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Complications of Demonetization

Complications of Demonetization in India

  • On November 8, 2016, India had another ‘Tryst with Destiny’ when Prime Minister of India announced the demonetization of the currency notes of INR 500 and 1000 denominations. Whenever a currency is stripped of its status as a legal tender, it is called as demonetization.
  • The demonetization of currency was introduced with the objective of twin objectives of fighting black money as well as fake currency. Ever since the demonetization move, India is divided into two blocks, one is vehemently opposing the move while the other is supporting it at any cost.
  • Since the demonetization, non-ending queues have become a characteristic feature of banks in India. However, according to the Indian Bank Association, the use of indelible ink had reduced the length of queues outside the banks by around 40%. Also, situation markedly improved on November 19 as apart from senior citizens, only bank customers were allowed to exchange currency at their respective banks.
  • Since the demonetized currency accounted for 86% of the total liquidity in the economy, the move had brought cash crisis like situation in the economy. The current rate of withdrawal from banks and ATMs is much more than the supply of new currency from the central bank. The financial analysts have different views about the time required to replenish the currency shortage varying from 45 days to six months against the government’s view that situation will normalize within two to three weeks.
  • The recalibration of all ATMs across the country to dispense the new currency may take another couple of weeks. The situation is expected to start normalizing only when all ATMs across the country become fully functional.
  • Current estimates suggest that out of INR 140,000 crore, which is in the form of INR 500 and 1000 notes and forms 86% of the money supply, roughly INR 300,000 crore would not be exchanged for new notes ever. This entire disappeared black money will be profit to the Reserve Bank of India and will be transferred to the central government as a dividend. That money will be a boon for social and economic infrastructure. Also, it would reduce the fiscal deficit of the government.

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