A Simple Note on Aftermath of Demonetization

On the night of November 8, 2016, Prime Minister Narendra Modi announced that Rs 500 and Rs 1,000 currency notes — 86 per cent of all currency notes in circulation in value — would no longer be treated as a legal tender.
Demonetization is an act of the government which eliminates the legal tender status of a currency unit in circulation. All the currencies issued by RBI have often been used as a monetary tender because the value they carry is promised by RBI and once the worth has been demonetised/recalled/revoked, the currency note cannot be used. 

Globally, the central banks follow a practice wherein older currency notes are recalled and new currency notes with enhanced security measures are issued to overcome the threat of counterfeit currency. 

Causes of Demonetization

As stated above, the very basis of implementing demonetization is typically to curb all the malpractices happening within the world and bring forward a fair and equal economy. The causes of such an extreme and sudden act in the economy can be as follows:
1. To tackle the menace of black money and counterfeit currency.
2. To manoeuvre towards cashless transactions.
3. To counterbalance the present economic condition.
4. To regulate situations such as inflation and to boost the economy.

Impact

The main impact of demonetization is on the households and the banking sector.  

Households have to submit all of their cash in the form of the ceased legal tender and the banking sector has the burden of building the premises for all of this to happen. 

All the sectors of the economy witness changes in their working, which sometimes do and sometimes do not turn out to work in their favour. 

We will study the negative and positive effects of this financial decision sector-wise.

1. Positive Effects of Demonetization

The positive effects of demonetization have been mainly focused on the long-term achievement of certain goals. The following are certain examples that explain the aftermath of demonetization. 

• Black Money Identification and Elimination

  Black money accumulation impacts a country’s economy negatively. Demonetization helps in identifying where the black money is stored and assists in eliminating the business functioning on black money, as well as destroying the savings of the people in the form of black money, thus having a positive impact on the economy.

• Financial Institutions or Banks

  Demonetization has a positive impact on the banking industry significantly. It infuses more orderliness into the banking system, which helps in easy and fluent management of such institutions. The economy moves towards cashless transactions as there is a lack of cash in the market which would mean better access to credit and revamping of financial operations of the economy.

• Online Banking

  Demonetization gives a major push to e-wallets and online payment methods like GPay, PayTM, and the Unified Payment Interface (UPI), an inter-operable system launched by the Reserve Bank of India and the National Payment Corporation of India (NPCI), which reaches out to every single person and helps them get into the online banking and payment system.

• Government
  Every government has to make sure that the economy runs in an organised manner and multiplies with the help of the credit system. Demonetization reduces liability for the government by decreasing the risk and liability of liquid currency floating in the economy. Handling and overseeing online transactions is far easier than taking care of the cash floating in the economy. Hence, demonetization reduces this liability by removing certain notes from floating unnecessarily in the economy.

2. Negative Impact of Demonetization

The negative impact of demonetisation is visible in the economy as it impacts the sectors in the short run massively but ultimately helps them in the long run. The following are certain sectors that have been adversely impacted due to the decision of demonetization. 

• Impact on GDP

  The GDP decreases as the circulation of currency is less because of the cash crunch in the country. The GDP formation gets impacted by this measure, with a reduction in the consumption demand.

• Impact on Real Estate Sector

  Demonetization smashed the real estate market and resulted in more than a 50 per cent drop down for a long period. While the short-term impact is negative, experts hope that rate cuts boost home sales.

• Impact on Tourism

  The cash crunch hits the tourism sector badly. It is very difficult for people to get money from banks and ATMs as there is a lack of availability of cash. The travel and hospitality industries are facing a tough time as a result.

• Impact on FMCG

  Discretionary consumption sees some impact as consumers with a liquidity crunch may become reluctant to spend.

• Impact on Automobiles

  Two-wheeler sales in the rural market have come down as the majority of the payments in the rural areas are routed through cash transactions. The luxury car segment also sees a slowdown as it is largely accounted for huge sums of unknown money, usually known as black money.

If the measure of demonetization is implemented efficiently, then a higher collection of taxes, higher investments in the market, price corrections, improvement of India in some of the international rankings, prevention of corruption practices, etc. can be expected. These are some of the reasons why people applaud this measure of the government, although they are facing many difficulties.

Conclusion  

Since the past century, governments across the world have been taking the decision of demonetization. However, despite the differences in the currencies demonetised, the objectives of removing black money, stopping illegal activities, and bringing currency into the mainstream largely remain the same. Though the decision might not have been very convenient to the general population, it had the national interest and economic growth at its core. In the long run, both positive and negative impact will be seen on the economy and its sectors, but the positive effects of demonetization may outweigh the negative impact.
After the demonetization of certain currencies, some sectors were not majorly affected, like Pharma, FMCG, Education, Agriculture, Hospitality and Telecommunication from an equity market-oriented approach. This move is positive for the Banking and Infrastructure sector in the medium to long term but results in negative effects for Real Estate, Customer durables, and Luxury items in the near to medium term. However, as stated before, in the long term, it is going to have the nation’s best interest in mind and make the economy stronger.