Impact of Demonetization on Indian Economy

CHITKARA UNIVERSITY DOCTORAL CONSORTIUM-2017

Impact Of Demonetization On Indian Economy

Dr.M.K Kulshreshtha,Sugandha Sachdeva

                                               GGSCMT,Gidderbaha,152101,India

GGSCMT,Gidderbaha,152101,India

Introduction

Demonetization is when currency notes of particular denomination ceased under legal authority. This term has become household name since 8th November 2016 when government pilled the Rs 500 & Rs 1000 notes out of circulation. In this paper short term and medium term impact of demonetization will be covered along with the brief of how business in India will be affected by demonetization. In this research paper the study of Economics Time, Forbes will be taken in to consideration.

Extended Introduction

Demonetization is the generations’ memorable experience and is going to be one of the         economic events of the time. Its impact to be felt on every Indian citizen. Demonetization will affect the liquidity side of the economy .Basically this demonetization is the liquidity shock  as intermediate denominations 500 & 1000 notes are being ceased and  due to this it leads to the lack of currencies, investments, production of goods, employment etc. In this research paper following points will be covered:

What will be the long/short term impacts of demonetization on economy?

 How demonetization will affect the business in India in current  year 2017?

. Liquidity crunch

 Impact on bank deposits & interests

Impact on black money

1.3Section Headings

General Impact

1.1Impact on real sector

1.2Impact on parallel economy

1.3 Impact on demand

1.4 Impact on prices

Small Term and Medium Term Impacts on Economy.

Demonetization affect on business in 2017.

Review of Literature

At the stroke of the hour midnight of 8th November 2016,India lost 86% o its monetary base.In the single move the government has attempted to tackle all the three issues affecting the economy i.e. a parallel economy,counterfeit currency and terror financing .The idea of demonetization is good but has to take consideration black money in the form of gold ,land ,property etc because only 4 % constitutes black money in the cash form.Small farmers ,sellers,merchants ,daily wage laborers etc are suffering.Demonetization step was taken to tackle black money and corruption,if time would have been given then this step might not be successful in controlling black money.Demonetization  represents much more than destabilization as critics argue  that it has struck badly the economic activities of the market.What are the pros & cons of demonetization is yet in progress to be analyzed time to time .Although demonetization has supporters like industrialists named Ratan tata,Mukesh ambani, etc favor the move but at the same time economists like Amartya Sen ,Paul krugman etc  are being critical.The net result which is being debated and yet continuing is  fall in GDP from 0.5% to 2%.

     Modi took a bold and visionary step to combat the black money in the economy ,and implementation of this step is perfect to some extent.Following are the highlights in India for the year 2016

GDP hikes up-to 7%

FDI went up high

Initiatives  like Make in India bear positive fruits

Biggest wild card was DEMONETIZATION

Theoretical Framework

                    IMPACT OF DEMONETIZATION ON INDIAN ECONOMY

Under this heading following points will be focused as per the available data for past few months because yet the results are to analyses as time progresses.

Lets put light upon the emerging points one by one:

3.1General Impact:

This demonetization measure had significant  and immediate impact on the Indian economy.This measure expected to result in long term impact on certain industries and sectors.Although this step has put negative impact on liquidity state of business but that to for short term period as due to circulation of new currency notes will cover up this negative effect.Due to decrease in the liquidity has given the birth to the other modes of transactions like e-wallets ,net banking etc means going towards digital mode.But on the whole this measure leads to the increased deposits in the banks  and increase in the financial savings.

3.1(a)Impact on Real Estate Sector

Due to demonetization it is expected that real estate sector will be adversely affected due to decline of informal funding sources.Resale transaction will decline and will result in the lower demand of resale properties.Luxury property rates are expected to get lower due to few buyers availability in the market .

3.1(b)Impact on Parallel economy

The denomination of 500& 1000 currency notes and emergence of new 500 &2000 currency notes will leads to the removal of black money  as owners will not be able to deposit entire into the banks due to limits being attached for deposits .Another impact was temporary stall in the circulation of currency  and at least there will be curb for the funding of anti social elements like smuggling ,terrorism etc.

3.1(c)Impact on Demand

The overall demand in every sector will be affected adversely.The sectors being affected are:

Consumer Goods

Real estate and property

Gold and luxury goods

Automobiles

As significant cash transactions are involved in these sectors so to denomination these ares will face moderate fluctuations in demand from consumer side.

3.1(d)Impact on Prices

Price sector will get lowered due to affect on the demand sector in the market

Consumer Goods:Prices are expected to fall down due to stall of cash but other modes of payments i.e use of cards ,cheque etc will be enhanced

Along with this  other sections in the market i.e agriculture sector , small traders,political parties ,household ,SME ,retail ,professionals etc will be affected.

3.2SMALL TERM & MEDIUM TERM IMPACTS ON THE ECONOMY

3.2(a)Let’s discuss the Short term impact of demonetization on economy

As demonetization has resulted in removal of 86%of currency and hampers the circulation of money as well .As income and consumption are two intrinsic factors related to each other and it will affect both the factors of the economy.As maximum sector in the economy predominantly works on cash so it will affect every individual.