Effects Of Demonitization

Not that some section of Indian society will believe it but the effects of demonetization has not been good at all for the country. I was reading an article in the NY Times the economy is suffering. The manufacturing sector is contracting; real estate and car sales are down; and farm workers, shopkeepers and other Indians report that a shortage of cash has made life increasingly difficult. This has been noted earlier as well.

Indians had to line up for hours outside banks to deposit and withdraw cash. New notes have been in short supply because the government did not print enough of them in advance. The cash crunch has been worst in small towns and rural areas. The amount of cash in circulation fell by nearly half, from 17.7 trillion rupees ($260 billion) on Nov. 4 to 9.2 trillion ($135 billion) on Dec. 23, according to the Reserve Bank of India. No economy can lose that much currency in a few weeks without creating major hardship — certainly not one like that of India, where cash is used for about 98 percent of consumer transactions by volume. And while a growing number of people have debit cards and cellphones that can be used to transfer money, most merchants are not set up to accept such electronic payments.

There is little evidence that the currency swap has succeeded in combating corruption or that it will forestall future bad behavior once more cash becomes available. The government had said that people bringing more than 250,000 rupees ($3,660) of the old notes to banks would have to show that they had paid taxes owed on the money. Because of those rules, officials had expected that a lot of black money would never make it back to banks. Yet local news outlets are reporting that Indians have successfully deposited the vast majority of old notes. That suggests that either there wasn’t as much black money out there as the government claimed or that tax cheats found a way to deposit their hoards of cash without attracting the government’s attention, perhaps with the help of money launderers.

Hopefully things will get better as the weeks go by.

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