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The desired effect of the demonetisation is to fight black money, corruption and counterfeiting but like any medicine, it also comes with side-effects
The desired effect of the demonetisation is to fight black money, corruption and counterfeiting but like any medicine, it also comes with side-effects

The demonetisation announced by Prime Minister Narendra Modi rendering currency notes of Rs 500 and Rs 1000 as invalid legal tender came as a shock to the country. The desired effect of the demonetisation is to reduce corruption, black money, counterfeiting and terrorist funding, but like any medicine, demonetisation also comes with side-effects.

Here is a glance at the side effects:

SOCIAL IMPACT

The social impact of demonetisation is the top concern for politicians queuing up to protest about the difficulties the common man is facing. Indeed, the social impact is the most major visible impact of demonetisation.

People who do not use ‘plastic money’ such as credit cards, debit cards or online banking will not have usable money for basic necessities. Small time merchants, and business persons without plastic money cannot buy further stocks. Small time shops and independent services like transport that do not accept other methods of payments will lose business. Daily-wage earners would not get money.

As situation improves, it will still take time for sufficient amount of usable currency enters the market and/or the market adapts to a more cash-less style of functioning.

POLITICAL IMPACT

Opposition parties from across the country have joined together to protest strongly against the demonetisation move made by central government. The demonetisation will have direct impact on political parties as politicians are notorious for having massive amounts of black money. All of the money that is not compatible with their incomes will no longer be as useful. Although it’s true that black money will eventually begin piling up again, it’s unlikely that much black money can be mustered before the upcoming Assembly Elections in 2017. As a result, the election would be more honest as paid votes, paid volunteers and paid supporters will be minimal.

Internationally, as old currency notes become mere pieces of paper, any international counterfeiting operations will be instantly useless. Any supply of black money or counterfeit money to terrorism funding will be stopped from the source.

BUSINESS IMPACT                                                  

Large-scale businesses that have used unscrupulous means to accumulate non-taxable income will fall in trouble as the piled up currency will not be valid. Small-scale business that operate on mainly cash basis would face difficulty initially, but the demonetisation has provided them an urgent push into a cash-less method of operating. As a result, more small and medium scale businesses will become digital.

Online companies on the other hand would flourish as they already have set-up for cash-less transactions. Companies that sell high-range products might face initial hiccups as customers juggle cash transactions and digital transactions. Sale of Jewellery and gold no doubt faced a sudden spike as people rush to invest the unstable currency into a more reliable format of gold.

ECONOMIC IMPACT

The key motive of demonetisation was to improve the economy, especially in long-term. As a result of the demonetisation, the public has been forced to deposit massive amounts of money, helping to fill Bank coffers with an unprecedented amount of money in record time. Conversely, the value of Indian Rupee is at one of its lowest and may even drop further to Rs 70 per US Dollar. Economy will become more organised, transparent and cash-less, all long-term benefits. In comparison, developed countries use around 4% cash on a day-to-day basis, while India functions on a 12% cash based system. Short-term however, the transition from cash economy to cash-less will be an immense undertaking.

Overall, the demonetisation is hitting India hard, due to the country’s heavy reliance on cash, but even if black money is generated in the future, the 2016 sweep will have cleared away a vast majority of it.