More than a Year Post-Demonetisation — The Top 5 Positive Impacts on Business Growth & the Overall Economy

What is Demonetization?

Demonetization is the governmental process of rendering the current authorized currency obsolete. A notable example is the decision made by the Indian Government on November 8, 2016, wherein the existing 500 and 1000 denomination notes were declared invalid starting midnight on the same day.

As of November 8, 2016, India’s paper currency denominations included Rs. 5, 10, 50, 100, 500, and 1000. Through the demonetization of the Rs. 500 and Rs. 1000 currency notes, the Indian Government opted to introduce new currency notes in the denominations of Rs. 500 and Rs. 2000 into circulation.

INDIAN GOVERNMENT’S PERSPECTIVE ON THE DEMONETIZATION INITIATIVE

The Indian Government implemented demonetization in India with several key objectives:

  1. Curbing the circulation of black money.
  2. Disrupting monetary support to anti-national activities and reducing terrorist financing.
  3. Enhancing the tax base by identifying and addressing tax evasion.
  4. Encouraging the adoption of digital transactions and plastic money in the country.

Driven by the noble vision of eradicating black money and uncovering tax evasion, the Demonetization initiative was undertaken to foster transparency and accountability in the financial system.

The Top 5 Positive Impacts On Business Growth & Development

1. The Move Towards A Digital Economy

India has always been a cash-based economy for eons. Post demonetization, nearly 86% of the total currency in circulation was nullified. This meant that people finally had the impetus to shift to digital payments.

In a country, where internet penetration now reaches even the remotest corners and the proliferation of Smartphones is at an all-time high, we were still using cash for a majority of our daily transactions. Post demonetization, this changed big time.

Digital payments witnessed an exponential growth up to 40–70% compared to 20–50% earlier. With further reforms from the government, today a vast majority of the Indian population, both urban and rural are using mobile apps and digital wallets to send and receive cash.

2. Black Money Reduced Significantly

Post demonetization, nearly 9.1 million new taxpayers have been added to the list, and the number of individual tax returns has reached an all-time high of 25.3%. More money entering the government coffers increases the availability of funds for various social and economic development projects.

Additionally, demonetization helped to identify individuals who have been evading taxes for years. Nearly 17.92 lac individuals have been reviewed by the tax department since their tax profiles and the cash deposits made after demonetization were way out of sync.

3. Significant Boost To Financial Institutions

Post demonetization, banks, and other financial institutions have seen a substantial increase in deposits. Nearly, 30 Crore families opened bank accounts for the first time using the Jan Dhan scheme, and zero-balance deposits reduced from a massive 77% to 20% post-demonetization.

All the excess cash in circulation has made its way into official channels. This meant that the interest rate cuts by the central government could be passed on to the borrowers.

This means you can now avail business development loans and other financial products at affordable rates.

4. Deathblow To Shell Companies And Hawala Transactions

Post demonetization, the government has shut down nearly 3 lac shell companies, which were siphoning black money. This number was mentioned by our Honorable Prime Minister, Mr. Narendra Modi in his speech on Independence Day.

5. Massive Shift In Investment Habits

For years, the primary method of savings for Indians was to stockpile cash notes at home or use bank fixed deposits. Post demonetization, millions of investors are looking for alternative investment choices. This has led to the massive spike in the popularity of equities and mutual funds.

Also Read: Factors That Contributed To The Development Of NBFCs In India

Retail investors are gradually moving away from low-return investments like fixed deposits to high-yield options like mutual funds. Similarly, real estate has become streamlined and reduced cash-based investments significantly.

Additionally, life insurance premium collection has gone up to 113% post demonetization.

REFINING THE STRATEGY FOR OPTIMAL DEMONETIZATION EXECUTION IN INDIA

Enhancing accountability is crucial for uncovering black money. To ensure the success of demonetization, a strategic approach involves channeling cash directly into bank accounts, facilitating withdrawals through ATMs or banks.

Expanding the Jan Dhan Yojna could have been transformative if the government mandated all banks to swiftly open instant accounts for those without any, depositing funds into these accounts. This approach would have allowed the government to identify money hoarders and black money holders, while providing basic savings accounts to all Indians, fostering an uptick in digital transactions.

An unforeseen challenge arose with the need to recalibrate ATM machines for dispensing new currency notes. To mitigate this, the government could have pre-emptively planned to print redesigned 500 and 1000 rupee notes with identical dimensions but distinctive features. This foresight would have obviated the necessity for widespread ATM recalibration, ensuring the immediate dispensing of the new currency.

Furthermore, depositing the new currency into circulation prior to the announcement of demonetization would have alleviated the ensuing cash crunch, fostering better governance. This proactive measure could have significantly eased the transition, maintaining liquidity and averting disruptions in the financial landscape.

Also Read:- PMEGP Loan Scheme | Interest Rates, Full Form, Apply Online

Final Thoughts

There’s no arguing the fact that demonetization is a reform of huge magnitude. And, it’s bound to have challenges on the way. But, it pays to be prudent and take a look at its outcomes on the economy in the long run. And, that has been hugely positive and boosted business growth in all sectors.

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By indifi

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