The entire nation was hit by a financial
hurricane on November 8, 2016 when the prime minister announced the demonetization of Rs 500 and Rs 1000 currency notes and the same to be
replaced by new notes of Rs 500 and Rs 2000. The main reasons cited were
to fight against the three main evils inflicting the society: black
money, corruption and terrorism. There are many who have welcomed the
bold move of the government, many others have been criticising it as
illogical political move lacking planning and direction.
now “illegal” currency accounts for 86% of the total money that is in
circulation, valued at Rs 14 lakh crore and 12% of the country’s GDP.
Clearly, with these going out of circulation and new currency coming in
the impact will be felt by one and all. To put things into perspective,
let us look at the short, medium and long Term view of this decision.
the short term, the move will hurt all Indians very negatively as
transactions in India are mainly carried out in cash. While some are
making noise even if the actual impact of the decision is not so much
on them, there are many businesses which are purely run on cash and such
a sudden move to push a cash economy to a cashless economy is
definitely going to be painful. With the limit on withdrawals from ATM
and also currency exchange from bank, the slowdown is expected to
continue across all industries for a couple of months. As the ATMs are
yet to be calibrated for the new currency and transferring such high
amount of currency in each and every branch of all banks is going to
take time the amount of currency in the market is going to remain low.
The country’s overall spending in the next 1 to 3 months will see a
sharp decline as the process of changing the currency continues thus
having a negative impact on the country’s GDP. The impact will be the
seen the highest in sectors which are majorly dependent on liquid money
such as real estate and jewelry.
the medium term, as the excess supply of cash is eliminated in the
market, it will have a positive effect on the inflation. The economy
will eventually start picking up and the volume of transactions would
increase over time. The legitimate money will be deposited in the banks.
The huge amount of deposits with banks will bring about lowering of the
interest rate. For those who are sitting with unaccounted money,
estimated to be 50% of total money, will either be extinguished or find
its way back in the system through income disclosures or money
laundering. Given the severity and strictness of the Government the
chances of the latter are grim. Each note is a liability of the RBI and
hence each note extinguished or which comes to the government by the way
of taxes or penalties reduces the liability of RBI. With the current demonetization the government is hopeful to get one-third of such money
extinguished which in value terms can take care of fiscal deficit of the
country for a year or two. Interestingly, in 1978 when the previous
demonetisation was carried out 25% of the unaccounted money was
In the short and medium
term the impact of this decision will mostly be may have negative on
all sectors especially those in the unorganised business, in the long
term such a move will have a positive impact on the economy. The
banking sector will be greatly benefited as more money will enter the
banking system. Inflation would come down as the circulation of money in
the market is reduced. Other sectors such as real estate and jewelry
will also stabilise in the long-term, with certain amount of price
correction. As the price of physical assets correct, people would relook
their investment portfolio and financial planning would be looked at
from a whole new perspective. There would be more participation in the
equity and bond market by retail investors.
there are still few who believe that with Rs 2000 currency note it
would be much easier to hoard cash, going forward the government will
make it more difficult to spend cash and make it mandatory to produce
PAN Card in high value transactions, so people would have little choice
to break rules. Also, the current demonetisation will create an
everlasting psychological fear in the mind of people.