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Global economic stand point of India on the demonetization effect

Representational Picture

The decision of the government to scrape 500 and 1000 currency notes is affecting different class of society in a different way. Let us analyse the bigger picture of India post this move.

1: Poor Class

This class is affected adversely immediately. This class hardly use debit or credit card. They also keep hardly any money in banks. They keep most of their money in cash in their home in the higher denominations. They have to, therefore, rush to the ATM and stand in the queue to withdraw their money to run their day-to-day affair. However, this problem is temporary and within a month, things are likely to return to normal.

This class is likely to make better use of banking channel and the cards in future. That will make their life more secure and help them earn more money through interest on their deposit.

They will also gain from the increases taxes and lower corruption in the government schemes that would follow this move.

2: Middle Class

The middle class of India is used to use credit/debit cards and other online methods to transact their business. They too have to stand on the big queue for short time because they still need the 100 rupee note for making petty payments. Yet they can buy most of things using their credit cards. This class would become more cashless now so that they can eliminate the need of currency notes as much as they can.

3: Upper Class

The honest upper class of the society is already making most of the transaction cashless even now using cards and electronic transactions. They too may face a few days of trouble but their life would become normal very soon.

The dishonest upper class is the worst hit due to this move of government because most of their black money is stored in 500/1000 notes which would go waste. They have to either burn their notes or give them to a large number of poor people (on commission) for converting that to white. The currency would become valid once replaced by new notes, but the black money would remain black. If they face the raid, they would end up becoming bankrupt once they have to pay 200% penalty on such money.

4: Politicians

Politicians are the worst affected class due to this move. They keep almost 90% of their money in black. Once that money is gone, they would no longer be able to buy the votes. It is for this reason that the move of Shri Narendra Modi is most significant. He has angered not only the corrupt and big businessmen but also his own class i.e. politicians. Every class that used to fund the elections must be angry with him.

Long Term Effects

In the long run, Indians would reap several benefits due to this move.

1. Once the black money is reduced, taxes would leapfrog

2. Developmental activities would pick up significantly as the tax revenue increases

3. Government can reduce rates of taxes since they can raise significantly more revenue with lower rates

4. Corruption would reduce since there would be little black money to pay bribe to government officials

5. Dowry and other social practices like extravagant marriages would reduce due to white economy

6. Illegal activities like murder, kidnapping, drug-paddling, prostitution, terrorism etc. would reduce since all these activities need black money

7. The honest people would live life of much more respect as dishonest would no longer be displaying their wealth for long time to come.