Black money vs Demonetization

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Riddled with black money, fake currency notes and the parallel banking system of hawala channels, India was suffering economically. With an intention to rid the country of black money and dig out tax defaulters PM has taken step to demonetized Rs 500 and 1000 notes. In order to have maximum impact the action needed immediate implementation which created temporary chaos and discomfort among the general public. Common Men are finding it difficult to buy with no money in pocket, wasting hours in serpentine queues outside ATMs and banks.

Additional to temporary hardship, demonetization will also have some negative ramification on economy too, like contraction in money supply and thus a slight deflationary impact, disruption in liquidity situation, making unorganized sector volatile etc. These effects are short term in nature and will wear off as days goes by and new currency notes are flooded in market. However, in longer run this move will give larger benefit to India.

Formalization of economy

Move will help government to fight menace of Black money and help in to root out counterfeit currency being circulated by non-state actors in India. Blow to Terror financing as anti-national activities were largely funded through unaccounted and counterfeit money. Banking system will get a big boost and common man is forced to start using cashless mechanism for their day to day activities. Small unorganized traders are bound to revisit their existing relationships, business or otherwise, and the manner in which they mediate financial transactions. This will likely lead to greater formalization of relationships particularly among the small and medium business groups.

Increased liquidity will make lending rates to come down and interest rates will fall by approximately 2%. With lots of cash with bank, this could drive a virtuous cycle in the economy where industry could borrow money at cheaper rates from formal financial system, boosting production and demand and giving employment which in turn will feed the cycle.

Impact on Used car markets

Immediate cash crunch will dampen the motivation to buy a used car. Used car sector was largely involved in cash transaction as it benefits both buyer and seller. Demonetization will impact the used car dealers as their unused inventory will rise and they have to sell before the year end in order to avoid further depreciation of cars.

Impact on New car sales

Demonetization’s immediate shock effect on new car sales was largely anticipated and it has started to trickle down. New car sales have been badly hit with demand in Gujarat, Punjab, the National Capital Region and Northeast being worse than the rest of India. Because of cash crunch fewer people are visiting dealerships and the impact on new car sales in November could be as much as 40%. Small business and trading communities are abstaining from making purchase decisions right now or deferring it for next year. 

PM’s step has unsettled each one of us for sure. Discomfort shouldn’t last long and as per industry experts benefits of demonetization will start coming out as days pass by.

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