Demonetization After shocks

Posted by The Open Page | 3rd April 2017

Decision of demonetization has a big impact on Indian economy. Demonetizing the current currency and in return providing a new currency to the people is a step taken by Indian government. For daily transaction the people of the country had to go for certain process which is avail to them as per the norms that is too in limit. This diverts the customers to the cash less transactions because of lack of cash and by saying that you need to have debit/ credit card or online payment options. People in this country are not use to such cash less transactions and it seems that they may avoid certain purchases because of lack of cash. This may have an echo effect on sales graph of unorganized retail, that it may decrease their sales turnover.
In simple term demonetization is called when old unit of money has to resign from the economic system and the place taken by new unit of the money. There are various reasons of demonetization where old units of currency declared null and void and replaced by new currency units either of same value or of new value.  In 2016 historical decision taken by the Indian government to demonetize currency notes of Rs. 1000 and Rs. 500 backed up by various reasons like to arrest corruption, to stop black money market, to cut fake currency chains and to promote white transactions along with cashless systems. These notes represent 86% of total money supply of the nation. In 2015 Zimbabwe government took the decision to demonetize the currency as a requirement to fight against hyperinflation.
The consequences
The sudden downfall observed in Indian market because of the decision of demonetization. The reason behind the impact is various sectors in India like agriculture, fishing and some unstructured markets are still cash centric.  They were on the virtue of shut down.  People instead of doing their regular business were standing in queues to exchange the demolished currency. That also reduced the flow of consumption and usage of daily need products. The currency ban also affects the bank credit that shrunk by 0.8% by November 25, but during the same time one reverse effect is that some borrowers and default account paid back to the  system as much as Rs. 66,000 crores. This will hint to the lower direct and indirect taxes as tax revenues will be generated from unaccounted wealth in to the system.
This cash ban could also affect the GDP negatively says some experts and research firm. It is estimated that for FY 18 GDP growth may stays to 5.8% opposed to 7.3%. In India Cash on delivery a famous model of buying is suffering from this cash crunch. About 70% online buyers in India favor COD. The e- commerce after this decision may observe short-term down fall. Generally the tendency is that black money spent on luxurious items. So this decision to trap the black money has duel effect. This in turn decrease e –commerce share of sales through COD and more and more people divert to online payment mode. 
The major positive sides of decisions are demonetization will plough back the wrongly stored money in the system so it will create a good circulation and liquidation of wealth. Secondly anti social factors would be in shock situation at least for some times because their inflow which is almost from black money will be cordoned through the decision. Moreover organizations or people having such storage of black money will be in trouble due to the fear of penalization by authorities. Smuggling and fake currency business would lose its speed and depth due to useless available stock of money with them.   
 Effect on liquidity
It was obvious fact that the total cash available with the people is not in the system. And that is why our banking system has some time suffered from the liquidity problems. The reason was again the same that unaccounted cash with the people. Because of demonetization step everyone had to put back all the old currency they were having in their bank account otherwise it will be considered null after the dead line. This will nurture the system of the banks and make them somewhat stronger, as more then 7 to 8 lakh crore of legal amounts will be back in to system. Not only has that but government also limited the withdrawals from the account. This step also carried the liquidity a bit longer. But once limits started increasing it may also a sudden squeeze to the liquidity. But still the system now could have eyes on this and by that records of the withdrawal can maintain once the limits eased.     
Cash less market
The another objective of taking this step may be to make and create digital cash less market. As because of shortage of cash during the period people stated using their plastic money say credit/debit cards or online payment options. In big payment in absence of the cards cheque transaction took place. Ultimately in all the transaction bank account to bank account transfer via some tools started. This automatically restricted the entry of black money in the system. Having said that those businesses which were not having these options and customers who were not friendly to card and online transactions found it difficult to go through. In this particular case there were two opposite effects. Unorganized retail businesses not having card scratching or cashless transaction facility for the customers started losing their business. On the other hand more and more customers turned to the organized retail stores like malls and all to fulfill their needs and this increased the turnover of the malls.
It was like two sided effect of demonetization. On one side it is going to benefit the nation by controlling the black money and corruption on the other side it is going to affect badly on trade and commerce.


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