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Impact of demonetisation on the  Indian Economy

After the initial reaction of shock and surprise on the government’s demonetization move, let us analyze the impact on our day to day lives. Experts are divided over the benefits and long term advantages of demonetisation. It is also interesting to note that very few countries like Zaire and Russia have used demonetisation. Having said that, it is definitely not a popular method but rather a blunt instrument used for radical change.

As we all know that our Prime Minister Modi took this extreme step in order to clean up the black economy. There were also huge concerns about terror funding through fake currencies. We now need to see whether the benefits outweigh the disadvantages of demonetisation. Having said that, all of us agree that the black money hoarders and tax evaders, will now see the futility of hiding their wealth.

It has also evoked mixed response as the rich were trying to use up their cash by paying their staff advance salaries inclusive of bonus upto 2 years and buying luxurious items to use  all the cash they had with them. While middle class was struggling with their day to day  payments and had to suddenly get used to digital mode of payments. The lower class, poor person was struggling to get work and earn his livelihood and then start getting used to opening the Jan Dhan bank account.

Not all the poor people  have Jan Dhan bank accounts and moreover illiteracy is the main issue , so the poor has suffered the most.India is a cash based economy and so many small traders, business men and retailers like beauty salons, grocers, vegetable and fruit vendors, milk vendors etc live on a day to day basis and so they are not even aware of their tax liability. All these small and first time entrepreneurs do almost all their transactions in cash. It is thus important to change their mindset to understand the digital transaction system. They also need to understand the existing tax and accounting practices which are as good as none for them.

Many professionals like doctors, accountants, lawyers, dentists, small establishment and service providers do their transactions in cash. They have never declared their full income as they do not believe in paying taxes to the government. It is only the salaried class and the corporates who are diligent tax payers.

There are huge benefits if you have a clean account for your business, by correctly declaring your income. You can get investments in your business for expansion and also be able to increase your working capital.

Some of the benefits of demonetisation  are as follows

 Remove Black money and corruption

It will help the government fight against black money and corruption. Many black money hoarders will think twice before hoarding money as they would have already seen the futility of their decision by now.

A big blow to Fake currency and funding of terror

In one single move of demonetisation, the government has literally paralysed the funding of the terror network. All fake currencies have been rendered worthless. Anti-national activities like smuggling and funding of terror have already been severely hit due to the lack of funds. All counterfeit currency activities are completely at standstill, but at the same time it is not impossible to counterfeit again.

Online payments through banks or digital payments

Moving towards digital payments or a cashless system is one of the main objectives and benefits. All transactions will be clearly tracked through valid identifications like a pan card and Aadhar card in the banking system. Banks are taking extraordinary precautions to tick off the authorities on any money laundering or any high deposits. People need to give a clear explanation of the source of funds. In the past one month, Income tax officials have been conducting raids on many large construction houses and other businesses. As the vigilance level is high on the part of the government, it will be very difficult for money hoarders.

Housing and Property sector to be regularized

Experts believe that the Housing sector will experience a lull in the coming months. Property prices are expected to come down due to the uncertainty and the negative impact on demand. Developers will be compelled to reduce prices to clear their inventory and increase sales.

Benami transactions are now difficult to do

All benami transactions have received a big setback. The new law has increased the imprisonment from 3 years to a 7 years jail term or fine or both.

Home loan rates are expected to be reduced

A large amount of money has already been brought back into the formal banking system. This will reduce the high cost of borrowings for banks and in turn will lead to the reduction in the lending rates of funds.

Changed approach of tax optimisation rather than tax evasion

Governments collect revenue through tax and then reinvest this amount in various developmental and welfare schemes of the nation. It is important to increase this revenue by bringing the tax eligible population into a tax paying population.

Some of the major disadvantages of Demonetisation are listed below:

Huge inconvenience to almost 90% of the population

People had to stand in long queues to just exchange their currency, leading to a chaotic and disturbing situation.

Inadequate infrastructure in rural areas

Majority of the rural population do not have banks or internet connectivity. It will be the government’s biggest challenge to convert these cash dependent areas to rely on digital payments. Most experts believe that we have gone too early for a cashless system as we are ill equipped for it.

Cost of Printing new notes and recalibration of ATMs

It is estimated that the Government of India will have to bear an additional cost of approximately Rs.12,000 crores just to print notes and recalibrate ATM’s.

Most of the black money is already converted into other assets

Most of the black money is already converted into gold, real estate and held in foreign bank accounts. There are higher chances of money laundering in this areas and it will be difficult to trace them.

Nexus between politicians, businessmen and agents

Jan Dhan account deposits have seen a steep rise since November 8.  Corrupt officials and agents have already taken bank passbooks and signed withdrawal slips from poor people well in advance. For e.g. cash of Rs.500000/- can be easily distributed into 25 accounts of Rs.20000/- each, in an average family with an average income. Nobody will be able to detect it.

Nexus between bank officials and havala money traders

We have already seen the scam in one of the leading banks, wherein bank officials in collusion with agents were able to give huge amounts of new currency. There are already income tax raids being conducted on the havala traders and agents who are possessing illegal new currency.

Rs.2000/- a higher denomination was brought into the system leading to a shortage in change

People are unable to get Rs2000/- change for a purchase which is in mere hundreds or tens. This has further aggravated the already difficult situation.

These are some of the major impacts on our economy due to demonetisation. As time goes we will be able to further analyse and review the benefits and disadvantages of demonetization on the economy.



Please  read our earlier article on Demonetisation.

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