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First, we need to know what demonetization is. Demonetization is to withdraw the status of legal tender from a coin etc and remove it from circulation i.e. ending something to be no longer legal tender of the country.
Demonetization, on one hand, is a weapon to fight against illicit activities like black money, counterfeit currency, corruption, money hoarding, tax evasion, terrorism, mafia etc. as it somehow tends to flash out the hidden currency and keeps a check on the circulation of currency.
Demonetization glorifies the need for cashless or digital economy and hence of education and e-infra. In Banking, Rate of Interest decreases which in turn leads to increase in investment and hence growth. It even helps Income Tax dept by bringing to the forefront the list of people whose savings exceed their income i.e. it unveils unaccounted income. It supplements Intelligence agency’s work by destroying Terrorism and Mafia’s economic advantage to some extent (terror funding). This would lead to increase the tax base and therefore increases Government’s revenue which it can use in developmental and welfare activities.
On the other hand, demonetization hurts the poor most as it worsens the condition of the ones who are dependent on informal sector {this sec is the one which is not monitored or regulated by the Government and hence is not taxed. For eg vendors, weavers, day laborers, construction laborers, cleaners, scavengers (ones collecting recyclables from the street and dump sites), waste pickers etc. }. In fact, more loans given out increases broad money supply which in return results to inflation.
It is important to note that it should not be ignored that demonetization needs full logistical preparation (i.e. efficient flow of information, goods) which if not done that too in an emerging economy like India can upset customer demand in long run as well as create panic and a lot of hue and cry which is magnified by opposition parties in politics. Moreover, due to this action, there is a possibility that the foreign tourists and NRIs are neglected which increases disenchantment among the fickle minded people.
Demonetization drive was taken by EU, Singapore and South Korea but after logistical preparation which was missing in India’s case. India’s 91 rank in Networked Readiness Index shows the lack of digital infra (rank 114) and levels of skills(rank=101). So moving towards cashless economy is a very risky challenge. Moreover, demonetization could cost RBI a huge sum of money. Corporate will see economic activity decline, with lower sales volumes and cash flows.
Hence, although demonetization gives a hope, in general, to fight against crimes and shows the political will towards it also glorifying image at international stature there on the other side it can backfire and create aggression in public and spoil image at international stature. But it is a known fact that every step fetches negative effects along with positive ones. A start was needed to be there and hope that Government overcomes all the negative effects and fetches the desired fruitful result for the India.
