DEMONETIZATION IN INDIA

14th December 2016

 

Bangalore, India

 

Bonjour les amis,  its me again to publish an article about one of the ongoing debates in India – demonetization.

Before we start it is important to first clarify the precise definition of a broad term such as this. So what is demonetization?? Investopedia defines it as the act of stripping a currency unit of its status as legal tender in order to fabricate certain changes that the government wishes to make. This alteration in currencies consequently impacts the economic status of a country .

In India, this policy was passed with a motive of eradicating black money stored in cash and take a massive step against money laundering as a whole. The issue of black money has been an arch rival to India’s economic growth ever since independence and this has only gone onto become a more sizeable issue over the passing decades. Economists have often introspected about its causes and removal but not many actions have been taken by governments majorly dominated by the Indian National Congress leaders. Then ,why is there so much opposition to demonetization which can be looked at as a mere first step taken for combating  money laundering??? The answer to this is deep rooted and a diverse set of aspects must be considered before a conclusion is reached. In the following few paragraphs, I will speak as an economist examining various dimensions of the policy.

This policy has taken a serious toll on trade and the equilibrium of demand and supply in markets. With lesser monetary flow, demand for goods and services has gone down due to which manufacturers have stopped creating more goods which in turn had brought down the supply. For a developing country like India, these kind of situations can hamper economic growth and depreciate our economy resulting in large scale unemployment and further agrarian distress. This ideology is heavily linked with the timing of imposing this policy and the government perhaps could have waited a few more years before doing so. In addition, a large volume of black money is stored in various other forms such as gold, properties and in Swiss bank accounts; demonetization therefore does not address the major issue. When we observe the policy on a macro scale it offers quite less and has more drawbacks. When time period is considered and when we think of it on a long term basis, it can be of great advantage but the short term consequences cannot be undermined.

 

The micro economical situation needs to be observed too such as the impact on individual firms and consumers in India. India has a rural population of a staggering 67% of the total population many of whom are not exposed banks and e-wallets. These people are heavily reliant on solid cash which is why the controversies surrounding demonetization have risen. In the eyes of a rural citizen every note of money carries a substantial significance and their deficit can have grave implications and directly affect their lives. With a shortage of currency, people are thronging banks to receive their share of cash due to which some people are unable to pay for themselves even during emergency scenarios.

Taking advantage of this situation the opposing political parties have sympathized with these people and have created raucous in the parliament. They are desperately trying to turn this whole situation into a political fiasco. This political battle have raised doubts in the minds of the people because of which the merits of this policy are overshadowed by their drawbacks and people no longer see the bigger picture. The prime minister has pleaded with the people to bear with him for a few months and promises a drastic improvement in the situation.

On one side, the government has announced that more policies will follow shortly to put a full stop to the long lasting crisis of money laundering and black money. However, on the other hand these policies affects the people in adverse ways and may have serious repercussions in the future. Also, there are various political parties who act as hurdles and stand between the government and the people to prevent them from achieving their goals.

It is challenging to decide what is right and what’s not but all that can be said is that no government in India’s history has taken such a stern decision and tried to address a major problem such as this. There may be inconveniences but I feel it is the role of every Indian citizen to respect this decision. If the policy is a success then this will go down as one of the best decisions probably in the history of Indian economics but for now a sense of hope is all that we people have.

 

signing off……….Akarsh

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