Demonetisation Impact on Economy

On that night of November 08, 2016, India came to a standstill owing to radical move taken by the Government of India. Banning old currency high denomination notes from almost immediate effect. The phenomena termed as 'Demonetisation'.

I have just tried to capsulise some broad impact of Demonetisation on the Economy. The same is as under: 

Short term impact

• Disruption in the current liquidity situation 
• Unorganised sector proceedings including small trade market activities will remain volatile in the short term.
• It is estimated that there may be a negative GDP impact in the current quarter as consumption shock gets transmitted in the system.
• An elevation of uncertainty is always a negative for equity markets. The long term outlook remains positive.
• Domestically, there could be some turmoil as the effect will be disproportionately felt by the lower and upper income classes.

Long term impacts 

• This essentially represents a change in regime for the real and financial economy. 
• Internationally, the government is likely to get a thumbs up for the move and more countries could potentially see this as a viable option to curb black money and stem illegal financial activity. 
• Such an action achieves larger significance for a globally connected India as it shows boldness in tackling an issue which has remained a thorn in the growth success story of this generation.

Sectoral impacts

• Technology and financial services are expected to gain in the medium to long term.
• Commodities and agricultural sector, including the market for consumer durables and non-durables, is expected to feel the heat. 
• Retail sector will have adverse impact. In the short to medium term, large denomination purchases will likely be made via electronic purchases rather than through brick and mortar outlets. 
• Real estate sector is likely to see a significant negative impact in the medium to long term particularly in the repurchase market. There are expectations of a revaluation of current real estate transactions.
• Luxury goods market is also likely to get affected as this move represents an erosion of real wealth to a large number of people.
• Areas of sub-sectoral impact will be felt in luxury cars, SUVs, gems, jewellery, gold and high-end branded products.
• On the positive side, there is likely to a reset of spending patterns as this move indirectly represents a significant push towards a cashless economy. 
• Businesses in the fin-tech sector including payment banks, mobile wallets, electronic transfer providers, etc., are expected to see gains.

Exchange rates be affected

We could see some turbulence of the domestic currency in the forex markets as notes in circulation will decrease. The same can be witnessed already.

Impact on inflation 

We are likely to see some decline in inflationary pressures as demand along with household inflation expectations are likely to go down. This would make RBI more comfortable on managing inflation in the future increasing the possibility of rate cuts in the future.