Demonetisation of 500 and 1000 rupee note
Dust is far from settling down on the sudden move against black money and corruption. ‘Demonetisation’ or ‘Re-monetisation’, whatever one may call it, has shaken the whole country as 86% of total value of notes in circulation was sucked out of the system. Most importantly, it made the ill-gotten cash worthless, unless the corrupt hoarders found innovative ways to change their old notes.
Opposition parties were quick to criticise the government demanding a rollback of the scheme. Winter session of the parliament has been a wash-out till date. Most of the political parties were building up their war chest for election early next year which suddenly became worthless.
It is obvious that the pain will continue for some more time as many ATMs are still waiting to be recalibrated or stocked with new notes. This led to an emotional appeal by the PM, “I also feel the pain but…The long term gain would be the India-of-their-dreams”.
The medium to long term impact will be positive if cash shortage eases by early January. As the cash in circulation moves into the banks, the deposits will spike improving liquidity. This will cause monetary transmission to improve. Weak demand, low cash in circulation and continued fiscal consolidation will keep inflation at RBI’s comfort level paving the way for further rate cuts. Lending rates will soften. Going forward, the use of digital transactions will increase the country’s tax base. As more of the parallel economy moves over to formal economy, the productivity and growth will get a boost. Financial inclusion slowly becomes a reality.
The authorities need to quickly print and replenish cash in ATMs and Banks, otherwise the goodwill of common people will evaporate. Obviously the next expectation is a bold budget with innovative tax reforms from Mr Jaitley to wipe out the hardship endured by the people.