Study Material | Test Series | Crash Course
Drishti IAS
call1800-121-6260 / 011-47532596
Drishti The Vision Foundation
(A unit of VDK Eduventures Pvt. Ltd.)
Current Affairs Crash Course Download Player Download Android App
Q. Demonetisation impact on black money and inflation: Discuss the impact of demonetisation on black money and inflation.
Jan 13, 2017 Related to : GS Paper-3

Ans :

Introduction-

In the month of November, the Indian government has demonetized the high value currencies i.e currency notes of 500 and 1000 with objective to unearth the black money, and to curb the corruption, counterfeit currency as well as terror financing. The demonetisation drive has impact on both black money as well as inflation.

Impact on black money-

  • Demonetarisation of Rs 500 and Rs 1,000 currency notes will address issues like black money and corruption and also help the economy become more digital.
  • The move will either unearth the black money slashed in the form of cash or forces to destroy those unaccounted currencies. Demonetisation will curb the menace of black money and will help check stashing of funds to a large extent.
  • Similarly it has major impact on corruption that exists in India and also on financing of terror activities in India. Hence it was considered as courageous step in the fight against unaccounted money.

Impact on inflation-

  • Rise and fall in prices are closely linked to the money supply in the market. If the supply of money increases, its value decreases and results into inflation. The reverse case is deflation, if money supply goes down, the value of money increases results into deflation.
  • The headline Consumer Price Index hit a two-year low of 3.63% for November 2016, it was 5.41% in November 2015. The major contributor to the slowdown in price gains was the food and beverages group, where inflation eased to 2.56% largely on the back of a slump in the prices of vegetables, a highly perishable commodity.
  • In the backdrop of demonetisation, due to restricted access to cash, the discretionary spending on goods and services in the CPI excluding food and fuel have been affected.

Conclusion-

Indian government’s decision to demonetise the high value currency is one of the major step towards the eradication of black money in India. The demonetization drive will affect some extent to the general public, but for larger interest of the country such decisions are inevitable. . Due to restricted access to cash the prices of many commodities have fallen and resulted into deflation. Now government needs to ensure the sufficient availability of cash in market, else prolonged deflation may create dangerous impact on economy.    

 


Helpline Number : 87501 87501
To Subscribe Newsletter and Get Updates.