The term demonetisation means a process of removing a Currency from general usage or circulation. This is necessary whenever there is change in the national currency. The old unit of currency is replaced with the new currency unit. Since the Indian government had taken steps to remove the old notes of Rs.500 and Rs.1000, it would be more appropriate to call the move as `scrapping’ or `phasing out’ of currency notes.
The Fiscal Deficit plays an important role in the growth of a country’s economic development. Generally, fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising Money from capital markets by issuing different instruments like treasury bills and bonds.
The Indian economy is heavily dependent on Cash. Less than half of the population uses banking system for monetary transactions At present, people are more interested in preserving cash-on-hand so this has direct impact on the purchasing power for time being, but if we look at a bigger scenario in the long run this step will have positive side to the story.
Different affected sectors
The major sectors which are hit by demonetization are Real Estate, Gold, Automobiles and the traditional trade. The traditional trade has been hit hard, especially wholesalers and kirana stores where transactions are largely in cash.
As per a report prepared by one of the Rating Agency, developers and contractors who had already been struggling with the issue of huge inventory are now stuck with the problem of slow sales. As a result of this, the property prices are being reduced to drive sales. This is beneficial to the salaried consumers for whom purchasing a house was a distant dream due to its expensive nature.
However, the demonetisation move could prove to be an issue for those who have been looking for deals in the high-end or luxury housing segment. Due to demonetisation, a large amount of cash-in-circulation is being brought within the purview of the formal banking system through low-cost current account and savings account deposits. This is reducing the dependency of banks on higher cost borrowings. Going forward, this step will mainly affect the Real estate sector in a much evolved manner and increase the transparency and clean the entire system.
More and more people are going for digital banking and online purchases through debit cards and credit cards. Digital wallets have seen the major increase in users since the announcement of demonetization. This essentially represents that data security infrastructure along with customer-redressal mechanisms will have to be well thought of and the purview of IT laws for cyber crimes will have to be expanded to include mobile-wallet payment systems.
The cash flow in the government system is increasing. The rupee is becoming stronger.
Impact on black money
Only a small portion of black money is actually stored in the form of cash with half of the population. Usually, black income is kept in the form of assets like gold, land, buildings etc. Hence the amount of black money countered by demonetization depend upon the amount of black money held in the form of cash. But more than anything else, demonetization has had a big propaganda effect. The citizens of the country are now much convinced about the need to fight black income. Such a nationwide awareness and urge will encourage government to come out with even strong measures to curb black money and encourage people to pay tax.