Effects of demonetisation on Indian economy
The demonetization of Rs. 500 and Rs. 1000 bank notes, was a sudden and swift practice that took the nation by astonish. In a move that has been lauded majorly by most of the sections of society, Prime Minister Narendra Modi on a spontaneous live TV address to the Nation on November 8, announced that the notes of Rs. 500 and Rs. 1000 would be deemed invalid as legal tender from the midnight of November 9, 2016.
Cash Economy – The currency of the abovementioned denominations constitutes around 87 percent of the total value of aggregate value of currency in movement. Cash on hand comprise 3. 3 percent of household assets, higher than investments in Equities. Cash transactions also comprise a huge role in real estate, construction and informal, unorganized sectors like vegetable and fruit market. While the role of cash in real estate and gold is important, it is also very crucial for the unofficial markets for their daily sustenance.
GDP in short term – For a short period, the GDP is predictable to go down due to reduced consumer demand stemming from compromised cash flow.The impact on construction, gold and informal sectors can lead to a dip in the GDP. However, the impact is not going to be significant, as the demand will only be overdue and revenue will enter these streams once the situation is normalized. The short-term transitional impact can be outweighed by the long-term benefit for GDP growth, which has the potential to reach new heights.