The liquidity shock of demonetisation imparted on November 8^th will surely go down history as one of the most significant steps taken in recent times to put a leash on all the exploits undertaken through the cash medium of currency exchange. In our today’s article we shall talk about the impact which the demonetisation drill had on our economy.

Enhanced Tax Compliance – In comparison to emerging economies around the globe, the tax to GDP ratio of India is only a meagre 16.6%. However the demonetisation drive has propelled black money holders towards taking the legal route which can pave the path for increased tax compliance in days to come. As more people enter into the taxation radar, this can lead to lowering of basic tax rates. Business houses which earlier under-reported their revenues shall have to follow the path of proper disclosure as they walk the cashless or digital road.

GDP Growth Scenario– The 7.6% GDP growth in the financial fiscal 2015-2016 slowed down by 0.5-1.5% during the 2016-2017 FY as a direct result of the acute cash shortage in the aftermath of November 8’s demonetisation drive. Cash intensive sectors like real estate and manufacturing were the worst hit and even the rapidly growing automobile industry reported revenue contraction during the quarter ending December 2016. The fact that cash was not readily available dwindled over the purchasing power of consumers.

With more than 90% cash transactions powering up the Indian market spectrum, this was surely equivalent to moving mountains. Banks also shifted away from their core loan issue function because of increased work stress related to managing the withdrawals and deposits. Business owners holding current accounts require large amount of cash within a short notice. Their operations also got hindered as they could not secure  the requisite amount of funding.

In the long run, this clean-up of illegal cash will actually impart the much needed inertia towards hiking up India’s GDP by attracting more borrowings towards the exchequer and improving the inflation outlook. It also holds the potential to revive investment opportunities.

SME Operations – They occupy the small yet mighty chunk of the Indian economy accounting for nearly 8% of GDP by employing approximately 80 million people on a yearly basis. The wage rate structure which is centred around a cash based architecture got adversely affected through the demonetisation move.

Reduced Lending Rates – The increased currency deposit with banks shall reduce the overall fund costs by replacing the high borrowings costs. This shall bring upon lower lending rates which can be imperative towards economic growth in the long run.

Dealing With Black Money – One of the most pertinent objectives of bringing upon this surgical strike was bottling up the flow of illegal money streaming through the system. Black money which accounted for 6% of the cash transactions have been reported to be converted into white via depositing the same into Jan Dhan accounts, exchanging for fresh new currency notes, depositing in own savings accounts by segregating into smaller chunks and making last minute purchases of luxury items such as to end mobiles and jewellery.

Note bank politics – Illegal funding served as a lifeline for political parties who were left handicapped just days before the crucial assembly elections all set to be held in Punjab, Uttar Pradesh, Uttarakhand and Goa. This is expected to usher in much more transparency in the operations of political parties who otherwise preferred taking the back route for accomplishing their goals.

Fake Currency -  According to a circulation of the ISI, fake currency worth 400 crore INR is in circulation inside the Indian territory with fresh fake notes worth 70 crore INR being inserted on a yearly basis. The demonetisation drive could purify our economy from the same.  

Hawala Racket – The Hawala method referred to the activity of transferring money without any actual money involvement. This was been increasingly used as a means for terror financing and money laundering on the go. But with illegal cash flushed out of the system courtesy demonetisation drive, hawala operations have ceased their operations abruptly. As per reports published by India Today, a Mumbai based hawala operator has burned currency worth 500 crore INR.

Real Estate Cleansing – If estimates are to be believed then 40% of the real estate sector of Delhi NCR is backed up by black money. Prime Minister Narendra Modi’s demonetisation move imparted a much needed correction to the real estate sector causing a dip in property prices and have attracted more customers simultaneously who could not previously afford the exorbitant rates.