Demonetisation in  India: A short-term solution? The main objective of implementing demonetisation as a macroeconomic policy instrument is to wipe out black money from the economy
The main objective of implementing demonetisation as a macroeconomic policy instrument is to wipe out black money from the economy

The main objective of implementing demonetisation as a macroeconomic policy instrument is to wipe out black money from the economy

DUBAI. – The recent demonetisation of high denomination currencies by the Indian government has generated widespread debate and speculation on its macroeconomic consequences.Demonetisation is the practice of invalidating a currency unit of its legal status as a medium of exchange.

The main objective of implementing demonetisation as a macroeconomic policy instrument is to wipe out black money from the economy. The amount of cash circulating in the Indian economy is currently estimated to be about 18 trillion rupees (Dh1 trillion). With demonetisation, this amount is expected to be reduced by about three trillion rupees. Thus money supply base in the Indian economy will decrease and, consequently, inflation is expected to fall.

Will demonetisation be effective as a policy instrument? Will it yield long-term benefits? The economic impact of demonetisation is likely to be smaller and much less effective than expected. The policy will most likely be effective only in the short-term. There are several reasons that could support this premise. Some amount of black money, out of the estimated three trillion rupees, has already been converted into gold and foreign currencies.

Demonetisation may have resulted in losses for some businesses and individuals who were unable to convert cash into other assets, but black market transactions continue to exist. Despite optimistic views from certain quarters in the political spectrum, to what extent demonetisation will be effective remains a speculation.

Demonetisation must be complementary to taxation policies. Unless the government is able to widen the tax base, reduce the volume of black market transactions and the size of the black market economy, demonetisation, most likely, will yield temporary or short-term benefits only. – AlJazeera.

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