The term demonetization is not new to the Indian economy. The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But these notes were demonetized in January 1946 and again in January 1978, according to RBI data. Everyone is aware about the demonetization policy of the government by banning Rs. 500 & Rs. 1000 currency notes in 2016. With exchange of the old currency notes coming to an end, many people are forced to open accounts to save their money. It is estimated that banks have opened about 30 lakh (and still counting) new accounts since the demonetization drive began on November 8. India’s largest bank, State Bank of India (SBI), with its 17,097 branches — half of which are in the rural and semi-urban areas – is opening 50,000 accounts a day.
2016 Indian banknote demonetisation Positive impacts:
- Payments companies Paytm and Freecharge saw a surge in adoption of their digital wallets which increases the cashless society.
- All sorts of illegal activities, like terrorist financing, etc. have been completely hit after the announcement.
- As the banks get a lot of liquidity in their hands, they will lend the money to the people at a lower rate of interest. Hence, the interest rate on borrowing will lower down.
- It will reduce the risk and cost of cash handling as soft money is safer than hard money. It will also reduce government liability. Since every note is a liability for the government, the old currency will become worthless for those people, who choose not to disclose their income.
- Only 39% of account holders in India own a credit or debit card, meaning the remainder would require a bank teller to carry out each transaction. Even online shopping in India is done with cash: about 70% of online commerce is paid with cash on delivery.
New Notes issued in 2016 by RBI
- This led to higher tax collection as business men are depositing cash lying with them as current year income with advance tax. Defaulters of bank, property tax, electricity bills and telecom bills are clearing their long pending bills and thus utilizing their old currency notes.
Negative impacts :
- The Indian Expressreported that at least 33 people have died as a result of demonetization, with causes of death ranging from people collapsing of exhaustion after waiting in the queues for the bank, a child dying in hospital as the parents only had only currency notes, and others committing suicide as they were unable to feed their families
- IMF cutting India’s growth rate from 7.6% down to 6.6%.After Prime Minister Narendra Modi announced the demonetization program in November of last year, India’s growth slowed to 6.1 percent in the first quarter of 2017 and moderated further to 5.7 percent in the subsequent three months.
- The liquidity squeeze caused by demonetization will be negative across sectors with high level of cash transactions.
- Real estate, jewelry, retailing, restaurants, logistics, consumer durables and luxury brands, cement and some segments in retail/SME lending space will be facing short term instability.
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