Impact of demonetization on growth of India
Recent ban on big notes of denomination of Rs 500 and Rs 1000 has the potential to impact each and every indian’s life in some way or another. A common theme associated with this move is that it would lead to some “short term pain” but will result in amazing “long term gain”. It is one of the boldest move taken by any government yet by investing their credibility.
This move has resulted in severe short term cash and credit crunch in the hands of consumers. This cash crunch can lead to a slowdown in demand in next few quarters to come. With decreased demand, growth rate is expected to slowdown in near future. This slowdown should be expected by us as India is a cash driven economy with more than 85% of cash was in big notes denomination and suddenly this cash has been taken out of system. The duration of slowdown in economy would also depend on how efficiently government is able to replace old notes with new ones. With low consumer sentiment and less cash for disposal, investing activities in stock markets or other asset classes are expected to come down in short term.
This move was planned by investing in plan for future. There are several positive results that can be achieved with this move. This move will result in reduction of black economy and increase in size of formal economy. This increase in formal size of the economy would result in increase tax revenues by the government. These tax revenues than can be utilized by investing in big nation building projects which demands huge capital expenditures like highway, power, steel, nuclear projects etc. It is expected that lakhs of crores of money would be deposited into the banks by 31st December. This will increase the money supply available to banks and will result in lower ROI for loans and lower emi as a result. Though, Fixed deposit rates are expected to come down in majority of banks due to surplus of money available to the banks.
This move is already welcomed by various investors and organizations like IMF. India has always been ranked way below its potential due to severe corruption in every level of administration. This step has the potential to impact some part of existing corruption by making huge amount of black money as unusable. This step is already seen by big investors both abroad and within country as a step in right direction. We can expect a spur in investing activities in years to come if these move is followed by more bold moves in time to come.
Every bold step as some level of risk attached to it and this step is no exception. This exercise is seems to taken with right intent and it may have some short term pain for citizens but, it promises to be a game changer for India in time to come.