For the next couple of months there will be a significant shortage of cash, but without any single doubt Modi Government has taken an unforgettable step by demonetizing old currency notes of 500 & 1000, assuming that this big step will payoff in long-run. It is said, “Honesty is the best policy”, and for the very first time in India we have seen that the people who are living with morality and honesty are feeling safe. Have we ever thought why this decision came so suddenly? This is the question, which is popping in everyone’s mind. So here, we look at the effects of demonetization on economy.
- Even after living in the 21st Century where banking network has spread all over, money lending is the oldest form of business. This business is still effective in some areas and stopping registered banks to do their work, with these changes people who are carrying legally earned income in their pockets or at home, will have to deposit before the deadline given by the government. Since the money earned is legal, it can be deposited in the banks and this will allow the banks house surplus amount and margin as well.
- After the bold step of demonetization, reports claim that government will keep a close watch on deposits over 2 lakhs in cash. This would lead into higher tax collection and a better tax to GDP ratio. In addition, government might reduce tax rates moving forward, as more taxes are collected and the money is accounted.
- Demonetization of old currency will help the government to fight Black Money consumption, corruption, terrorism. Activities like smuggling and espionage will stop, due to lack of funding.
- ‘Deflation’ increases the value of money we have because total money supply goes down but the commodities and things available in the market does not go down. Process of demonetizing will lead to heavy deflation as people who have earned money through illegal means like corruption and smuggling will be afraid to declare the money they are holding in their homes, as the government/income tax department might question them on legitimacy of their income.
- A big number of people with their legally earned money will deposit their cash in the bank, and the bank with more deposits can do more lending. Loans (credit) will become easy task and the interest rates may come down. However, this will happen slowly, not overnight.
Thus, by going through above points it can be clearly said that demonetization of INR 500 & 1000 notes is a positive move for Indian economy as well as it is a good lesson for those who are playing with Indian Taxation Policy. It might appear inconvenient for some time but it is really a bold shot, which will payoff in long run.