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People are getting less fearful of technology and more at ease with the digital world with each passing day. Demonetization has made significant inroads into India’s digital payment system. The move to demonetize the previous currency was a step toward eradicating unaccounted money from the Indian economy. The decision was made in response to the threat of illicit money, counterfeit cash, corruption, and terror funding. The government’s decision to demonetize old cash and replace it with new currency caught the country by surprise. In the long term, demonetization has both beneficial and bad consequences, but the negative consequences do not exceed the favorable consequences. This is a global-scale and high-quality invention for the Indian Economy and has eventually led to the strengthening of such systems and the necessary infrastructure. UPI was first launched in the country after demonetization, and its quick rise has been genuinely phenomenal. In October 2021, the value of transactions over the Unified Payments Interface (UPI) crossed $100 billion. Digital transaction systems, E-wallets, online transactions utilizing E-banking, the use of plastic money (Debit and Credit Cards), UPI, EFTPOS, Net Banking Aadhar card, and other methods of money transfer have become the norm. With cash transactions on the decline, demand for other means of payment has increased. Impact On Digital Payments/ Online Transactions Consumer purchasing power is also impacted by cash shortages, as cash accounts for 90% of transactions in the Indian economy. The stock values of firms in these industries will suffer as a result. This mostly affects long-term investments such as real estate, vehicles, and the cement and steel core businesses.
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Impact On Purchasing Powerĭemonetization has had an impact on the purchasing power of consumers.
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In comparison to the previous trend, demonetization boosted the direct tax-to-GDP ratio by 0.2%, 0.8%, and 1%, equal to Rs 40,000 crore, Rs 1.25 trillion, and Rs 1.89 trillion indirect taxes in 2017, 2018, and 2019, respectively. However, this downward trend reversed in 2017 and has gradually grown since then, reaching 6% in 2019. India’s direct-tax-to-GDP ratio has consistently declined from 6.4 percent in 2008 to 5.4 percent in 2016 – a 1% decrease over eight years. Banks can utilize this liquidity to lend to customers in the long run. People were made obligatory to deposit their money in banks, which had enhanced the liquidity of the banks in the short term. In the short run, this resulted in a liquidity crisis since many institutions were unable to exchange cash owing to a lack of funds.Īccording to research done by the Reserve Bank of India, the economy’s regulator, 15.30 lakh crore banknotes have been demonetized. It was a complete shock and a chaotic scenario in India, which is essentially a cash economy with the majority of transactions taking place in cash.Īlso Read: A Failed Demonetization And A Rain Of Gold Coins: A Reign Of Misgovernance And Strange Economic Policiesįurthermore, the demonetization was limited to Rs 5 notes, which constitute 86% of the real currency in circulation. People were waiting in large queues in front of banks and ATMs to exchange and withdraw cash. The country was in turmoil in the weeks that followed the declaration. 1000 notes were terminated, and a new Rs 2000 note was released. However, in the long term, it was more beneficial. The consequences of demonetization on banks were both positive and negative. The Effect On Banks And Financial Institutions With the pandemic year seeing the biggest ever GDP decline of 7.3 percent in 2020-21 and a large base effect in GDP statistics for 2021-22, it has become very difficult to estimate the post-demonetization effects.ģ. This action could also have an impact on GDP creation due to a decrease in consumption demand. However, this trend reversed after demonetization, and the economy began to lose power, with GDP growth reaching just 4% in 2019-20.īecause of the country’s cash constraint, the circulation of currency has decreased, causing GDP to fall. India’s GDP growth rate has steadily grown from 5.2 percent in 2011-12 to 8.3 percent in 2016-17.