Indian Economy revive from effects of Demonetization

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Demonetization has been implemented thrice in India - in 1946, 1978 and in 2016. 

In 1946, the currency note of Rs.1,000/- and Rs.10,000/-were removed from circulation.The ban did not have much impact, as the currency of higher denomination was not accessible to common people. However, both the notes were reintroduced in 1954 with an additional  introduction of Rs.5,000/- currency.

The second currency ban came in 1978 when currencies of  Rs.1,000, Rs.5,000/- and Rs.10,000/- were taken out of circulation. The sole aim was to curb black money generation in the country. It didn't have much effect on the people and effected only the privilege few while the ban in 2016 has shaken the whole country. 

In 2016, the objectives and the outcomes of the Demonetization were: 

   -To plug financing of Terrorists.

   -To help unearth black money - will expand the fiscal space of the Government.

   -To help reduce interest rates in the banking system.

   - To help formalize India's informal economy. It will reduce the extent of cash            transactions and help in creation of less-cash economy. Govt. offered several            incentives to induce people to use digital transactions. 

Demonetization is a generations' memorable experience and is going to be one of the economic events of our time. It effect the the economy through liquidity side.  It has been praised and criticized on various grounds.In the short run, there have been problems related to liquidity crunch, loss of growth momentum, unemployment and a temporary halt to major economic activities. The long term effects of demonetization are yet to ascertained. It is expected that it can improve the India economy in the long run by increasing tax compliance and financial inclusion. It can boost the GDP by increasing the availability of funds for lending and also by reducing transaction costs if the economy moves to digital modes of payment.    

The possible benefits are as follows-

1. Increased savings. 

2. Lower lending rates.

3. Curbing anti-social activities, like Hawala rackets, fake currency.

4. Reducing counterfeit currency notes.

5. Better economy.

Demonetization as a cleaning exercise may produce several good things in the economy. At the same time, it created unavoidable income and welfare losses to the poor sections of the society who get income based on their daily work and those who doesn't have the digital transaction culture. 

Overall economic activities will be dampened in the short term. But the unmeasurable benefits of having more transparency and reduced volume of black money activities can be pointed as long term benefits. 


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