Demonetization – Analysis and the Effects

PM Modi’s surprise announcement regarding the demonetization of large currency notes ( 500 and 1000)has raged a political debate in the nation. There are still long queues outside the banks, ATMs, Post Offices and the RBI outlets. Seen as the biggest reform of the decade, the step has brought in many problems with it. As everyone knows there is no revolution without sacrifice, so we have to make some sacrifices for the betterment of our economy and our nation.

Many financial pundits are analyzing the situation of the nation, we will try our level best to do so. Now we will take respective sectors, employment, banks and duration of the effect into consideration.

DEMONETIZATION AFFECTS AGRICULTURE

Agriculture seems to have  taken the biggest blow on the way to the demonetization campaign. As the Rabi season is approaching and the sowing of wheat is on its peak, farmers are having trouble buying seeds, fertilizers as the old currency is not valid and banks are having large  queues. Approximately 80 percent of farmers in the country harvest wheat and these are the farmers who are suffering more. Moreover, farmers have their bank accounts mostly in co-operative banks and these are the banks which are exempted from exchanging the old currency. Another reason is the on going harvesting of rice throughout the nation. Farmers are having more trouble in selling the rice in the mandis and in the market.

Also Read : Demonetization effect on elections

LOCAL MARKETS

It is important to know that a major workforce of India is employed in these unorganized sectors and are likely to take hit due to major effect on liquidity in the market.  Every payment in the local market is done through cash. As old notes are invalid and there are not enough new notes available, the local vendors and shopkeepers are seen to be in a massive loss and a huge drop in their sales is observed. Even if someone approaches a shop with the new denomination of 2000, the shopkeepers don’t have enough small currency to give back change.  The owners of small kirana stores in villages don’t have bank accounts. Moreover, in majority cases the bank accounts are in local cooperative banks present in the villages and these co-operative banks are not authorized for accepting the old currency.

But there are many measures been taken by the Govt. of India for better liquidity in the local markets and exchange facility be given to every one in the rural areas.

SECTORAL IMPACT 

Different sectors will have different impacts from short term to medium & long term. As discussed above the unorganized sectors are worst hit. And so is the case with the sectors related with these unorganized sectors. These sectors are facing the collateral damage. The commodities and agricultural sector, including the market for consumer, durables and non-durables is expected to feel the heat. In short to medium term the large denomination purchases are likely to be done through electronic means rather than bricks and mortar outlets, thus affecting the retail sector adversely.

Real estate sector will also take an adverse hit in a medium-long term, particularly in the purchase market. Revaluation of current real estate transactions of board  are likely to affect the major players in the market.

LUXURY ITEMS

With the erosion of real wealth due to the demonetization campaign the luxury market is likely to get affected. Looking into the sub-sectoral units the likes of SUVs, luxury cars, jewellery and other luxurious items.

In spite of these negatives, this very step of Government will give a push to the Indian economy in near future. This will also change our economy from cash based to cashless economy. Another thing to be seen is THE BOOM in the banking sector. A scheme that will increase the reach of banks to far flung areas.

In the next post we will discuss the advantages and how this will push the economy. A nice discussion on how it will be a handsome scheme for the underprivileged of the society.

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