The action of demonetization of Rs. 500, 1000 currency notes has been a bold one, impacting one and all across the nation, widely applauded and apparently sounds in the interest of nation.
It’s relevant here to first understand meaning of demonetization; dictionary meaning states that ‘an act to end something as legal tender’, in other words a process whereby unit of old currency is replaced by unit of new currency. This results in elimination of fake currency or black money from the system, supports the economy and strengthen domestic currency.
It’s also true that people holding unaccounted cash will suffer but the big black money hoarders who don’t keep black money in cash but deposited or invested it in safe heavens may remain unaffected. Impact of this move is briefly outlined herein below:-
Business
a. Elimination of black money from the system may adversely affect in the sectors having large cash transactions such as real estate, construction, health care and trade operated at remote locations due to short availability of cash.
b. In near term conversion of black money in gold, silver and diamonds may be regarded as safe but the strong monitoring of IT department will be there. With the black money drying up, the jewellery market may also witness slowdown.
c. Huge income disclosures are bound to be there and eventually large money may be coming into mainstream which will support the trade and business in long run.
d. Huge volume of business in India is still unorganised and prompted to deal in cash due to higher tax rates and complex tax administration system. At the same time direct tax rates are still higher which prompts to explore means of avoiding disclosures. Hope, woes of business men will be considered favourably in times to come.
Common Man
a. A sudden development may be little inconvenient for a common man for a short duration due to limited cash withdrawal guidelines but with the availability of fresh currency the panic will be subsided within few days.
b. People having large undisclosed cash have to bear the pains of disclosure and pay applicable taxes but in long run they can have a sigh of relief by bringing their wealth in mainstream.
c. Use of funds in illegal activities will be curbed to a large extent resulting in controlling drug trafficking and terror financing.
d. Huge population of India including farmers and backward regions may face problems due to lack of use of banking. However, this move will create a widespread awareness at remote locations to go to banks.
Economy
a. Parallel shadow economy on account of black money will see a sudden hit and black money hoarders will be bound to deposit the unaccounted cash which eventually will boost the economy.
b. Elimination of fake currency will get out of the system which will not only strengthen rupee but control illegal activities to a large extent.
c. In near term the economy may witness slowdown due to money sucked out of market, limited availability of cash and uncertainty.
d. Cash less transactions through proper channel will be encouraged.
e. Introduction of Rs. 2000/- denomination currency note may again facilitate creation of a parallel black economy. Although, indications of strong measures are aired, still, the fact remains that high denomination currency facilitates the black money operations.
f. For encouraging all the transactions through banking channels it is essential to keep only small denomination currency notes.
g. Proposed stringent action against black money hoarders coupled with several moves to curb black money will eventually strengthen the economy
Overall, this move can be regarded as a long awaited treatment against so many ills; off course, improvement can’t be achieved without cost, therefore, the short term inconvenience is not a bad bargain for long term benefits.
(Author is CMA, CS, LLM and can be reached at vineet.chopra01@gmail.com)
