Demonetization: Potential Impact on Economy and Finance

• Posted By Amritesh
• On November 20th, 2016
• Comments: one response

 

Demonetization of larger denomination notes (i.e Rs 500, Rs 1,000 to be precise) has taken the nation by storm, it is being talked about in the every nook and corner of the nation. Some are favouring the move while others are not too pleased with it. But at the end of it all, the truth is that Rs 500 and Rs 1,000 notes are no longer the legal tender and Individuals are better off exchanging the same from the Bank branches nearest to them. Masses have been impacted by the move but then any reform is bound to affect the common people. Rural population are bound to hit hard by such a move and many may question the timing of such a decision, but again there is no perfect time to implement reform measures and short term hardship should not undermine the long term gains. However, the impact of such a bold measure remains to be seen in the long run.

 

Urban population do have the means to deal with the crisis but Government will soon have to use all its machinery to reach the rural areas with inadequate facilities so that the poor and less privileged are not hard done by the decision.

 

Potential Impact of Demonetization

1.) Potential Cash Crisis in the Economy crippling the purchasing power of Individuals over a short term. Largely, driven by scepticism.

2.) Individuals forced to declare their undeclared wealth and pay taxes resulting in higher revenue for the Government which may be used for development of infrastructure and generating jobs.

3.) People are encouraged to use plastic money which the masses have been susceptible of using until now. As the figures show that only 1%-2% people use credit/debit cards and e-wallets for transactions.

4.) Transparency in the financial dealings and effective monitoring of cash flows in the economy.

5.) Widening the ambit of taxation and eradication of tax evasive practices.

Curb the parallel economy mushrooming with the aid of Black Money and Counterfeit notes.

 

Potential Impact on Economy

1.) Economy growth may witness sluggishness in the current and coming few quarters, but should do reasonably well in the long run.

2.) GDP growth expected to be adversely impacted by the demonetization in the short run. But the trend will reverse in the long run.

3.) Inflation expected to remain subdued as the demand and consumption may be impacted.

4.) Slack in Trade and moderation in prices of goods expected over a period of time.

5.) Technology to play an extensive role in the transformation of the economy.

6.) Government expenditure may reduce as more and more individuals will move to cashless transactions resulting in lesser requirement for currency notes. (It costs approximately Rs 2.50 to print Rs 500 note and Rs 3.20 to print Rs 1000 note, reduction in cash based transaction will lower the demand for currency notes.)

 

Potential Impact on Finance

1.) Transparency in Financial Dealings and efficient monitoring of fund movements will curb malpractices.

2.) Individuals will opt for Tax Planning over Tax Evasive measures.

3.) Boost to cashless transactions and moderation in the use of currency notes.

4.) Investments in the Financial Products and Real Estate may see potential rise in the long run as fund flows will be more streamlined.

Revenue in State coffers to increase resulting in more money being ushered in the development works.

5.) Widening of Tax regime will help in generating more revenue and at the same time will help Government to reduce the tax burden on the Salaried Class.

 

Emergence from Demonetization

1.) Going forward, Individuals expected to be more forthcoming in declaring their income and lawfully paying taxes on their earnings.

2.) Following demonetization Government needs to implement strict measures with aid of technology so that scope for parallel economy does not exist and tax evasion becomes impossible to a large extent.

3.) Creation of more jobs for the youths and simplification of Regulatory Compliance promoting ideal scenario for business.

4.) Restructuring of economy which will attract investors and promote growth.

5.) Curb the flow of illegal and counterfeit currency which would lend stability to the economy.

6.) Evolve an Ecosystem wherein, Rural as well as remotest location should be digitally connected in the coming years making it possible to communicate and provide prompt services based on requirements.

 

Goods and Services Tax (GST): All About GST

Income Tax Declaration Scheme: All You Need To Know

***The opinions expressed are entirely personal and not an endorsement.