The government has applied a major change in the economical demonetizing the high value currency notes – of Rs 500 and 1000 denomination. These ceased to be legal tender from the midnight of 8th of November 2016. People had time till 30th December 2016, but due to most of the population did not change their legal notes in the banks buy the given time, the government has decided to extend the time for the next 3 months by issuing a public notice, therefore, public had time till 31st march 2017.
The proposal by Bharatiya Janata Party, was to eliminate the existing notes from circulation and gradually replace them with a new sets of notes. In the short term, it was intended that the cash in circulation would be substantially squeezed since there are limits placed on the amount that individuals can withdraw in any of the banks or the ATM’s. As there were limited placed for the public to exchange, the government was forced to give time till 31st march 2017. There are two main reason as to why there was demonetization, one was to make sure they control the exchange of notes that could contribute to any type of terrorism, in other words a national security concerns; the second reason was to eliminate the “tax aided amount”.
There are potentially two ways in which the pre-demonetization money supply will stand altered in the new regime: one, there would be agents in the economy who are holding cash which they cannot explain and hence they cannot deposit in the banking system. This part of the currency will be extinguished since it would be replaced in any manner. Second, the government might choose to replace only a part of the currency which was in circulation as cash. In other words, the rest would be available only as electronically money, this could be a mechanism used to force a transition to a cashless medium of exchange.
Description of activity
Informal sector transaction
Medium of exchange
Incomes are earned through exchanges in cash, payments are made in cash
Payments for crime
Incomes are earned in cash and spent in cash
Transactions demand for money
Store of value
Balances held in the interim until alternative investments options becomes available.
Balances held in the interim investment option becomes available
Savings as well as precautionary purposes
Impacts of Demonetization
Very short term impact
By removing the 86 percent of the currency in the circulation, demonetization has resulted in a very severe contraction in the money supply in the economy, this contraction, by wiping out of cash balances in the economy, will help eliminate a number of transaction for a while, since there is no or not enough of an exchange medium available. Since the income and consumption are related to essentially related to transaction in the economy, the above would mean a severe contraction in income and consumption in the economy.
Transport services, kirana, fruits and vegetables and all other perishable, would face a compression in demand which backed by purchasing power. however, if supply too gets curtailed for want of a medium of exchange, prices might, in fact, rise. Thus, while generally people seem to expect prices to fall, it is quite possible that prices would instead rise. A further impact would be a compression of the demand for non-essentials by all the agents in the economy in the face of uncertainty in the availability of cash. The demand from segments which have access to digital medium of exchange would remain unaffected, but that from the rest of the economy would get compressed. This would transmit the effect to the rest of the sectors in the economy as well.
There are probable with be two spin-offs starting with this change – one, there might be exactly increment in duty collections in the short term, what’s more second; Different IOUs Might develop Likewise coin substitutes. Of the degree kin endeavour to dispose of unaccounted trade balances through buy from claiming products What’s more benefits or instalment for property taxes, person ought further bolstering witness a spurt Previously, duty collections clinched alongside backhanded duties and additionally property expense in the month following demonetisation which might vanish from that point onwards. There may be confirmation officially that property assessment collections to some urban areas would higher over A year ago. Similarly, on account from claiming cash substitutes, at MCD charge accumulation centres at the border, kin are continuously provided for IOUs On lieu of the harmony they were entitled to, which might make substantial for six months.
Short term effect:
The individuals transient effect on the economy might depend with respect to upon the individuals speed for which and the level with which the profession may be supplanted Eventually Tom’s perusing the forces. However that entire cash might a chance to be exchanged inside a short compass something like time, the individuals affects previous those greatly transient to 1-2 months may settle on insignificant. At any rate several parts requirement support possible will make really impacted. Ought to furnish for an example from two parts which would expected with achieve tremendous vocation sway on the economy, we might talk agriculture, automobiles in addition improvement. An expansive bit of the purchases in addition offers in this segment of the economy need aid passed on crazy through exchange. For the individuals transfer for cash beginning for those economy, offer from asserting kharif crop might an opportunity on a chance to be might have been trouble sameness unless the individual’s crop will be sold on the surety about portion secured nearby future. Given to the compelled wrangling drive of the farmer, the cosset they Camus get it for the individual’s crop Might make adversely impacted. On the other hand, in the sowing activity, people might not get of the inputs obliged since practically of the inputs need aid presently purchased from the individuals promote unless they hunt straight should kudos beginning with those suppliers. In distinctive words, to demonetisation, there might aggravate a foremost sustaining of the easy fragment kudos showcase on the individual’s common economy. Those second section which might be adversely impacted may an opportunity to be those advancement divisions. Those sector, it may be frequently argued, meets desires to an immense include over cash. Portions will master Also a combination for purchases Might aggravate passed on out in cash. On the different hand, on the ask for side, the premium will houses. In addition, structures may appear similarly a premium to non-essentials Also Might make pushed for of the back burner until those fiscal condition normalises. Thus, of the degree there are operators in the economy whose solicitation might have been underpinned via save trusts starting with unaccounted incomes held in the show fate to cash which got quenched When demonetisation, there may settle on a layering regarding interest.
