The haul benefits for the economy. The smothering of

The move by
the government to demonetize Rs.500 and Rs.1000 notes by replacing them with
new Rs.500 and Rs.2000 notes has taken the country with surprise. The move by
the government is to tackle the menace of black money, corruption, terror
funding and fake currency. From a market point of view, this is an
exceptionally welcome move by the administration and which has taken the black
money hoarders with surprise. The aggregate value of old Rs.500 and Rs.1000
notes in the circulation is to the tune of Rs.14.2 trillion, which is around
85% of the total value of currency in circulation. This implies the total cash
has to now pass though the formal banking channels to get legitimacy. The World
Bank in July, 2010 assessed the measure of the shadow economy for India at
20.7% of the Gross Domestic Product (GDP) in 1999 and ascending to 23.2% of
every 2007. Expecting that this figure has not ascended from that point forward
and that the cash component of the shadow economy is also proportional (it
could be higher), the assessed unaccounted value of the currency could be to
the tune of Rs.3.3 trillion. Presently, post the declaration of demonetization
by the administration this cash would need to be either represented by paying
the relevant taxes and penalties or would get extinguished.

The
positive macro benefits of this move by the government

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This move by
the administration is probably going to have long haul benefits for the
economy. The smothering of the significant extent of unaccounted money would
decrease from the liabilities of the administration and would add to its
finances. This can have very strong implication as the government would get
money to spend without borrowing from the market. This would imply that while
financing costs can be low, the administration spending on large infrastructure
projects would kickstart capex cycle and push economic growth higher in the
medium term. The move is additionally prone to have a propensity changing
effect in the Indian population and there could be increased belief of keeping cash
in the banks rather than reserved at home and utilize formal banking channels
for their spending needs. With a large part of the cash moving through the
banking channels, the banking sector is likely to be flush with funds in the
near term and this would help them reduce cost of funds for such period. Also
with more money being kept in the banking channel, some of these low cost
deposits may be sticky and improve the medium to long term Current Account and
Savings Account (CASA) ratio of the banks. Another component of the
demonetization would be diminishment in cash transactions in real estate. This
is probably going to reduce the land costs and make it affordable to some
degree. This might be obvious more in the rural belt, where numerous non-farming
entities buy farmland, not for cultivating but rather for cash hoarding reason.
The demonitisation and consequent reduction in shadow economy would bring the
demand for such farm lands down. This move is likely to lead to better tax
compliance, raise the Tax to GDP ratio and improved tax collection. This could
lead to lower borrowing and better fiscal management. Also with lower cash
transactions in the near term, inflation may see downtrend in the near term.
Also with higher tax to GDP ratio, the government may also get enough headroom
to reduce the income tax rates, which can lead to higher disposable income with
people and can improve consumption demand in the medium to long term.

However
there could be near term challenges

In the near
term, the decreased capacity of the unorganized sector to deal in real money
would affect the demand Consumption items which had large element of cash
dealing involved may see lower demand. Real estate and allied sectors may see
near term to medium term negative impact. This may also lead to corporate
earnings getting impacted in Q3FY17, as a large part of the old currency gets
extinguished and takes time for fresh money to come into circulation.

Impact on GDP and economy

The Indian Economy which was labelled as the ” fastest growing major economy ”
in the world and the “main brilliant spot” among Emerging Markets
appears to have backed off even before the most recent “stun
treatment” of “demonetization”. The as of late discharged
development figures from the Central Statistical Office, indications at a lull
in the Indian economy notwithstanding amid the quarter before demonetization
happened.

 

India’s GDP which developed at 7.6% in FY 2015-16 is
probably going to back off by 0.5% to 1.5% according to reports of different
offices. This is because of less accessibility of trade out money serious
divisions like assembling and land. Indeed, even the car business which was
becoming quickly before has seen a compression in the October-December quarter
of 2016. Acquiring energy of customers has been contrarily influenced because
of money not being promptly accessible.

 

Indian economy is to a great extent money driven with over
90% exchanges occurring in real money and advanced exchanges representing only
the rest of the 10 percent.

 

Banks have likewise been concentrating on the single
undertaking of store and withdrawals with the outcome that their center
capacity of issuing advances has been antagonistically influenced. Likewise
present record clients, who are to a great extent entrepreneurs, require a lot
of money at short notice have not possessed the capacity to get to money and
credit attributable to confinements on withdrawals and powerlessness of banks
to concentrate on the assignment of issuing advances.

 

Additionally since customer request has hindered and subsequently
modern creation has declined, business age has been antagonistically affected
by the money demonetization drive. Since the assembling area which represents
the most astounding work of gifted and semi-talented workers, is seeing log jam
underway; less occupations are being made as well as occurring at a higher
rate.

 

While this move by the Indian Government will kill the fake
cash, its effect on the dark economy and defilement is very bantered about.
While in separation demonetization won’t not be compelling in contracting the
dark economy over the long haul, it will acquire the majority of the cash once
more into the framework from where following and following should be possible
no sweat. Additionally moves by the administration like not permitting high
measure of money costs as an assessment deductible cost is relied upon to build
the expense income of the legislature.

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