How did demonetization impact Indian Economy?


On 8 Nov 2016, Prime Minister Narendra Modi took the whole nation by surprise with demonetization of Rs.1000 and Rs.500 notes.but why PM MODI took this big step and how effective is demonetization of high-value notes to curb black money.The government decision to demonetize has many problems in the daily life of common people, as the majority of Indians still prefer notes for daily transactions.But this decision was made to curb corruption, black money, terrorism and fake notes flowing illegally inside the country in many sectors.Black money is largely generated through corruption or not paying legitimate tax.cease of old notes aims to nationwide crackdown on corruption and black money holder.India government declare that there will not affect on white money holders and new notes to be replaced after ceasing of old notes.But demonetization has severely hit the economy of middle and lower class such as farmers, vendor, laborers and small-scale workers. Majority of black money holders store their amount in RS.500 or RS.1000 notes, as it becomes easier and requires less space to deposit huge amounts.Cease of Rs.500 and Rs.1000 notes will force black money holders to unearth illegal amount and deposit the same into the bank account. If the amount exceeds more than 2.5 lakhs or average household income then account holder may attract IT department Officially.Depositing old notes into the bank account will also help to identify fake currency flowing illegally inside the country.Cease of high denomination notes may unearth huge undeclared illegal cash deposit which may help police to execute massive crackdown over such cash holders.holders of undeclared cash are in the panic state as they have no option left except replacing old notes with new ones through the bank account.Huge deposits into the bank account will help to extract tax which eventually benefits Government.But many black money holders have already found new ways to escape inevitable tax penalties by converting black money into physical assets like gold and property.Demonetization has also created major problems for the half rural population as the majority of them have no access to the bank accounts.Because of lack of money farmers who were dependent on informal money lenders had to face many problems due to non-availability of cash.The rural population still continues the traditional way of depositing money as cash safely in their homes after years of collection. This may result in the opening of thousands of more bank accounts in rural areas.Demonetization may bring changes in the monetary system in remotes areas by opening and develop a better system for rural in future. As per Government instructions scrapped of RS.500 and RS.1000 can’t be used to buy physical assets like gold and properties in real estate. Since the ban was introduced on 8 Nov 2016, there were reports jewelers across the country worked complete day and night to convert black money into gold assets. Income tax department has sent notice to 600 jewelers across the nation to submit details of sales that took place between November 7 and 10. Authorities have made PAN ID mandatory if sell is more than 2.5 lakhs. officials are keeping track of multiples sales below 2.5 lakhs to an individual person.Real Estate sector is worst affected by demonetization of high-value notes because while buying or selling property payment is majorly done in cash.The scrapping of high denomination notes will make buyers difficult to pay in cash hence property prices are likely to fall down. Real Estate is entangled with financial system of the country and demand to this sector cause severe damage to the economy.Banking financial system is highly dependent on real estate and home loans, if properties prices fall down then the bank may force buyers to pay more EMIs.Demonetization did not just hit black money holders but it also has a major setback to terrorism and Maoist insurgency. Terrorism across the borders produced fake currency of RS.500 and RS.1000 to fund terrorist activities in India especially in Kashmir region.Since the ban was introduced unrest in Kashmir came down there is no source left to fund separatist group to keep unrest going.while Naxals rushed to the local villages for help by utilizing poor villagers Jhan Dhan account.Demonetization will not only stop the flow of fake currency into India but it also helps to end the circulation of counterfeit notes within Indian markets. Security features in new RS.2000 and RS.500 notes is a matter of concern for the government defeating counterfeit note production still remains a major challenge for RBI.The government encourages the use of unique payment interface to build a cashless economy to target such terror activities.The cashless economy may slow down such activities but cannot evade terrorism, western cashless economies like Belgium and France are best examples terror, victims.Demonetization has its both advantages and disadvantages over its implementation.Demonetization affected the livelihood of people of a country where 90% of the transaction are carried out in cash, sudden elimination of 86% cash put the burden on the economy.Demonetization will have a short-term negative impact on Indian economy.Many research organization estimates GDP growth rate may shrink by 0.5% by 2017.Demonetization won’t affect much to black money holders because their most of undeclared wealth is in the form of assets like gold, foreign currency, and properties. Empowering investigating agency like CBI, RTI and much more is the most effective way to curb black money and corruption.on other hand demonetization lowers cash circulation and encourages digital transaction through mobile banking, net banking, debit card, etc.Unearthed black money after demonetization will be heavily taxed along with penalties thus plenty of revenue will help to bring down fiscal deficit.


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