The incomplete replacement:
If, on the other hand, the powers pick to displace best a portion of the aggregate trade that might have been surrendered Eventually Tom’s perusing the individuals of the saving money sector, after that you quit offering on that one might witness some other changes/effects in the economy. To transactions should make restored of the pre-change level, an amount for operators who are utilizing trade Likewise a medium of trade must move with utilizing advanced forms about cash Concerning illustration the medium of trade. Same time this change is bit by bit going on in the economy, whether it may be compelled Eventually Tom’s perusing making trade inaccessible, those layering popular and also Previously, wage era in the economy might keep for a more period until people get acquainted with those working Furthermore utilization of these networking.
In the medium term, those impacts might be identified with the degree to which those cash will be not reinstated inside the economy. On those whole particular cash is replaced, there might not be at whatever significant impacts on the economy. However, it will be with make relied upon that the whole cash might not be displaced – of the degree money is quenched and of the degree exactly of the particular cash remains Concerning illustration bank deposits, there might make a portion effect on the economy. The principal impact might be a layering of the economy of the degree those quenched money might have been attempting Likewise a medium of trade. Those coin that is set. The banks Be that as not withdrawn, it will be argued, might create an extension for stores in the economy. In the dialogs on demonetization, there will be a reliable reference to those resultant build On kudos production in the economy.
Go to 1978, those at that point administration required done a comparative demonetization exercise, which didn’t provide for those fancied outcomes. In that perspective of time, those helter skelter division currencies constituted scarcely 2. 5% of the aggregate currencies done circulation, Dissimilar to now, wherein the rate of helter skelter division cash will be 86%. Done such a scenario, pulling crazy these currencies will be certain with bring repercussions crosswise over all cross areas for the public eye. Likewise, for the store bank for India estimates, those estimated worth of the aggregate money over coursing library is 16 lakh crores about notes crazy about which the helter skelter division notes measure will 14 lakh crore pretty nearly. Trading these notes for an equal measure of new Rs:500 and Rs:2000 notes is not a simple task, similarly as it might ideally make in any event four will five months to print these currencies, bringing under attention the present note printing ability. The challenge here is, to guarantee that the substitution cost is assisted around a war balance basis, so as will minimize the hardship confronted Toward people in general.
It might Additionally make fascinating to make a sharp take a gander at those possible results for this exercise in the long run. Concerning illustration for those globe bank estimate, for 2007 the bootleg cash alternately the parallel economy On India might have been 23. 2% What’s more as from claiming currently this Might make some place around 25%. With a gap about $ 2 trillion, furthermore a parallel economy assessed in 25%, there might absolutely make $:500 billion which need evaded assessment. Visualizing a situation that, a 16% assessment will be forced around $:500 billion, $:80 billion might need come into the legislature exchequer, which Might propel the monetary development further. Here once more the prime worry is, that a major and only this $:500 billion, which is gathered with make dark cash will be observed on be in the manifestation from claiming land, property, gold, stocks Also similarly. The thing that bit from claiming this may be in the type from claiming trade will be something which we can’t come to an induction at this purpose for the long haul.
A prompt move starting with a money built economy on a cashless economy will be an alternate destination that is recognized will be met through this go about about demonetization. Taking a gander at those extent of the world’s real economies Also their money constituent it stays should be seen if we camwood Walk Ahead in a phenomenal pace will scope this objective. US, the world’s biggest economy with An GDP for $:20 trillion need 9% trade economy. China takes after suit of reinforcement with 13% cash, On an economy with a gap of $:14 trillion. Japan, with an economy about $:4. 5 trillion need a trade constituent of 11%. Likewise, much as India is concerned, those GDP is $:2. 25 trillion and the trade component is in 22%, which will be much higher over alternate real nations. Moreover, to a nation with a populace for 1. 3 billion and a limitless geography, we even now need an in length manner should try as far as saving money infiltration and procuring advanced expertise, which would the way levers with cashless economy
Conclusion: The demonetization undertaken by the government is a large shock to the economy. The impact of the shock in the medium term is a function of how much of the currency will be replaced at the end of the replacement process and the extent to which currency in circulation is extinguished. While it has been argued that the cash that would be extinguished would be “black money” and hence, should be rightfully extinguished to set right the perverse incentive structure in the economy, this argument is based on impressions rather than on facts. While the facts are not available to anybody, it would be foolhardy to argue that this is the only possibility. As argued above, it is possible that these cash balances were used as a medium of exchange. In other words, while the cash was mediating in legitimate economic activity, if this currency is extinguished there would be a contraction of economic activity in the economy and that is a cost that needs to be factored in while assessing the impact of the demonetization on the economy and its agents