This move isexpected to cleanse the formal economic system and discard black money from thesame. The reasons of demonetisation are as under:· To tackle black moneyin the economy;· To lower the cashcirculation in the country which is directly related to corruption in ourcountry;· To eliminate fakecurrency and dodgy funds which have been used by terror groups to fundterrorism in India;· The move was estimatedto scoop out more than more than Rs 5 lakh crore black money from the economy. To reduce theimpact of sudden commercial collapse, a 50 day period ensued where thepopulation could exchange their cancelled cash for newly designed 500 and 2,000rupee notes or deposit them into bank accounts. Common people now haveincreased the use of digital currencies. So, the people do not need to carryphysical currencies to any place, which also reduced the crime rate. India ismoving towards cash less economy.
This will curb the black money to a greatextent. For poor people, GOI has announced that black money retrieved from thedemonetisation measure will be deposited for four years without interest onKalyan Yojana to benefit the poor in marriage. This will create a positiveimpact on the social sector in the long run.
Demonetisationwill make most of the transactions be done through the formal banking sector.This will increase the transparency with people and corporate paying taxproperly. It allows banksto pass on the benefit of ample liquidity to consumers by lowering lendingrates. On the other hand, with more taxes being collected due to higherdeposits in banks that can be taxable as well as increased compliance due togreater scrutiny and oversight by the Income Tax department, the government toomight be tempted to announce lower rates for taxes and other aspects of whatare known as fiscal measures.
In this context, it is worth remembering that thefiscal stimulus which is by lowering taxes and providing more incentives toconsumers as well as producers by boosting supply can be complemented and supplementedby the monetary stimulus which is by boosting demand for goods and services bylowering lending rates thereby putting more money in the hands of consumers.The demonetisationexercise would drastically affect the corrupt practices and people who are holdingblack money in cash as they would not be able to exchange much, as they would bein a fear of getting prosecuted by the authorities. Further, enemies of thecountry who are involved in counterfeit currency and terrorism would not be ableto continue it further.Since governmentinvestments will increase and there will be a positive impact on the GDP in thelong run.
Higher income tax collections arising from better compliance would offerscope to reduce tax rates over long term, which would increase disposableincome. This can give a positive impact on consumption demand in long term.