Is Demonetization Really a Smart Move?

IS DEMONETIZATION REALLY A SMART MOVE? (Economic Perspective)

What is Demonetization?

Demonetization is the process of stripping away the legal status of a currency in day to day transaction.

To answer this question first we need to find out the reason for which it has happened. The reason provided for this was to put a check or curb on the Black Money which are in the form of cash. Which brings us to the next logical question that how much of the money are in the form of Black Money?

To answer this question I will use the data provided in one of the article in the Indian Express which says that according to the top expert only about one twenty of the full portion black money is in the form of cash. That means that still 80% of the Black Money is out there in the form of Gold, shares, Foreign Currency, Infrastructure projects and other financial Instrument. The total black money that are stashed in Swiss bank is US $ 2.1 Billion. Let us say that this money is the 80% of the total black money. So Net black money will be 2.1/.8 which is equal to 2.625 Billion. Out of this only 20% of the total Black money has been reduced because of demonetization. The no. will be $ 0.42 Billion Dollars.

Now let us try to calculate the monetary downside impact of this decision:

Because of Demonetization there will be a cash crush in the society which will result in an inflation in near future. According to the CII estimates the retail sector has already seen a sale slump by 50%. Another major sector which will see a downfall is the agriculture as the Kharif season is already at its end with the harvest going to happen in the December. The Problem is with the sowing of Rabi crop as most of the Indian farmers rely on debt for the purchase of seeds and fertilizers with a cash crunch happening with most of the Micro finance organisation, it will take a hit.