8th Nov. 2016, Respected PM Narendra Modi announced Rs. 500 and Rs. 1000 will not be a legal tender from that midnight. 86 percent of the Indian currency was called back from the market. This decision got the immediate attention of the entire nation and it has affected the life of every single citizen of the country.
From the same moment, India started witnessing the new phase of transition. Long queues in front of the bank and ATMs to withdraw money, restrictions on spending, cash crunch for every single transaction and the decision being used by various political parties for their personal gains.
But, if we look very closely at this historical event we may be able to understand, what is the width and depth of this decision in short term and in long term. India has seen demonetization decisions in past. 12 Jan 1946 and 16 Jan 1978, Janata government demonetized Rs.1000, 5000, 10000 and people were given just 3 days to change their currency. We can assume considering the living standard of the people during that time, the bottom of the pyramid might not hugely impacted.
But, in 2016, the situation is different. Social media is being utilized to influence people, youth of the country is very active, political parties are using the event for their own political benefits, people with chunk of black many are busy finding out ways to turn it white, and common man just standing in the queues waiting for the money, suffering from cash crunch and hoping for the decision may result in wellness of the country.
If we summarize the effects of this decision, it may look like this.
|Positive Effects||Negative Effects|
|1||Inflation in short term and in medium term will be lower||Bottom of the pyramid is going to suffer a lot at least in short term/ He has to go through nightmare to change, exchange and utilize the available currency|
|2||Counterfeit and fake currency will be wiped out from the economy||Cash crunch in the market will harm SMEs|
|3||For medium term- banks will be strengthened to provide loans, hence SMEs and entrepreneurial activities can be motivated||In Short and medium term it will harm wedge workers. They will have to face lower employment rate, lower income and hence more suffering|
|4||It will make people accountable for their transactions bringing more transparency in banking & financial sector||Very small portion of the black money is in the form of currency. Chunk of black money is in the form of assets such as land, gold, diamonds and real estate, hence government’s next move should be focused on this|
|5||Government and RBI will have large amount of cash reserve (3 Lack Cr will not be returned to the bank) which can be used for infrastructure development and other economic activities||In short-medium term lower supply of the money in the money market is going to harm investments, hence $ will appreciate, stock markets will suffer and hence more loss for investors|
|6||Leaked currency for terrorism activities due to fake currency-cross border transactions or for drug mafias will be under control|
|7||It will be a strong signal for the people involved in the black money transactions by the government|
|8||More money supply for banks hence loans will become cheaper, the interest rate will be lower||This also implies, savings in the bank will not be a good investment option. It will return you less as compared to present.|
|9||More government spending on infrastructure will result into lowering down the real estate cost and hence it MAY help a middleclass to afford house in cities.|
|10||Digital transaction will go up, and also it will create more awareness about the digital transactions and its benefits. I will act as catalyst for Digital India||Bottom of the pyramid or common man is not yet educationally capable of understanding digital transactions. The section of the society will be away from this transition|
|11||Under the table cash transactions such as donations in education institutes, bribery to officials, spending of the political parties may be lowered and under control in future|
|12||Indian economy will more towards more organized, tax collection will rise|
If we look at the positive effects:
The big picture will look like this. 86 % of the total currency is in the form of 1000 and 500 Rs. Notes. Demonetizing the huge chunk of currency along with restricting withdrawals will result into bulk of currency inflow in to the banking system. Approximately 3 Lakh crore even will not return bank as it is in the form of black money and it will be wiped out from the market. This will be profit for RBI which can be transferred to the government later can be utilized to socio economic activities. Also, it will reduce interest rates making loans cheaper, lower inflation as lower purchasing power of the consumer as there is less money in the market. Digital India will take a boost. Real estate will become affordable. It will bring more transparency for banking and financial transactions. Tax collection will rise and hence more infrastructure development and more GDP growth in long term. This big picture may look like a glorifying.
Who will suffer the most? Still, today more than 60 percent of the population is living in rural India. Literacy rate 0f 68 percent and only 19 percent internet penetration reveals huge population is still away from the digital banking. They are still dependent of traditional banking. Also, these people are dependent on daily agricultural wages. Cash crunch will result into unemployment of such people resulting into drastic effect on their families.
Small scale industries, rural artifact businesses, daily wage earners, small traders, other laborers getting hampered drastically. Agricultural products prices being lowered creating lower earning for farmers (Beneficial for other sectors of the society-lowered inflation).
If we look at the rate of printing money, it will take minimum four months to restore the condition back to normal, at least near to the normal. But, during these 120 days, common man is one who is going to sacrifices a lot for this country hoping this decision will be beneficial for the nation. He will be the one who is at loss, go through pain but looking for the better results of this decision in future.
And hence, here it makes very critical for the government to manage this transition very very carefully. Results of this steps are dependent of the implementation and the management by the government. Certainly government has taken very strong step and shown courage for such a bold step, but it also comes with huge amount of risk.
Let’s hope for the best.