The Short And Long Term Impact Of Demonetisation

The Centre's move to demonetise high-denomination currency has shaken up the economy.

- Joe C.Mathew And Dipak Mondal

For Mumbai-based Delta Corp, November 9, 2016, will remain a black day. That day, the gaming and hospitality company, which runs three casinos offshore of Goa, saw its share price fall 20 per cent on the Bombay Stock Exchange (BSE). What hit the company’s shares – which further fell 33 per cent to ₹108.37 on November 22 – was the decision of the Narendra Modi government to demonetise ₹1,000 and ₹500 currency notes. About 86 per cent value of currency in circulation was in these two notes. Their withdrawal, at a four-hour notice, pushed India’s economic activities to the brink. As India’s former chief statistician Pronab Sen says, the old currency became non-legal tender before the issuance of the new currency, which had never happened elsewhere. “There was no pre-announcement, and that was a shock to the system.”

Stocks plunged on November 9, the day after the announcement – the BSE Sensex fell over 1,500 points in early hours of trade. After all, the move has affected every sector. From farmers to truckers, manufacturers to retailers, sellers of goods to providers of services, every participant in the country’s economy experienced the shock of ₹14.7 lakh crore worth of currency exiting the system. Of the ₹17 lakh crore worth of currency notes in circulation, only ₹2.3 lakh crore worth small-denomination notes remained to service India’s growing and largely informal, or cash, economy. Electronic payments account for just 2.5 per cent retail transactions. The informal sector accounts for about 93 per cent employment. Fifty per cent of India’s economy depends on cash. Almost two weeks after demonetisation, former prime minister and economist Manmohan Singh said the decision would mean a 2 per cent fall in India’s gross domestic product, or GDP, growth.