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Q. Short term impact of demonetisation: Discuss the short term impact of demonetisation on Indian economy.
Nov 18, 2016 Related to : GS Paper-3

Ans :

Introduction-

In a bid to unearth black money, to curb the corruption and terror financing the central government has demonetised the high value currency of Rs. 500 and Rs.1000. It is one of the boldest moves in the economic reforms of the country as it unearths black money to large extent and also contain the corruption as well as terror financing. But in a short run it has caused some inconvenience in the Indian economy particularly in small-retail and informal sector.

Impact of demonetisation in short run-

  • As 86% of currency notes in a circulation are rendered illegal tender, it is bound to create a short-term disruption in daily lives of country of 1.3 billion people.
  • India’s economic activity still takes place in the informal sector with no  or less cheque, card or net payments, most of the transactions takes through cash payments only. 
  • Recent demonetisation of high value currency has created cash crunch in the economy, this has direct impact on the small, retail and informal sector as most of their business is transacted through cash only. 
  • Many small scale traders have experience no or very less business in the last one week due to demonetisation. It hampered the small scale economy in short run.
  • To some extent both rural and urban people have felt uneasy over the currency swoop and faced some challenges in their routine transactions,
  • Even farmers experienced the problem in sowing rabi crops due to unavailability of cash that needed them to purchase the required items due to demonetisation.

Analysis-

  • In the first week it has been observed that government was not prepared enough to handle the issue of cash crunch after demonetisation. It was mainly attributed to maintain the secrecy in such huge scale exercise. 
  • It is true that cash crunch has been affected the Indian economy, particularly of small scale and retail sector. But the impact is of only short run, as government has already initiated many measures in this regard.
  • Even the problems faced were not that serious as it was reported, because many traders found alternative methods to deal the situation resulted out of demonetisation. 

Conclusion-

The demonetisation of high currencies which intended to curb the black money has created the situation of cash crunch. Cash crunch to some extent has affected the Indian economy and this impact will be for short run.  As government has already took various initiatives hence the impact created by demonetisation and cash is for short run, in coming days things will back to normal.   


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