Indian Money Demonetization and It's Impacts

Strategic Decision Making for County’s Economy

By Divy

Yesterday in an address to the nation India’s PM, Mr. Modi surprised the whole country by demonetizing INR 500 & 1000 rupee notes by the midnight. Old currency will be replaced by new 500 & 2000 rupee notes. Maine purpose for this action was to curtail the flow of counterfeit currency and black money in the economy thus hampering the parallel economy. The move was planned in such a way that people who are hiding huge pile of black money won’t be able to take any evasive measures. Though it won’t have much effect on stash of black money deposited in foreign banks but still will impact the corruption at domestic level. India is considered 3rd largest exporter of dirty money. Black money and counterfeit currency is also used in funding the terrorist activity in the country by enemies of the state.

As per Reserve Bank of India till March’16, 14 Trillion out of 16 Trillion worth of currency issued by the central bank was in denomination of INR 500 & INR 1,000. Which means only 2 Trillion of currency will be left in the country with demonetization of two highest currencies of the country. This decision will have huge ripple effect in the country some of them are listed as below:

• Heavy Deflation: Money earned through Illegal means and not taxed will be worthless now as people won’t be exchanging the currency due the fear of prosecution which would mean there will be a reduction in total money circulating the in economy leading to deflation. This in turn will increase the value of INR as total supply will go down but demand will remain intact.
• Overtime Inflation: There will be lot of cash finding the way to the bank deposits which will lead to easier lending and reduction interest rates. As more and more loans will be floated in the economy it will lead to increased money supply and thus inflation overtime. This deflation and subsequent inflation will balance out each other eventually.
•  Increase in cashless & digital money transactions at-least in urban India due to daily and weekly limits on withdrawal through banks and ATMs.
• Easier tracking of money being exchanged as exchange will only happen by producing valid government recognized IDs.
• Financial Intelligence Unit and Income Tax department will have information shared by the banks about exchange which will make exchange of black money difficult.
• Real Estate and Housing will be in reach of common man as this move will remove black money out of the real estate market and housing prices will witness a downward trend. This would attract both domestic and foreign investment in the country’s real estate.

Banks and ATM will be closed for a day to make the transition smooth and people will be able to exchange the old currency in banks by showing a valid government issued ID. There is also maximum cap on daily and weekly cash transactions to further control the flow of new currency in the economy.