Demonetization
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Demonetization involves stripping a currency unit of its status as legal tender. The document discusses the reasons for and effects of India's 2016 demonetization, which aimed to eradicate counterfeit currency, fight tax evasion, and promote a cashless economy. The short-term effects included liquidity stress and economic chaos. However, it increased cashless transactions by 400-1000% and led to 86% of cash deposits in banks, increasing liquidity. This higher liquidity enabled banks to lower lending interest rates and incentivize more investment. Both monetary and fiscal policy tools could be used to further stimulate the economy in light of reduced money supply and consumption.
Demonetization
- 2. Whatisdemonetization • Act of stripping a currency unit of its status as legal tender. ReasonsofDemonization • Eradicate counterfeit currency • Fight tax evasion • Promote a cashless economy EffectsofDemonization • Liquidity Stress • Short term Chaos • 400 to 1000% increase in cashless transactions.
- 4. •REDUCED SUPPLY OF MONEY •LESSER MONEY IN THE HAND OF PUBLIC LIQUIDITY •LOWER LIQUIDITY LEADS TO REDUCE IN DEMAND OF NORMAL AND LUXURY GOODS DECREASE IN DEMAND •REDUCED DEMAND LEADS TO REDUCED SUPPLY. •DECREASE IN FACTOR INCOMES REDUCED INVESTMENT
- 5. •INCREASED CASH DEPOSIT. •86% OF CASH IN 500 - 1000 DEPOSITED IN BANKS. Liquidity in Banks •SBI REDUCES LENDING INTERT RATES •0.9 PERCENT DECREASE IN LENDING RATES. LOWERING OF INTERST RATE •MANUFACTURERS AND INDIVIDUALS TAKE LOANS TO INVEST. •MULTIPLIER EFFECT INCENTIVES TO INVEST
- 6. Open Market Operation Printing of new Currency CRR REPO RATE
- 8. HIGH LIQUIDITY IN BANKS DUE TO DEMONIZATION WILL INCREASE THE LENDING OF MONEY AND REDUCTION OF LENDING RATES. HUGE DEPOSITS IN BANKS DUE TO DEMONIZATI ON WOULD LEAD TO LOWER DEPOSIT RATES IN SAVINGS ACCOUNT.
- 9. After demonetization the demand and supply of money was eased due to the wide acceptance of mobile wallets. Paytm’s traffic increased by 435%, app downloads grew 200%, and there was 250% rise in overall transactions and transaction value. Government has brought UPI, USSD and BHIM app to reduce the requirement of physical money.
- 10. Due to reduced supply of physical money the consumption in the economy has taken a hit. Consumption Production Employment Growth Tax Revenue Due to reduced money supply India risks the position of fastest growing economy.