Demonetization which has a dictionary meaning of “withdraw from use” has given the Indian economy a new meaning. An economy largely dependent on cash transactions has suddenly found itself lost from 8th November. The currency which was in use for most of the transactions i.e INR 500 & 1000 notes has become worthless. So fear, anxiety crept in the minds of ordinary citizens and businessmen alike. Fear has led to chaos in the markets, long queues in front of banks, T.V anchors suddenly jumping in to educate pros & cons of the impacts.
From an economic point of view, there are positive effects of this move, the focus being on bank loans & interest rates. Before 8th November, money market was in a bad shape with less circulation & investors worried as to what is going to happen if they invest & what should be their priority sector. Due to this, if balance sheets of most companies are seen, they have got huge cash balances for the reason not knowing where to invest. Now, due to demonetization these balances are deposited or invested in the business for productive activities. These activities ultimately lead to increase in liquidity funds in the business. This situation will further improve with cheaper rate of interest loans, thus leading to increasing economic activities in the market. This increase in economic activities ultimately leads to rise in G.D.P.
Looking from an investor’s point of view, an increase in output shall lead to more sales which give scope for organisations to declare more dividends or go in for expansion. If my investments get more dividends or help the Sensex to increase, there will be wealth maximisation. If this happens, standard of living shall go up further, leading to increase in economic activities.
Common man’s Approach
If we look at the same from common man’s point of view, then if economic activities increase, it leads to more payments that will eventually increase production. If the production increases, there are high chances of increased payments to the common man, which might get them interested in investment activities. Going by the psyche of the people, their first investment activity will be in the real estate sector.
Falling interest rates along with more earnings shall give everyone hope to own a house in the near future by applying for home loans. In a similar manner, for existing home loan applicants, the falling interest rates are a welcome change, as it will reduce the tenure of repayment, thereby ensuring the applicants shall become owners within a shorter period.
We can conclude that there are more positive effects of demonetization, with the only major negative effect being the pain suffered by the common man, whilst withdrawing his/her own money from the banks.