2500-Rs.4000/-.

2) Middle class and Upper middle class: People under this category use credit cards and debit cards and also net banking to do their businesses, online shopping, and bill payments if electricity, landline, mobile, DTH, etc. so these people are not as much affected as they can wait for the queues to subside and later on deposit their old currency notes. However, to buy vegetables they may require lower denomination notes but still they can manage easily.

Middle/upper Middle class housewives may have a huge amount stored in their several purses and this amount can be deposited up to Rs.2.5 lacs without any inquiry. Any amount above it may be scrutinized by the Income Tax department.

In long term, this category will become more cashless and opt for e-wallets.

3) Rich: Rich people also use cashless techniques to make their day-to-day transactions. Rich, who do clean businesses and honestly pay their taxes, may not face much trouble. They send their servants to exchange cash so rich don’t stand in the long queues outside banks.

The main negative impact will fall upon the rich who are corrupt and practice black money, escape taxes and pile stocks of higher denomination notes in their houses, bathroom tiles, or in beds, etc.
Since cash exchange limit was only Rs.4000/- (later revised to Rs.4500/- and then Rs.2000/-) – so it was nearly impossible for them to convert their thousand crores.

In order to secure their image, they might either burn old currency notes or throw it in rivers or donate it in temples.

If there is Income Tax raid on such people, they would have to pay 200% penalty.
However, government has now given such corrupt people another opportunity to turn their black money into white. Lok Sabha has passed Income Tax Amendment Bill, within it an additional 50% penalty being imposed on the entire black amount while another 25% of amount will be parked in a Bond with no-withdrawal structure for full four years. This scheme is only till 30 the December 2016.

Effects on Industrial Sectors in India:

Due to 86% of currency is sucked up by the demonetization move, the industries and companies have a direct and immediate set back. It’s because 98% of India’s economy deal in cash. Let’s see how different sectors are impacted:
• Real Estate: Property dealing is done 35-40% in black for house booking or down payments. This is going to make a huge negative impact on property dealers. Whereas for citizens, it’s a good news as property rates would come down significantly.

• Auto Industry: Car sales inquiry has gone down to nearly 50% whereas two wheeler vehicles sales have hit 70-80% badly. This problem will remain until market have enough cash liquidity.

• Banking Sector: A gala days for all Banks. More than 8.5 lac crores have been deposited in banks as per RBI’s update on 28th November 2016. Because of this liquidity, few banks have already reduced home loan rates. Most banks have written off their bad loans worth 2.5 lac crores so that in coming quarters they can show clean books in their FY17 earning results.

• Pharma and IT Industries: Pharma is hardly impacted since medical stores and hospitals had liberty to accept old currency notes. IT industry too doesn’t have any impact because of demonetization but it’s down due to Brexit and Donald Trump’s victory in US.

To sum it up, once black money is reduced, we may see huge tax collection which will benefit the poor and honest people of the county. As tax revenues will increase, we may also see escalation in developmental activities in all sectors. However, if government failed to control the bribe takers and scammers, the black money will again circulate in the market and it can be a big setback for the nation since everyone has wholehearted welcomed this change! For now people are facing some difficulties and for long run effect we still need to wait for the clear outcome.