Demonetization of Large Denomination Currency Notes and Its Influence on the Indian Financial system

Demonetization of Higher Denomination Currency Notes and Its Influence on the Indian Financial state

On November 8th, 2016, Government of India announced its final decision to demonetize or ban previous currency notes of INR 500 and INR 1,000 in circulation. This shift was taken to control “black income and counterfeit notes utilized by terrorist corporations for illegitimate functions” in the financial system. These two currency notes account for 86% of all the currency in circulation.

The transfer to demonetize Significant Denomination Currency notes has massively impacted life of practically each Indian according to the sector info. This has also hampered the economic functions about the state. A new report from Deutsche Bank estimates that Indian authentic GDP development is probable to slow down to 6.5% in the present fiscal 12 months because of to demonetization. Big implications of this demonetization are described underneath:

Cash-significantly less Financial system

India is predominantly a “cash-based” financial state, with 98% of all shopper transactions conducted in cash, in phrases of volume, and about 85% of staff getting their wages in cash. This transfer is also predicted to propagate the notion of “Electronic India” mission undertaken by government to make changeover smoother from a cash-based economic system to a “cash-significantly less” economy.

Growing Tax Revenue

In addition, India is basically a quite weak country in global specifications with annual for every capita GDP of down below US$1,600 in 2015, as data from Earth Bank implies. By forcing people today with illegal cash holdings to deposit these kinds of cash holdings into bank accounts and pay taxes is supposed to increase tax revenue to the government. These tax revenues can then be used to finance improved community infrastructure as properly as other social welfare systems for the poorest sections of the society.

Performance of the Move

Previous RBI Governor, Raghuram Rajan, had pointed out for the duration of a conference in 2014 that demonetization has constrained positive effects. He also talked about that it would be helpful for the Indian economy to have a far better tax routine to achieve positive very long operate sustainable consequences.

For its immediate implications, this decision by the Indian government is supposed to suppress out the black income in circulation. This will only affect unaccounted cash that is held in cash. That is, it will not have any impression on the black money that is held in the type of assets such as gold or property, and foreign currency denominations. In addition, this will have minimal result on reducing the corruption or to enhance the tax revenue in the lengthy run.


This demonization software is expected to enable government to deal with black funds and counterfeited currency notes in the overall economy, but only to some diploma according to marketplace research. This system is expected to carry positive effects for the Indian economic system, together with lowering interest premiums, reducing inflation in the medium operate, and larger taxation revenue in the quick run, and diminished tax stress. Nevertheless, the Indian government will need to have to work on various other transparent policies and a greater tax system to obtain its plans of rooting out black revenue and finally the parallel financial state.

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