Demonetisation and Its Effects

Demonetization was a process adopted by the the govt to eliminate many issue which have been challenging the governance since time immemorial like black money, funding for terrorism and counterfeiting of fake currency. By adopting such sudden and quick step of declaring Rs 500 and Rs 1000 notes as illegal, govt thought to eliminate these obstacles. Various short term, medium and long term advantages were expected out of this.

Demonetization, a drive to curb black money from the economy was partially successful and partially not. The brighter side of the coin of demonetization consists of:

1. DIGITIZATION: People of India responded quickly to the change and in a few days later various online metods like e wallet and m wallets, private players like Paytm, along with govt. systems like Rupay, BBPS,et Paytm were used frequently.
2. CURBING OF BLACK MONEY: The fact that Rs.1000 and Rs.500 notes were found floating in rivers and drains , shows the height to which black money was curbed.
3. INFLATION CHECKED: Inflation was checked as a huge amount of money was extracted out of the economy .
4. Property rates will nose dive which will be beneficial for the middle class and other migrants which enters and are not able to buy houses because of such high property prices.

Government has expected such things to happen but some of its expectations backfired like fake currencies have started to creep into the economy, which shows that the new currency security features have been compromised. Key reasons for the rise of fake currency are so many ;Poor border patrolling, which has led to the rise of fake currency smuggled from Pakistan and Bangladesh,Corruption among the public officials which has led to the easy distribution, storage and printing of fake currencieies,Easy access to cash and increasing the withdrawal limits,people involved in printing fake currency got enough time after 8th nov to start printing again,political funding requires huge amount of money so in such case, fake currency can easily enter into circulation,funds from various terror activities like naxalism,terrorism or cross border smuggling ,drug or human trafficking across the borders,funding of various NGO's, money from tax havens or P-notes and Lack of awarness about the security features of the new currency among the masses.

Poor people were used by the rich to deposit money in their accounts, thus, the rich avoided penalty and were able to retain their undeclared income.there was UNCHECKED OVERSEAS BLACK MONEY because the Black money kept in foreign tax havens, in the form of gold couldn't be tapped. Moreover there is a big setback for the international standing of the Indian economy. If we look at the farm sector in rural areas, we see that farmers generally use cash in most of their dealings and India is also largely a cash economy. The cash transactions in this rural economy are far higher than the total number of electronic transactions done on a daily basis.moreover, in tribal areas the poor people through middlemen are getting their currencies exchanged at higher rates due to information unavailibity and helplessness

Demotisation though has become a hot issue in debate with regards to effect on domestic economy. However, in current era of globalization, domestic policies of a nation has domino effect on other economies .

Nepal – Most affected: Transacts daily with India in INR for its necessary supplies, and shortage of new currency has caused shortage of essential commodities and affected Indo-Nepal trade .Also needs INR for international exchange to other currencies, but have banned all financial transactions in Indian rupees and termed new notes as “unauthorised and illegal”. Lack of reliable information -> Nepal Government is not sure of the amount of INR currency its citizens hold (esp. in informal areas) and to exchange them would be an ardent task in short term (As per Nepali Rashtra Bank ~ INR 35 mn in 500 and 1000 rupee notes are present within its formal financial network. Security concerns were also there as RBI was reluctant to freely provide currency due to possibility of their unscrupulous usage (terrorism – used by ISI, black money generation)

Bhutan – Not much affected. Bhutanese currency is pegged with Indian currency at 1:1, and Indian currency is legally tradable in Bhutan, and Bhutanese Central Bank offers currency at least hassle without much hoarding (also better synergy with RBI, Govt.), still short term shortage would occur. Decrease in number of religious travelers to India to visit Bodh Gaya and monasteries, also also loss of revenue from tourism to Bhutan Govt. due to less visists by Indian travelers

Trouble for Bangladesh. Sri Lanka and Myanmar: Allows use of rupee as a parallel currency because of their trust in India’s financial robustness and policy stability, but this move has rattled them.It have affected small and marginal traders (border haats) along the borders the most who generally deals in INR Cash. Bangladeshis, SL visiting India for medical purposes were facing major problems to arrange INR funds, and are stuck with high denomination older notes.It had hit the extremists badly esecially in Myanmar as the currency they have hoarded from so long has become just a piece of paper with zero value.

Pakistan - Blow to its Na-pak iraade : As it has Reduced smuggling of goods/weapons and terrorist activity in Kashmir region owing to non-availability of new currency to fund their heinous motives and also made the fake-note printing press maintained by ISI worthless and hence terror financing got a huge set back.

A marginal currency appreciation owing to weeding out of black money, fake money out of formal system to some extent would further increase the cost of imported goods from India. Also it would lead a push towards gold in these economies (safe-haven)

In short term, demonetization would definitely affect the broader economy of nieghbourhood nations to some extent, and the move is also seen as against the principles of ‘Neighbourhood First’ policy. Also, Govt. in these nations would now would be cautious regarding freely trading in INR, and instead may push for use of their own currencies.

One of the main objectives behind the demonitisation move was to counter the menace of fake currency which was plaguing the country's economy and was used for terror financing. Key steps taken to address the issue:

1. Enhance knowledge about the security features of the notes among the masses to check the flow of fake currency.
2. Stringent border patrolling
3. Punitive measures to be taken with corrupt officials, smugglers etc.

The new issued currency have multiple security features like bleed lines, raised printing etc. Tackling fake currency requires more awareness among the users, stringent security checks and a push towards digital economy and hence Steps like Digi Dhan and Grahak Kalyan Yojna are strategic steps taken in the direction to promote digital and cashless economy from a cash intensive economy. Since cash availability was limited hence many businesses, traders, shop keepers started accepting cheques, payment through e-wallet and credit/debit cards. People were educated to learn technology for transactions. This could happen as people were not having any other option left.

As we all know that it was a liquidity shock , thus; created a situation where lack of currency jams consumption, investment, production, growth, employment etc. The intensity of demonetization effects depends upon the liquidity shocks and their duration in the economy. In the long run, a move away from the use of cash is the surest way of curbing the black economy. Less cash economy can happen with shift in payment patterns. There was certainly evidence that the number of electronic transactions went up. But after the money supply started coming back, those get reduced. Whether Indians have changed the way they make payments is still questionable. Undoubtedly, the steps taken have widely affected our economy world bank, IMF, ADB and and many agencies predicted decline in production, so do in exports. foreign investors become reluctant to invest for a while. It is true that the reforms were taken at a crucial time when Indian economy was witnessing one of the highest growth rates and after demonetization it declined to nearby 6%.But,these are only aftershocks of these steps, where later in the long run these reforms will be seen as milestones in the growth of Indian economy.