9 Nov 2016

e-Khaliyan

How will scrapping currency notes of INR 500 and INR 1000 affect the daily lives of Indians?

I was going throgh Quora and found this answer very appropriate to the question, I have put answer by Abhimanyu, Here is detailed analysis by him - 
ULTRA SHORT TERM IMPACT
  1. Disruption of public order ->The Government has provided a small cache; where a few places like hospitals, petrol pumps etc. will still have to accept old 500 and 1000 bills for the first few hours. But this is just to soothe and preemptively pacify any violent public reaction. In effect, once this news breaks out, no hospital or petrol pump is going to accept old currency. This might lead to chaos and disruption in public orders.
  2. Long queues at ATMs and CDMs -> People generally have a tendency to react to such events without taking a pause. On hearing the news, they will immediately go to withdraw small bills and deposit large bills. In the first few hours, we can accept long queues at ATM’s.
  3. Long queues in banks ->Once banks reopen and begin to exchange the old currency bills for new ones, you can expect long queues in banks and a general slowdown of work.
  4. Desperate Housewives ->Another group impacted by this news, would be housewives who collect small amounts of money and store them hidden from the eyes of their husbands! All that money stored in kitchen jars will now come out.
  5. Wedding Season ->And finally, we know that November and December in India officially constitute the Wedding Season, with lakhs of weddings taking place all over the country. Most of the transactions during these wedding take place in the form of cash, and hence they would be affected the most. Although, this might have an unexpected effect of curbing Dowry, as the groom side would refuse to accept any cash in Dowry!
SHORT TERM IMPACT
  1. Immediate Deflation -> As people begin to deposit more and more money in their bank accounts, the amount of liquid money under circulation will drastically reduce. This would lead to heavy deflation.
  2. Deflation increases the value of money -> (that we have) because the total money supply goes down but the commodities and things available in the market have not gone down. To understand this phenomenon, let’s take an example. Suppose there are are 1000 items and 1000 coins, each item's value would be Rs. 1. If there are 1000 items and only 500 coins, each item would cost Rs. 0.5 only, which means with each coin, you can buy 2 items!
MEDIUM TERM IMPACT
  1. Prices of Gold go down -> As people have less money to spend, demand of Gold falls. Our imports of gold decreases.
  2. Prices of Real Estate go down -> In short run, the effect is same as that for gold. As people have less money to spare, demand goes down and so do the prices. But traditionally, real estate sector is observed to deteriorate slowly and recover fast.
LONG TERM IMPACT
  1. Increase in Banks’ Deposits -> As people deposit more and more currency with banks, banks have now a huge amount that they can lend as credit.
  2. Cheaper Credit -> Now that the banks have more to lend, credit becomes easier and interest rates go down.
  3. Inflation -> As people take more credit, the money supply in economy once again increases, leading to inflation
  4. Balance -> In long term, this inflation would balance out the deflation.
ULTRA LONG TERM IMPACT
  1. Drastic decrease in Corruption and Black Money -> I don’t think this point needs any further explanation.
  2. We move towards a Cashless Society -> The transition is already happening. A large portion of our day to day transactions is already happening via Paytm, Internet banking, Mobile Banking etc. But this move of our government is bound to give a push to this phenomenon. This will usher in a new era of paperless currency. We are expected to go all digital in near future.
  3. Modi wins next Lok Sabha election -> Such a move is bound to have political implications. People won’t forget this easily. Modi has proved that he has balls of steel, and he will be elected

source -  Quora