Demonetization & Its Effects- Cash Is No More A King!
What Is Demonetization?
When a currency note of a particular denomination ceases to be a legal tender it is termed as demonetization. But since our government is replacing the old Rs 500 notes with newer ones and doing away with the Rs 1,000 notes, it would be more appropriate to call the move as `scrapping' or `phasing out' of certain currency notes.
What Has The Government Done?
Prime Minster Narendra Modi's decision to scrap high value notes of Rs 500 and Rs 1,000 has created a shortage of cash in the system, leading to a lot of discomfort for the general public and businesses. Also, since there is a shortage of newly printed Rs 500 and Rs 2,000 notes, the situation has worsened. The move has also led to a shortage of lower denomination notes such as Rs 100 and Rs 50 that are still legal tender, as people have taken to conserving whatever cash they have in hand.
How Will It Impact The Economy?
Since our economy is heavily dependent on cash, as only less than half the population uses banking system for monetary transactions, demonetization has hit trade and consumption hard. With people scrambling for cash to pay for goods and services, the move is likely to take a big toll on the country's growth and output during the current fiscal. Consumption makes up for around 56% of India's GDP , hence, a drop in spending will pull down growth. The current step could also lead to behavioral changes in households' savings and their consumption pattern, say economists.
Benefits Of Demonetization
Source:UTI & economictimes.indiatimes.com
When a currency note of a particular denomination ceases to be a legal tender it is termed as demonetization. But since our government is replacing the old Rs 500 notes with newer ones and doing away with the Rs 1,000 notes, it would be more appropriate to call the move as `scrapping' or `phasing out' of certain currency notes.
What Has The Government Done?
Prime Minster Narendra Modi's decision to scrap high value notes of Rs 500 and Rs 1,000 has created a shortage of cash in the system, leading to a lot of discomfort for the general public and businesses. Also, since there is a shortage of newly printed Rs 500 and Rs 2,000 notes, the situation has worsened. The move has also led to a shortage of lower denomination notes such as Rs 100 and Rs 50 that are still legal tender, as people have taken to conserving whatever cash they have in hand.
How Will It Impact The Economy?
Since our economy is heavily dependent on cash, as only less than half the population uses banking system for monetary transactions, demonetization has hit trade and consumption hard. With people scrambling for cash to pay for goods and services, the move is likely to take a big toll on the country's growth and output during the current fiscal. Consumption makes up for around 56% of India's GDP , hence, a drop in spending will pull down growth. The current step could also lead to behavioral changes in households' savings and their consumption pattern, say economists.
Benefits Of Demonetization
- Help reduce corruption & black money menace that would improve business sentiment and ease of doing business
- Help broaden tax compliance sustainably & increase tax collection kitty that may lead to lowering tax rates. While along with GST, it would further help improve the TAX to GDP ratio
- Help to have better control over money laundering and counterfeit currency problem to help lower inflation
- Help to counter menace of financing of terrorism
- Help limit future black money creation and give boost to overall business confidence
- Help achieve higher financial inclusion
- Help to get unaccounted black money to the government kitty that can be channelized to reduce fiscal deficit or for any development projects
- This is a structural reform that would see its positive impact on the Indian economy in the longer-run. Thus invest in equity funds with minimum 5-7 years investment horizon
- Invest in equity funds that are sector agnostic
- Markets may see certain short-term correction due to the US election results and demonetization of Rs.500 & Rs.1000 note thus invest in a staggered manner
- Do not try to time the market, invest regularly by doing SIPs to create long term wealth
- Don’t keep money idle in savings bank account for your short-term liquidity needs, rather invest in liquid schemes and earn potentially better returns
Source:UTI & economictimes.indiatimes.com