It's been 50 days of demonetisation and it has impacted the Indian economy!
Demonetisation is a cleaning exercise that will provide several good things to the economy. At the same time, it has created unavoidable income and welfare losses to the poor sections of the society who get income based on their daily work and to those who do not have the digital transaction culture.
* Short term - Overall economic activity will be dampened.
* Long term - Unmeasurable benefits of having more transparency and reduced volume of
black money activities.
Let's see its impact on the Indian economy:-
(a) It acts as a liquidity shock that disturbs economic activities.
(b) People are still not able to get sufficient volume of popular denomination, especially Rs.500/-
which formed 49% of the previous currency supply in terms of value. Higher the time required
to supply Rs.500/- notes, higher will be the duration of the liquidity crunch. This situation
is likely to prevail till the requirement of notes is met, probably, till Mar '17.
(c) The daily wage earners, other labourers and small traders lose income in the absence of liquid
cash and cash stringency will compel firms to reduce labour costs thereby reducing income to
the poor working class. There will also be a 'trickle up' effect of the liquidity crunch to the
higher income people, with time.
(d) Consumption has been hit and the cascading effects could be:-
low consumption - low production - low employment - low growth - low tax revenue!
(e) There is a loss of growth momentum which will reduce India's GDP growth, albeit, temporarily.
(f) It has impacted upon bank deposits and interest rates.
(g) Only a small portion of black money is actually stored in cash. Usually, it's stored in the form
of gold, land and buildings. However, it has had a propaganda effect. People are now convinced
that the menace must be fought.
(h) The biggest impact has been on counterfeit currency whose circulation has been brought under
check.
Tailpiece.
Let's wait for the PM's new year's eve announcements and I'm sure there would be enough reasons to cheer.
Demonetisation is a cleaning exercise that will provide several good things to the economy. At the same time, it has created unavoidable income and welfare losses to the poor sections of the society who get income based on their daily work and to those who do not have the digital transaction culture.
* Short term - Overall economic activity will be dampened.
* Long term - Unmeasurable benefits of having more transparency and reduced volume of
black money activities.
Let's see its impact on the Indian economy:-
(a) It acts as a liquidity shock that disturbs economic activities.
(b) People are still not able to get sufficient volume of popular denomination, especially Rs.500/-
which formed 49% of the previous currency supply in terms of value. Higher the time required
to supply Rs.500/- notes, higher will be the duration of the liquidity crunch. This situation
is likely to prevail till the requirement of notes is met, probably, till Mar '17.
(c) The daily wage earners, other labourers and small traders lose income in the absence of liquid
cash and cash stringency will compel firms to reduce labour costs thereby reducing income to
the poor working class. There will also be a 'trickle up' effect of the liquidity crunch to the
higher income people, with time.
(d) Consumption has been hit and the cascading effects could be:-
low consumption - low production - low employment - low growth - low tax revenue!
(e) There is a loss of growth momentum which will reduce India's GDP growth, albeit, temporarily.
(f) It has impacted upon bank deposits and interest rates.
(g) Only a small portion of black money is actually stored in cash. Usually, it's stored in the form
of gold, land and buildings. However, it has had a propaganda effect. People are now convinced
that the menace must be fought.
(h) The biggest impact has been on counterfeit currency whose circulation has been brought under
check.
Tailpiece.
Let's wait for the PM's new year's eve announcements and I'm sure there would be enough reasons to cheer.
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