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One of the biggest decisions taken by the Indian Government in recent times is the decision to demonetize all ₹500 and ₹1000 banknotes. While making this announcement on 8th November 2016, the Hon’ble Prime Minister Narendra Modi also announced the issuance of new ₹500 and ₹2000 banknotes to replace the demonetised currency. This step has divided the society into two- on one hand are people who praise this bold move of the government and support it wholeheartedly, on the other hand are people who are critical of this move and believe that the move wasn’t necessary. In any case, demonetization has certainly impacted the Indian Economy.
Black Money and Corruption
One of the main benefits of demonetization and the reason for this step is to control and reduce the amount of black money in circulation and corruption activities. It is believed that this step will hit the people who hoard black money and force them to either abandon the money or to enter the system by accounting for it and paying the prescribed penalty. As it will be difficult to keep unaccounted cash, corruption activities will reduce too.
Blow to Terror Funding
The withdrawal of ₹500 and ₹1000 currency, which are also the most widely used denomination as fake currency and for terrorist activities, will serve a huge blow to terror funding. Demonetization has checked the flow unaccounted cash and fake currency in the system, and therefore, has hit terrorist activities, at least in the short run.
Thanks to the momentary cash crunch forced by demonetization, people, even in rural areas are gradually moving on to cashless transactions. The move has encouraged people to reduce their dependence on cash and participate more in the banking activities. The data shared by RBI reflects this shift. From January 2016 to August 2017, Debit card transactions increased from Rs 2328 bn to Rs 2700 bn, NEFT transactions increased from Rs 7086 bn to Rs 12500 bn and so on.
Increase in Funds with Banks
Thanks to demonetization, Indian banks which were struggling due to cash crunch and were short of funds now have ample amount of money which can be used for future finances and loans after keeping a certain amount of reserve as per RBI guidelines.
On the other hand, the biggest drawback of demonetization was the inconvenience it caused to the public at large. In the aftermath of the announcement of this step, the common man suffered as new currency was hard to get and people had to rush to exchange their old currency. In cases of medical emergencies and the like, the step proved to be a huge disaster.
People who are critical of demonetization argue that it has increased unemployment. A lot of small traders and merchants, as well as people in the agriculture sector, depend massively on cash and will be forced to run out of business.
High Cost of Remonetisation
The Reserve Bank of India spent over Rs 12000 crore to print new currency needed to replace the demonetized old currency. The new currency had a lot of different features, which escalated the cost of printing. This impacted the profit of RBI and subsequently, it paid less dividend to the government (Rs 30,659 crore) in 2016-17 as opposed to 2015-16 (Rs 65,876 crore).
Demonetization has impacted the Indian Economy indeed. The long term impact of the decision is yet to be cleat but the advantages will most likely outweigh the disadvantages.
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