On November 8, 2016 evening, Prime Minister Modi, in his televised address to the nation, made Rs 500 and Rs 1000 notes invalid, saying that it was aimed at curbing the “disease” of corruption and black money which have taken deep root. People holding notes of Rs 500 and Rs 1,000 can deposit the same in their bank and post office accounts from November 10 till December 30.
What are some major effects of Demonetisation ?
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Demonetisation to Cut Tax Avoidance & Corruption
Demonetisation will be credit positive for India as it is likely to reduce tax avoidance and corruption, Moody's Investors Service said on Wednesday.
Besides, it said, the country remains resilient to economic disruption and the worst of the liquidity crunch has passed, which should support a rebound in consumption and investment.
The US-based agency however projected growth to slow to 6.4 per cent in the January-March quarter, from 7 per cent in the previous three months.
"Looking ahead, we expect remonetisation to continue at a similar pace," Moody's said in its report on demonetisation.
"We continue to believe that in the medium term demonetisation will strengthen India's institutional framework by reducing tax avoidance and corruption. It should also result in efficiency gains through greater formalisation of economic and financial activity, which would help broaden the tax base and expand usage of the financial system.
"All this would be credit positive for the sovereign," it said.
The agency said that if most of the old notes are deposited into the banking system, legitimising previously undeclared incomes and wealth, the benefits to the government related to higher future tax collection will accrue from measures aimed at leveraging the information obtained when notes were deposited.
"Such measures have yet to be detailed," it added.
Moody's said however that demonetisation has hit bank's asset quality and demand for credit. "This trend is likely to continue over the next few months. We also expect asset quality to deteriorate in the current quarter, but Indian banks have sufficient buffers to withstand the impact."
More positively, banks have experienced significant deposit inflows as a result of demonetisation, it said.
"However, we expect bank deposits to increase by only around 1-2 per cent, with cash remaining the dominant means of retail transactions," it added.
Impacts of Demonetisation in India
1)Black Money- Black money stored in the form of Rs 500 and Rs 1000 notes will be taken out of our system. As predicted by ICICI Securities Primary Dealership the government's plan to scrap ₹500 and ₹1,000 notes will uncover up to ₹4.6 lakh crore in black money.
2) Terror funding - Fake Indian Currency Notes (FICN) network will be dismantled by the demonetisation measures.Taking out 500 and 1000 rupee notes out of circulation will have a lasting impact on the syndicates producing FICN's, thus affecting the funding of terror networks in Jammu and Kashmir, North-eastern states and Naxalite hit states.
3) Real estate may see significant course correction - The demonetization decision is expected to have far reaching effects on real estate.Resale transactions in the real estate sector often have a significant cash component as it reduces incidence of capital gains tax.Black money was responsible for sharp appreciation of properties in metros; real estate prices may now see a sharp drop.
4) Political parties in crisis ahead of polls - With nearly five state elections in 2017, demonetization has stunned political parties.Especially, in large states like Punjab and Uttar-Pradesh, cash donations are a huge part of "election management".In one stroke, big parties will find themselves hamstrung as cash hoards are often undeclared money.Parties will have to completely rejig campaign strategies in light of expected cash crunch.
5) Moving towards digital payments - Demonetization will likely result in people adopting virtual wallets such as Paytm, Ola Money etc.: This behavioral change could be a game changer for India.
6)Temporary chaos and confusion - Public will face minor problem for a few days owing to the scarcity of lower denomination notes in the system.