The strategic move of currency demonetization by Narendra Modi led BJP government is definitely turning bundles of black money into mere waste papers. Though this move may have come as a surprise for everyone but considering that it is being referred to as a masterstroke, the government must surely have been working on this plan for quite some time. It is definitely a good move as far as the economy is concerned but it will have some consequences. For starters, demonetisation will affect the demand for gold. As we all may be aware that black money is directly linked to gold. The demand for gold will decrease in the long run. How will this happen? After the announcement was made on Tuesday, people across the country were seen thronging jewellery shops in order to convert their money, either black or earned through legitimate means, into gold. The reason for this is that people consider gold as a pretty safe investment. This led to an increase in demand for the precious metal. The rise in demand led to an increase in the prices but if you are acquainted with how the market works, you will know that this increase in demand will last only for a short while, till people can use the old notes to pay which is only for a very short while. After that the demand for the precious metal will go down as people won’t have money to buy it in huge quantities, thanks to the caps on money withdrawal.
Demonetisation will also shake the real estate market. Real estate is considered as a safe haven for black money and many people invest a lot of their money in this business. Due to demonetisation, secondary i.e. resale market will be affected. Prices will come down due to the less number of buyers. People will prefer to invest in gold rather than real estate which involves tedious paper work.
Inflation will also go down due to demonetisation as people will have limited access to cash but only for a short period of time. Inflation may go up in the long run as banks are receiving huge amounts of deposits. SBI, received Rs. 53000 crores in deposits in last few day, only a portion of which got exchanged due to the caps imposed by the RBI. Increase in deposits means banks will provide cheaper credit in future thus increasing the money supply in the economy which will drag the prices up. This will definitely not happen in a day or two but will take some time.
The replacement of 1000 and 500 rupee notes is a tedious job as the majority of currency flow is in the denomination of these notes. Replacing them with new notes will be a tough job for the banks and we are already witnessing the desperation and panic that this move has set in all over the country. People are trying to get their notes exchanged as soon as possible despite the fifty-day exchange gap. Rural areas will see more problems as far as the exchange is concerned as they mainly depend on cash transactions and many of them don’t even have bank accounts. The caps on the withdrawal limit by the government will also cause certain problems to a number of people especially those who mainly deal in cash transactions. Though many have criticized the move, it will turn out to be a positive one, made for the betterment of the economy in the long run.