Demonetisation

Demonetisation refers to an Economic policy where discontinuity of the particular currency from the circulation and replacing it with a new currency, In the current context it is banning of 500 and 1000 denomination currency notes as legal tender

The Indian constitution pledges a Right to property Article 300A says:

“No person shall be deprived of his property save by authority of law”

It refers to the decision of RBI / Government to recall the status of a currency note to be used as a legal tender, usually all the currencies issued by RBI can be used as a legal tender as the value they carry is promised by RBI and once the value has been demonetized /revoked the currency note cannot be used.

WHY WAS DEMONETIZATION DONE?

~ To tackle the menace of black money/parallel economy /shadow economy

~ The cash circulation in India is directly connected to corruption

~ To control the menace of counterfeit currency

~ To prevent the cash being used for terrorist activities

~​ INDIA has one of the highest cash to GDP ratios at 12percent

Short term pain, long term benefits:

● There will be some contraction in money supply and thus a slight deflationary impact, which will cause some inconvenience in the very short term

● In longer term it will lead to a greater proportion of economy shifting from black to white

● It may also raise permanently the cost of holding cash by adding a risk premium

● The incentives for honesty have been improved , dramatically, with this reform measure

This is not the first time , India has 2 demonetization faced

1. January 1946

2. January 1978

BENEFITS:

1. this will result in reduction in inflation as conspicuous consumption will come down

2. To eliminate black money and growing menace of counterfeit currency notes

3. This move will benefit the poor, middle class and aspirational middle class by increasing opportunity and bringing real estate and higher education within their reach

4. The government’s move will benefit companies in the cashless economy

5. There could have been no bigger catalyst for digital economy and for digital wallets in the country

6. Macroeconomic indicators are likely to improve too as inflation slows, fiscal balances improve and interest rates soften further on ground

7. Tax collection will increase and accordingly more money will be available to the government for development expenses

8. Commodity price fluctuations will be controlled or minimized

9. The international image of the country in terms of FDI, collaboration, investments etc will increase

IMPACT ON REAL ESTATE SECTOR:

1. real estate prices would come down in short to medium term as land would become cheaper

2. Land transactions and luxury residential segment would be impacted the most because they employ the maximum black money

3. Bringing down land prices would thus be beneficial to the organised construction sector

4. The demonetisation, coupled with the passing of real estate regulatory act, would weed out the black money elements from that sector

DEMERITS:

1. cash crush

2. Economic slowdown

3. Recalibration of ATM’s

4. Currency destruction

5. Inconvenience to common people

6. Unfavorable impact on GDP growth

7. High scarcity of money exchange

Concerns:

● If unaccounted money by Indians is held in the form of foreign bank accounts, the present scheme can do nothing

● As long as agricultural income can be used as a route to avoid taxes and indirect tax rates have multiple rates and exemptions, the problem of tax evasion is unlikely to go away

● On the negative side, the disruption in transactions could hit the emerging growth of consumer demand

● Traders and retailers have been deprived of funds to carry on their business

● With the loss of purchasing power, the country is being into an artificially created recession and the level of economic activity is declining

CONCLUSION :

Central government’s recent decision to demonetise the high value currency is one of the major step towards the eradication of black money in India.

The demonetisation drive will affect some extent to the general public, but for larger interest of the country such decisions are inevitable.

Also it may not curb black money fully, but definitely it has major impact on curbing black money to larger extent.

“Every Indian including common man should be responsible for part of nation building , and our temporary inconvenience is negligible as related with the outcome in future”.

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