Pros and Cons of Demonetization

Pros and Cons of Demonetization

Image source: indiatribune.com

Demonetization involves changing the current currency status by replacing it with a new note or coin. This reduces the circulation of the money. Conversion of Rs.500 to Rs.1000 leads to a shortage of hard currency affecting small-scale merchants who transact using hard cash. Let’s look at the pros and cons of demonetization.

 

Pros:

1. Reduce inflation: Demonetization led to reduced prices of goods. It also contributed to the decrease in inflation as people don’t have money to waste on unnecessary things. The low demand made goods cheaper.

2. Long-term GDP: There is a boost in the long-term GDP and a widening tax net through penalizing non-tax payers. Crackdown on black money has reduced the cost of capital and increased flow in the financial sector. This leads to an increase in the economy of the country.

3. Increase in digital transactions: Demonetization led to a cashless transaction with more daily transactions in digital form. More people subscribed to digital transactions via the use of debit cards, m-wallets, and PayTm.

4. Reduce spending habits: Ban on bondage resulted in cashless transaction making people reduce their spendthrift habits. This made them spent money only on things they need.

5. Cheaper home loan: After demonetization, there was more money in the bank prompting banks to give loans to individuals at a cheaper interest rate. This made home loan cheaper.

6. Rise in e-banking and e-commerce: Digitization of money transaction has led to a shot in the he-commerce sector and e-banking. This leads to the digitization of the economy and more people buy goods online.

7. Tax compliance: Rise in digital transaction increased the level of tax compliance. The digital transaction tracks all purchases and sales, therefore no tax evasion.

8. Improve Indian economy: Through demonetization, the Indian government was able to address counterfeit currency circulation, reduce terror financial, and issues to deal with the parallel economy.

9. Reduce corruption: Transparency in all the transaction carried out ensures people will not engage in corruption, accept illegal money or circulation of black money.

10. Increased market share: The formal market sector increases its market share is able to account for the 60% of India’s GDP while the informal sector reduces in market share after demonetization.

 

Cons:

1. Disruption in trade: There was a lot of loss recorded by the small industries after demonetization since most of them carried out cash transactions. No cash meant no business and also it hampered employment.

2. Effects on the media and advertising industry: Demonetization has affected the advertising and media industry as consumers are very choosy on what to spend their money on.

3. Loss of consumption: Demonetization reduced cash flow among people and this temporarily disrupted consumption for almost one quarter.

4. Difficult transaction: Although people benefitted from the ban on bondage, there were also losses in transactions where small-scale merchants were unable to do any kind of transaction due to limits in cash withdrawals from banks and ATMs.

5. Impact on agriculture sector: The agriculture sector relied on cash transaction and the decision to demonetize affected the agriculture sector. Although the farmers demonstrated against the sitting government about the decision, it didn’t yield many benefits.

6. Expensive: Switching to cashless economy required a huge investment in banking and technological infrastructure which turns to be very expensive to banks and the Indian community at large. Low internet speed, electricity and lack of bank account affect the cashless economy.

7. Cybercrime: The growing number of cyber-crimes and cyber terrorism affects the cashless economy. Digital transactions open loopholes for individuals with malicious intentions like hackers.

8. Affects bank savings: Reduced interest rates affects those who save money in the bank because they will get less money from their fixed deposit account.

9. Lack of freedom: With cash on hand, you have the freedom to do what you want.

10. Lack of knowledge: Large percentage of Indian do not know how to transact digitally and most of them do not have bank accounts. Internet accessibility is still inaccessible to the majority of Indian people.

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