Demonetisation of Indian Currency

Demonetisation of the Indian currency was a surgical strike against black economy, which was initiated with the Prime Minister Narendra Modi’s announcement that RBI was cancelling the legal tender of high denomination currency notes of Rs 500 and Rs 1,000. An expected hullaballoo followed the announcement with people getting restless about the second demonetization drive (the first demonetisation was done in 1978) by the Government. Let us observe the effects of this decision.

Demonetisation | The after effects

Demonetisation of Indian Currency

  • Legal cash with people will see the vault of the banks, which will increase the lending activity of banks. The banking sector which was scrambled by the issue of NPAs (Non-Performing Assets) might get a temporary relief.
  • Interest rates may come down due to surge in deposits which would make credit cheap for the businesses to expand and flourish.
  • Black money got a shot in the foot with the hidden cash becoming obsolete. Transparency might follow the game now.
  • People from the poor and middle income group would rejoice because of sinking of prices of real estate sector and higher education (the two harbingers of black economy).
  • Organisations operating in the field of cashless economy such as payment banks and the UPI (Unified Payment Interface) would get a boost from this pragmatic move.
  • Appreciation of rupee against the foreign currency basket can also be anticipated which would bring down inflation in long terms giving relief to the poor and middle income population.
  • Initial transition of black money into gold purchases have also paved the way for the success of Government’s ‘Gold Monetization Schemes’.
  • Due to lower value of currency available in the market, businesses would be forced to shift towards a cashless economy to prevent hassles of currency maintenance.
  • Internal security of the nation would get a boost with the funds cycling across the nation to propagate terror operations, smuggling, drug trafficking, human trafficking etc getting obsolete with the dawn of the day.
  • The issue of counterfeit currency causing huge loss to the exchequer would be resolved with this one big solution.

Demonetisation | The new set of Challenges

  • Government should ensure smooth transition towards the new currency with minimisation of volatility in the circulation of currency.
  • Income Tax Department needs to keep a close watch over the cash deposits above Rs 2.5 lakhs with adequate safeguards in place to track the unaccounted wealth.
  • The economy would transit swiftly to a cashless economy; therefore, an adequate IT Infrastructure should be in place to ensure security of transactions.
  • In both short and medium terms, the real estate sector would suffer from reduction in market prices and the gems and jewellery sector getting an increase in prices, due to the uncovering of the parallel economy and demand-supply mismatches respectively. SEBI and RBI should work in tandem to keep close watch on this phenomenon too.
  • RBI would need to bring frequent revisions to its monetary policy to get itself in sync with the currency fluctuations which may otherwise have inflationary repercussions.

The government’s move is tantamount to the fact that a strong political will and good intentions can unearth even the decade old secrets. While the intent is clear, the implementation and long term impact is yet to be seen. It is laudable that if the Government wants to keep a secret, it really can, with some people calling it ‘Pokhran-3’.

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Raj Malhotra IAS Study Group.

Comments ( 1 )
  1. rk

    Of the four forms of blackmoney, i.e. Indian rupees, foreign currency, gold and jewellery and property INR is most likely to lose value over time (for example, due to inflation). The remaining three are known to appreciate in value, so why would anyone keep the bulk of their black money in Indian rupees? cash is reportedly the least preferred form of holding ‘black money’.

    If the government believes that black money is held predominantly in the form of notes of large denomination (Rs. 500 and Rs. 1,000), why introduce a new note of a higher denomination Rs. 2,000 note

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