Demonetisation Effects on Economy

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Demonetisation Effects on Economy

Demonetisation effects have turned the world into two halves one for and the other against. Finance Minister has tried to water down the dis-beliefs by few economists who are sceptical. His argument being that demonetisation effects will be to help in curbing unaccounted wealth and become a new hallmark for white transactions. One of the Demonetisation effects is the potential to kick-start economic growth if the economy adopts white transactions and public spending by the government is accompanied with this bitter pill.

Demonetisation Effects | Analysis

Demonetisation effects

Demonetization drive in isolation may not yield effective results. There should be a stringent follow-up from the Finance Ministry and RBI officials regarding the steps to be supplemented with the demonetization drive for the realising the effective objective of a white, traceable and cashless economy.

  • Low interest regime due to supply of high deposits. It should increase investments both domestic and foreign in origin due to decrease in cost of borrowing.
  • If anticipating reduced corruption levels, the foreign investors find it comfortable investing in India, it would be the success of the demonetization drive.
  • If the demonetization scheme helps cleaning the system especially in the political spectrum and bureaucracy, the investor confidence would be increased.
  • Demonetization drive should be accompanied by multiple other actions – Efficient tax system, proper circle tax rate, curbing benami property transactions through the mandatory use of Aadhaar Number in property dealing, use of Aadhaar in transactions of imports and exports, penalising those who evade tax and most importantly a tight control on participatory notes funding black economy.
  • If cash supply chain is broken, people will lose jobs due to inadequate currency available for MSMEs. If the government is able to tackle the cash crunch in the economy, this side-effect can be tackled.
  • How the Government uses the money accumulated through demonetization for health, education, waiving off farmer loans, public welfare activities and other social programmes has to be seen. This is an important issue because lower circulation of money in the economy affects demand in the economy and affects overall investment cycle.
  • How the Government handles the rural distress post-demonetization period also needs to be seen. Effective social sector schemes through a tightened control and regulation regime should be made. Example – Universal Basic Income (as discussed in an earlier article)
  • It is also to be seen if the RBI gets initial success in opening the ‘Islamic window’ for gradual expansion of ‘interest-free’ banking in India which has its own merits such as – availability of huge funds through investment, less volatility in market, lower cost of borrowings etc.

Conclusion

If there is enough cash to flow in the economy and Government can avert the crisis that poor people are actually facing, then only this structural change can be deemed to be successful in the long run. Till then, it can be said that it’s a work in progress. Any economic policy cannot shoot an arrow in the wind without preparing for the effects of it on the ground. The Government is preparing the ground for its success, but few more decisions need to be merged in the leap towards a cashless economy.

By | 2016-12-01T12:55:08+00:00 December 1st, 2016|Categories: Economy, GS Paper 3|Tags: , |0 Comments

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