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India is a country where most of the transactions are cash-based and preferred by many. This preference has led to a situation of high demand for currency. In these transactions, the currency used are of high denominations i.e. INR 1000 or INR 500 notes. All of a sudden these currency notes have been demonetised, making them no more valid legal tender. This took place on the 8th of November 2016 at 8 p.m. when it was announced by the Prime Minister in his address to the nation.
Implications of Demonetization
The implications of demonetization have been calculated, and it’s effects are felt, both socially & economically. In the immediate economic consequences; production slow down, less number of goods are offered and less demand for goods are expected. As far as the social consequences are concerned, the public at large are finding it hard to carry out daily transactions, and have become slightly uncomfortable, as they have to either deposit their cash or exchange the same.
Effect on Economy
The short-term problems were expected when the announcement took place, but the benefits, in the long run, are expected to outweigh the other problems. In the short run, cash shortages are expected and economy shall show a downward trend. This is expected as the outflow of cash from the system shall be more compared to the inflow.
But in the long run, when the market gets stabilised, the balance is struck between inflows and outflows. The reverse economy, in the long run, expects more of outflows as banks, who work on commercial terms are expected to disburse more loans. In purely economic terms, interest rates have to decrease because of large cash balances. The public at large, as well as investors, are expected to utilise this opportunity for increasing the investments. Real estate being the biggest investment sector, it is expected that the number of people who apply for home loans in the near future, is going to increase. For the public in general, loans are taken for assets purchase and long-term assets purchase are housing/ land investments. Taking home loans at lesser interest shall reap benefits both in EMI amounts as well as the tenure of investments. In a similar manner, organisations take loans for capital investments for expansion of existing or new business set up. In both the cases, employment is generated thereby expanding the flow of money.
The public deposits increase shall mean flushing of money from circulation. If money is taken out, people’s purchasing capacity shall decrease in the short run, but if more opportunities are generated, which is expected, the flow of income is going to increase. Then, it is expected that the demand for goods and services is going to go up. Once the circular flow takes place, the economy is bound to boom. The time taken for this boom to be visible purely depends on the investments flow. If we go by the capital markets, until now there has been no crash in the stock markets, indicating that the markets are stable. Going by this logic, it is expected that the retail markets are to recover very soon.
From the above it is expected that demonetization negative effects are short lived & positive effects shall be long lived.
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