Everyone in India and abroad was surprised by the government's announcement to exchange existing currency notes of Rs. 500 and Rs.1, 000, which accounts for nearly 85% of the currency in use. People are waiting long hours outside ATMs/ banks, and facing difficulties while trying to exchange existing currency and withdrawing new currency notes. The general public reaction to the Demonetization Drive has been largely positive but there are a couple of disappointed people also. Some consider it to be an excellent move, actually a master plan, which might help in curbing corruption within the future; others are anxious about the impact such an outsized scale transition would wear everyday lives of citizens thanks to lacking financial liquidity.
Demonetization is an act of stripping a currency of its status as tender. This move is typically taken when a country’s old currency is replaced with a replacement one. This is one of the boldest move by the Prime Minister and other people barely had hours to react. However, this isn’t the primary time this went on. In 1946, when the Federal Reserve Bank of India demonetized the then under-circulation Rs 1,000 and Rs 10,000 currency notes. Higher denomination banknotes of Rs 1,000, Rs 5,000 and Rs 10,000 were introduced eight years later within the year 1954. These very notes were also demonetized by the Morarji Desai Government in 1978.
Advantages of Demonetization:
Increases Deposit Base & Savings:
Currency demonetization increases deposit base and savings as individuals will deposit more and store less physical currency reception.
Improves Monetary Transmission & Reduces Lending Rates:
With currency demonetization, there'll be a movement of currency from individuals to banks and Financial Institutions. The increase in deposit rates would put all of this money into circulation. The value of funds will reduce for Banks, and therefore the overall lending rates for various trade, business and commerce activities would scale back.
With improved monetary transmission, there'll be space for a much more liberal monetary policy, which might end in an extra reduction of interest rates within the future. Most analysts are already projecting a lower repo rate within the coming months.
Jan Dhan Yojana accounts have a really high number of dormant or unused accounts. These accounts have suddenly seen a spike in usage, and individuals who’ve had these will finally start using them and it'd help them in inculcating banking habits.
The govt will significantly enjoy the extra cash that's pushed into the economy. There’ll even be a way higher collection of income and other taxes by the govt.
Quite short term benefits, there's an angle of future GDP growth also, which we should always be ready to observe over subsequent few years. This move could positively impact the GDP figures of our economy by around 2018.
A couple of might criticize this move at the present, but it'll bring multiple long-term benefits for the nation’s economic health. This complete exercise could be slightly discomforting, but demonetization will certainly have long-term benefits and implications.
To sum up, touch patience will go an extended way in making this demonetization drive a hit. The inconveniences or difficulties of time-consuming currency exchange and reduced withdrawal limits at ATMs and banks will gradually pave the way for a more resilient economy. And this successively, won't only benefit us as individuals, but as a nation marching towards a brighter future.