Is India’s GDP expected to fall Post Demonetization Scheme?

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Before proceeding with the discussion on the short term and long term ramification of Prime Minister Modi’s demonitisation move to ban 500 and 1000 INR currency notes, we need to understand that India is still a developing economy with most of the transactions take place through liquid cash.

Not all people in India are included in the banking system. Probably that’s the reason why “Jan Dhan Yojna” initiated by the central government saw a whooping participating of such a huge chunk of people.  The government can definitely take a credit for the same, but it also brings India’s stark reality of development to the fore. Even after 69 years of the nation’s independence, India couldn’t successfully ensure cent percent financial inclusion of all its citizens.

Now coming back to the aftereffect of demonetization, we need to realize that a country’s economy can’t run by whims and fancies. A rationale must be there before taking any serious decisions such as the demonetization. It followed with a nation-wide liquidity chaos and even after two weeks the crisis won’t seem to go away so easily.

If the current state of cash crunch continues for a few weeks more then there’s no doubt that the nation’s economy is set to plummet further in the following months. Indian economy has definitely come to a standstill at this point in time. Common people and SMEs (Small and Medium Enterprises) are definitely bearing the brunt.

The Decision Was Right but Implementation went wrong!

Nobody doubts the intent of the government but they are questioning the modus operandi of the banks to tackle the current problem. The government’s decision to demonetize 500 and 1000 INR notes was announced on November 8 to curb the rising black money and fake currency menace throughout the country.

Initially, it was believed that situation would become normal within a few days. But the problem still persists and people are clueless even now. Empty ATMs and long queues inside and outside the banks are a daily occurrence now. At least, ATM machines should have been recalibrated beforehand to prevent the current nation-wide cash chaos.

The current crisis will surely leave its negative impact on the overall economy of the nation. The GDP growth of 2017 and 2018 is set to be heavily hit due to the decision. However, in the long term everything will return to normalcy and boost the nation’s economy as well – it will take time.

The Effect of Cash Crunch on India’s GDP Growth

Some economists are of the view that around 2% of the nation’s economy will decelerate in FY 2018. At present, India’s projected GDP growth rate is around 7.3% but after this demonetization, it is expected to stay somewhat around 6 per cent.

According to a report, the ongoing cash crisis has affected around 40% of the nation’s daily transaction. Currently, 86% of the total money in circulation consists of 500 & 1000 INR currency notes. Obviously, when the entire 86% of the money in circulation would cease to remain legal tender – its impact was bound to be severe.

India is basically a cash-based economy with most transactions take place through cash. Especially, in day-to-day businesses like grocery, vegetable and medicines – retailers usually prefer cash than cheque or electronic mode of payment. Cash has continued to remain a preferred mode of a transaction because it’s prompt and conventional.

However, the demonetization move of the government has its own advantages too. Prime Minister Modi has simultaneously tried to solve three persistent problems of Indian economy i.e. a parallel economy backed up by black money, hard-to-recognise counterfeit currency notes of 500 & 1000 INR and also the terror financing. The decision will certainly prevent hoarding of unaccounted cash, tax evasion and investment of black money in realty sectors in future.

 



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