(Note: This post does not advocate for any party and is totally written with an independent view on the economy)
Most of the Indians are convinced that it will or might help the economy in the long run. Let’s discuss step by step the merits and de-merits of the Indian Currency ban on the Indian economy. For this purpose, let us characterize the time into short term, mid term and long term effects.
- SHORT TERM EFFECTS: For the short term, no doubt people will face difficulties to get the currency exchanged as the logistics for such a huge operation is insufficient in India. Apart from these hardships, the overall economy will be negatively impacted due to low currency rotation in the economy. Flushing out black money, also means decrease in the amount of spendings people will make including marriages and others. For the immediate short term, prices of some commodities may increase which will get stabilized over weeks. Later, due to less demand and more supply, prices will come down and the inflation rate will decrease. However, there is also worry of deflation which means prices coming down over a certain period of time which might last months. Although it might seem a welcome sign to general public, it will be a cause of concern to the economy in short term. A slight inflation is good for any economy and Indian economy is different from the western economies. Apart from this, the advantages will be removal of fake currency from the system, hawala transactions will be affected and corruption might see a decline in short term.
- MID TERM EFFECTS: Situation in terms of overall GDP growth will improve as banks will lend at lower rates. Interests on savings will be low but people will get home loans, car loans etc at much lower rates. The real estate and automobile industry will come out of the depression phase. Slowly, the deflation will be zero and companies will post significant growth rates. Tax collection of government will increase manifold and can have a positive impact of the fiscal budget. Budget may be advanced to January 2017 in view of the major economic reshuffle due to the currency ban. Budget spending will be huge on infrastructure, defence and other sectors which will act as a catalyst for growth.
- LONG TERM EFFECTS:Most of the long term effects of the decisions will be positive. As this will bring more revenues for government which in turn will be spent on infrastructure and “Make in India” initiatives which will generate more jobs. People will have more spending power, which will increase businesses of companies as well as small traders. Money will rotate in a more transparent way than before. Will it completely remove black money from the economy? Surely not. Black money will stay but will be very limited compared to pre Nov 8, 2016. Overall, it’s a good move and it takes guts to take such a bold decision. This decision will go down in history as one of the most important decisions made in Independent India. The earlier historic one was the globalization policy which was the brain child of the then Finance minister Shri. Manmohan Singh. However, this decision by Shri. Narendra Modi is the first and biggest step ever taken in Independent India to curb black money and fake currency and will be remembered by generations to come.