It is widely expected that demonetization will bring long-term benefits. Will demonetization deliver benefits that outweigh the short-term costs? Critically examine.

The sudden decision of government to demonetize the 500 and 1000 rs notes came as a shock to everyone and the cash crunch still exists to date after one month. There is no doubt that it induced the pain on the common man but it expected that it will bring the long term benefits.

Short time cost:

  1. Due to the cash unavailability, workers belonging to unorganized sectors,small businesses,farmers are the most effected
  2. Projected GDP growth rate of 7% will not be achieved with the reduced economic activity for the 2016-17
  3. There is no cash available for the urgent needs of individuals

Long term benefits :

  1. Lending rates may come down boosting the loans
  2. Better tax compliance and better tax to GDP ratio
  3. Better tax collection can result in government spending on infrastructure,health,education and social welfare schemes
  4. Though block money is not removed completely, it will be reduced
  5. Corruption will also be reduced with the increased digital payments
  6. Better monitoring of the online money transfers can prevent the funding for illegal activities

Challenges:

  1. Demonetization is forcing individuals and businesses to go digital without much awareness and know how can be risky
  2. Lot of block money is held as real estate properties, gold and deposited abroad. This can’t be brought into economy by demonetization
  3. With lowered interest rates , there is risk of FIIs and FPIs flows from the economy

Though it seems like this move will long term benefits which out weight the short term cost,whether the demonetization will reap the long terms benefits is remained to be seen in the future.

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