How the Ban on Rs. 500 & Rs. 1000 Notes will Impact the Indian Economy


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Impact on Indian Economy
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So, the latest news that has shaken all of us Indians is –PM Narendra Modi has banned Rs. 500 and Rs. 1000 notes as a step to curb black money and corruption. With that started the numerous posts on social media in support of this step, and of course, the long queues of people in front of banks to deposit or exchange their old notes.

Well, this step by our government is likely to influence the Indian economy significantly. Some of the leading research houses and brokerages have put forth an interpretation of this development, and how it may impact the different sectors and the economy as a whole.

Let’s see what they think on how this step would impact our economy:

Nomura

According to Nomura, although the citizens may face inconvenience in the short term, the ban is a major step of the government to clampdown on corruption and black money. As old notes are deposited in banks, the deposit growth in banks will see a spike and there would be a moderation in currency in circulation, which would be a favorable factor for liquidity of banking sector.

The ban on old notes may encourage rural households to open new bank accounts for depositing the old notes, which may give a boost to the financial inclusion thrust of the government. Next, as black money was an element in transactions of real estate, this step by the government is quite likely to affect the real estate market adversely. The real estate market is already wavering under high inventory at the major cities like Delhi and Mumbai.

Since some portion of black money may be included under legitimate channels, there would be a boost in the tax revenue collections of the government.

When talking about inflation, since black money played a role in high inflation, this move may contribute to reducing inflation. However, the ban may hurt consumption demand of near-term.

 

Citigroup

As per Citigroup, bank deposits may see an immediate boost in case some of the old note holders go for depositing them, instead of exchanging for new notes. There may be a significant decline in the currency in circulation if enhanced scrutiny compels people having unaccounted for cash money, to not deposit or exchange. In that case, the base money would go down, but the boost in money multiplier, due to a higher ratio of deposit to currency, may mitigate the effect on the overall supply of money.

In case, money supply goes down temporarily on account of these moves, then assuming that there would be no immediate variation in circulation velocity, we may see deflationary tendencies, or some decline in real demand. The impacts may vary based on sectors – contractionary in some sectors whereas deflationary in others. This may make a risk for the economy, but for a short term.

 

BofA Merrill Lynch Global Research

The BofA Merrill Lynch Global Research estimates that this move could lead to a disclosure of about 1-2% of the GDP. They see a three-pronged effect of this step.

  1. Firstly, the move should result in lower yields and lower rates. Well, a cash of Rs. 100 disclosed will lead to Rs. 55 of deposit mobilization in banks as well asRs. 45 of taxation (supposing the tax rates of IDS 2016). This would eventually result in a lower fiscal deficit. Subsequently, the organization can become increasingly confident of their call of the 75 basis point cut in the lending rates of banks by September 2017.

At the meantime, they hope the RBI to lower down its pace on the open market operations (OMOs) until it becomes clear that how much money would go into bank deposits by 30th December.

  1. Secondly, the adverse impact on wealth is likely to hurt discretionary demand of higher-end temporarily. Simultaneously, a buffer may be offered by the lower rates.
  1. Thirdly, the organization expects that the RBI would recoupforex reserves in case adverse wealth impact lowers down the demand of gold import.

 

Kotak Institutional Equities

This organization sees the decision of the government to removethese high-denomination notes and replace the old notes with new notes, as favorable in medium term for our economy. The recent step seems to be the final move in the systematic approach of the government to remove all black money from our economy. The organization hopes the banking system and the economy to be benefited, since a large portion of black economy is likely to become a portion of formal economy.

The organization doesn’t see any substantial effect on general consumption, since most Indian consumers use notes of small-denomination for small-value transactions and items. Moreover, consumers can exchange their notes of high-denomination with new notes at banks.

The demand of residential real estate has been subdued anyway for some time. It should be noted that it had become difficult already to make use of cash for any high-value transactions in our country, with the need to disclose PAN for transactions of high value.

This is what the pioneers of economy research think how this move would impact the Indian economy. What do you think about this step by our government? Would it strengthen our economy? And would it be successful in curbing corruption and black money from our country? Please share your views and opinions as comments below.

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Reshma Banerjee
Reshma Banerjee works as a content writer. Drawn to stories since childhood, reading is her favorite pastime. She loves admiring nature’s beauty and thinking about the mysteries of the cosmos. Follow her on Facebook or Twitter