Demonetization Effects on Economic Pillars

Demonetization Effects on Economic Pillars

Demonetization effects on economic pillars

Three years back, an unexpected appeal by PM Narendra Modi shook the Nation. It was an appeal to join him in the fight against corruption and black money. This could be the riskiest political move by the Modi Sarkar, however, they took a stance and start the implementation of demonetization. It has been a year after this bold move, so, let’s examine the results of the move.

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The move has had a great impact on the economy and has resulted in the following:

  1. Black money unearthed
  2. A cleansed financial system
  3. Drop in real estate prices
  4. The decline in lending rates of the bank
  5. Detection of fake currency notes
  6. Increase tax compliance

1. Black Money Unearthed:

With more than 98% of the cash returning to the banks; it was not difficult the track the black economy. Some think that the demonetization has failed but the entire exercise has made it possible for the Government to uncover the black money hoarders.

Some Crucial Outcome of this:

  • More than 17 lakhs cases identified where cash transaction didn’t match tax profile
  • More than 3 lakh crore in 23+ lakh bank accounts are under investigation
  • 0.011%  of the country’s population deposited 33% of total cash. These accounts are now under audit.

2. A cleansed Financial System:

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There was crack down on 2 lakh bogus companies, which were created for the sole purpose of tax evasion. These companies had 100+ bank accounts each in their name. One of them had 2000+ bank accounts. Further, based on the data received from banks, it was revealed that about 58,000 bank accounts of 35,000 companies deposited and withdrew Rs. 17,000 Crore post-demonetisation. The above examples bring forth the modus operandi of some of the shell companies caught during the investigation. The wide-scale purging of shell companies is proof that demonetization was an earnest step taken in the right direction to cleanse India’s financial system of its deep-rooted menace.

The numbers show that the implications of demonetization were huge, considering that it pushed the colossal financial system towards transparency, in one big sweep.

3. Drop in the Real Estate Prices:

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According to the Economic Survey, the weighted average price of real estate fell post demonetization. The report said:

“An equilibrium reduction in real estate prices is desirable as it will lead to affordable housing for the middle class, and facilitate labour mobility across India currently impeded by high and unaffordable rents.”

The real estate was well known for parking a lot of black money and dealing in cash transactions; which was reduced post demonetization.

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4.  A decline in the lending rates of the bank: 

The MCLR i.e. Marginal Cost of Lending Rate declined from 9.3% in Oct 2016 to 8.5% on June 17. Various loans such as Education, Home, etc also got cheaper.

Bank-Lending-Rates-Declined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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5.  Detection of Fake Currency Notes: 

Fake currencies have a grave effect on the economy as they have an artificial increase in the Money Supply, which causes inflationary pressure.

The counterfeit data given in RBI’s annual report shows detection of 762 thousand fake currency notes, an increase of 20% since the last financial year. Among these, a majority of the counterfeit notes have been of Rs 500 (MG series) and Rs 1000, 41% and 33 % respectively.

There has been no case of detection of high-quality fake currency notes post demonetization.

6.  Increase in Tax Compliance: 

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Demonetisation has led to a significant widening of the tax base with a record increase of 26.6 percent in a number of new tax prayers from 66.53 lakh in 2015-16 to 84.21 lakh in 2016-17. In addition, the number of e-returns filed increased by 27.95% from 2.35 in 2016-17 crore to 3.01 crore in 2017-18.

Conclusion:

There are many more benefits of demonetization, on average, revenues of urban local bodies across the country increased almost 3 times. revenues of ULBs in Madhya Pradesh and Gujarat increased almost 5 times.

 

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