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Advantages and Disadvantages of Demonetization policy


In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest denomination notes. These notes accounted for 86% of the country's cash supply. The government's goal was to eradicate counterfeit currency, fight tax evasion, eliminate black money gotten from money laundering and terrorist financing activities, and promote a cashless economy. By making the larger denomination notes worthless, individuals and entities with huge sums of black money gotten from parallel cash systems were forced to convert the money at a bank which is by law required to acquire tax information from the entity. If the entity could not provide proof of making any tax payments on the cash, a tax penalty of 200% of the tax owed was imposed.

In 2015, the Zimbabwean government demonetized the Zimbabwean dollar as a way to combat the country's hyperinflation that was recorded at 231,000,000%.

The main disadvantage of this sudden apply of a scheme is fallen on mainly informal and agriculture sector of an economy. Financial illiterate peoples with less knowledge of this step of government. The Government knows that once cash is in banks it will track down because these are pure numbers. As we know that peoples with these sectors largely have a very few knowledge about banks and even less have a bank account in any bank. They generally summed up their money in homes or to the local sahukars. Now it is known fact that every father will have to save at least 10 lakh (on average) rupees accordingly to use in future (marriage, land, start a small business etc...). But suppose they have a low income of 50,000 rupees per annum and they surely cannot provide proof of that money they will be imposed 200% taxes. To save from these litigations they will use illegal ways and it directly supports corruption because in-between peoples surely will involve in this and it directly against the reasons of demonetization.

Next main disadvantage might be a decrease in land rates and will surely affect the Indian economy in future like 2008 crisis in United States. Simples supply and demand, as land capital is fixed and demand will slow down as builder or landowner has to pay 30% tax on earning and land owner will have to sell the land less than market value with a loss, however, real estate market will boom after there will be enough money supply.

Another main reason for demonetization is to form India a cashless economy or to support digital banking but in small business and in villages and small cities where peoples even don't know about mobile banking and their business will surely be deprived of flourishment as the new companies from organized sectors will take over and they will be out of business and by business means rozi-roti. Surely it will benefit only a few selected organizations or we say "survival of fittest".

Another main disadvantage is that some companies were using online banking system previously and were only and after this step they start evolving in various sectors and businesses that were unexpected to them and since peoples have a mindset that they are providing this online system long before the step and suppose another new start-up also want to business in that value but peoples will always prefer old one as many peoples in India are uninformed so they will surely invest in big company and it will surely have its monopoly in market that is biggest difficulty in free market economy.

Now the advantages as a coin have two sides, every decision has also two effects. As more uninformed money will run through banks and it will surely decrease the black money and for sure will evaluate the numbers and will be tracked the culprits. It will increase the tax revenue as more uninformed money will be accounted and once it is in banks it will surely have accountability.

As more money will run through banks it will surely increase GDP of India in upcoming time. It will surely attract foreign investment in the country as seeing the fair accounting of money and as there will be more cashless economy more investments will fall under India. It will increase the digital empowerment as more peoples will become aware of digital banking and surely will increase IT start-up in a country which will create more employment in India and increase the standard of living.

As of now 250 out of every million Indian notes were faked and the government said it increase encrypting in new notes and surely will decrease the fake currency use that has mainly done the main rival country (Pakistan) for supporting terrorist activities. And finally last but surely not the least this will surely improve the image of India in front of the world seeing this powerful step taken against corruption.

"I personally think it's a chicken or egg situation because of the more prepared you are, the more people who are aware, the more opportunity you're giving to people to find loopholes in the system," said Arpan Nangia, the head of the India desk for HSBC's commercial banking division. "Whereas the downside of making it a surprise was [that] the government and the central bank were severely unprepared to manage the whole situation."

I think the government could do some steps to smoothen the transition. A safeguard can be provided for sectors which are sure to be affected more and adversely of this step. The government could inform the citizens about the cashless economy first so that there will be no haphazard in the transition and peoples will know about digital banking more and surely will affect but in much less content. It should provide safeguards to the unorganized sectors like small businesses so that they will not unemployed after transition and it should apply some rules and regulation so that there will be no monopoly in a market as there are huge chances now.

- PARVIN MOR