Demonetization- if you have been following the current political and economic developments in the country, you must have come across the term at least once, or you must already be quite familiar with its working. Whether you love it or hate it, almost everyone has a particular stance on demonetization, and this has stirred up quite a lot of heat in the last couple of years. On November 8th, 2016, the government of India took a rather sudden decision to stop the circulation of old 500 and 1000 rupees denomination and provided an extended deadline to get rid of these notes by exchanging them or declaring them at the bank.
The main motive behind demonetization was to curb the circulation of illegal and counterfeit notes within the economy and to curtail the effects of the shadow economy. It was also done targeting the rampant overflow of new money and corruption which had been a somewhat problematic issue that the government had been trying to tackle for quite a long time. According to the latest reports by the Reserve Bank of India in 2018, around 99.3% of all the banknotes in circulation were demonetized, and a tiny fraction of them remained un-deposited or unreported to the banks.
To say demonetization created a stir in the lives of normal people and businesses would be an understatement. Since the announcement was made rather suddenly, there was a flurry of people flocking their nearest banks and ATMs. And since the new notes were being printed at a pace much slower than that of the demand there raised an issue of cash shortage. The transportation and logistics industry was hit rather hard by this, thousands of trucks remained stranded, and bus conductors lacked sufficient denominations to go about their everyday business. On an even larger scale, the effect could be felt when the stock market plummeted, with BSE SENSEX and NIFTY showing extremely poor performance much to the chagrin of the investors. Industrial output saw a sharp decline since there was a rampant cash shortage and this affected the production process. The agriculture sector was hit hard by demonetization as well since the bulk of the transactions carried out in this sector are through banknotes. As a combined effect of all the above-listed factors, the GDP of the country showed a dip which proved to be a concern for many.
However, not everyone was critical of this move. Demonetization was seen as a favorable move by the international media, citing it as an effective measure to fight black money and corruption. Many foreign economists also termed demonetization as a welcome macroeconomic development in their articles. This also paved the way for introducing various digital modes of transferring money and increased the usage of debit cards within the nation, thereby taking a turn towards the idea of a cashless economy. Demonetization has been already put up to a lot of debate by policymakers and economists alike; however, its actual impact on the economy will be made more visible in the long run.