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    Categories: Income Tax

Short term & long term impact of Currency Demonetization for Indian Economy

The demonetization effort being led by PM Modi in India is appreciable to an extent but follows positive as well as negative aspects. The aim is to wash the stock of “black money” out of the economy and get it into the banked and taxable part of the economy.

“Cleaning of the black money is a very positive step. However, certain things will happen as a result of this. Transactions will now begin to move to white economy through the banking system which means there will be surge in bank deposits. Even savings in terms of deposits will go up.”

Many renowned personalities like politicians, businessman, and so on have huge reserves of black money either in India or abroad. All the notes of are in high – value denominations. Now with the news of demonetization they will be forced to deposit their black money into the banks, after submitting their PAN or Adhar or Passport number, to get new currencies. This will help the government to catch the culprits and keep an eye on all the fraud people who are helping them in converting their black money into white money.

Though this move causes some difficulties for the common people because banks and post offices do not have sufficient amount of cash. People are facing lot of problems with the old currencies. They have to make long queues either to deposit their money or to exchange them. Moreover the ATMs are not updated yet. The shopkeepers and the others are refusing to take 2000 rupee note because they don’t have sufficient amount of small denomination currencies. The government is taking necessary steps to upgrade the ATMs and printing new currencies at a very high speed so that it reach the people without making any more chaos in the market.

The sudden stop in the availability of currency has led to a liquidity shock to the people in the nation. Lack in currency of Rs.500 and Rs.1000 has disturbed economic activities such as consumption, investment, production, employment etc. In this context, a number of short term and long terms impacts can be seen on the Indian economy.

Short-term impacts

  • GDP formation will be effected with the reduction in consumption demand. Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓
  • Certain sections of the society namely agriculture sector, small traders, households, SME’s, daily wage earners etc. will face short term disruptions due to absence of liquid cash.
  • Money supply will reduce in the short-run until the new 500Rs. & 2000Rs. gets widely circulated in the market.
  • Negative impact on disposable income and the consumption patterns of the people is expected.
  • Less currency circulation will reduce inflation.
  • Short term recession in sectors like real-estate, construction material, textile, handicrafts etc.
  • Its impact will be seen on farmers as this is the harvest time and farmers generally deal in cash.
  • Rate of capital formation growth will go down as no investments will take place.

Long-term impacts

  • Government revenue will boost up as more earnings would be declared. The unbanked people will move to banking like Jan-dhan contributing towards government’s efforts of financial inclusion.
  • Demonetization will set accountability in motion as service/sales tax is not paid by people like local photographers, tailors etc. and thus their income goes unaccounted.
  • Collection of higher taxes will help in nation building like development of roads, infrastructure, transportation and many others.
  • Increase in nation developmental projects will demand more labor and other skilled manpower which will give rise to employment opportunities.
  • It will bring more business in taxation i.e. GST benefits.
  • Cash in system will boost educational loans and business loans thus bringing more opportunities.
  • It will lead to better business environment, less corruption and transparency.
  • Substantial increase in the demand of Digital transactions system, E-wallets, usage of plastic money, online transactions using E-banking etc.
  • Gold imports will be reduced because of the investments in gold by people as an alternative to cash deposit in the bank.

To conclude the decision of demonetization will prove excellent in long run and our tax consultant will earn a huge profit because now the people will appoint them for the returns and filling and the government can earn huge economic benefit.

Team TaxReturnWala:

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