Page 32 - Banking Finance December 2016

ARTICLE

Impact of Demonetisation reserve money and hence money supply will decrease per-
manently. However gradually as the new notes get circu-
Parallel Economy cannot survive:
lated in the market and the mismatch gets corrected,
There is no chance now the parallel economy can survive money supply will pick up.
and sustain at all. The removal of these 500 and 1000 notes
is expected to - remove black money from the economy as Positive effect on Prices
they will be blocked since the owners will not be in a posi- Price level is expected to be downward spiral, due to mod-
tion to deposit the same in the banks, - Temporarily stall
eration from demand function. This demand driven drop in
the circulation of large volume of counterfeit currency which
prices could be understood as follows:
is eating like termite the growth benefits of economy and -
Y Consumer goods: Prices are expected to drop only mar-
this will certainly curb the funding for anti-social elements ginally due to moderation in demand as use of cards
like smuggling, terrorism, espionage, etc.
and cheques would compensate for some purchases.
Positive effect on Banks Y Real Estate and Property: Prices in this sector are largely
expected to drop, especially for sales of properties
The banks will find more amounts being deposited in Sav-
where major part of the transaction is cash based,
ings and Current Account of banks. This in turn will no doubt
rather than based on banks transfer or cheque trans-
enhance the liquidity position of the banks, which can be
actions. In the medium term, however the prices in this
utilized further for lending purposes in the economic activi-
sector could regain some levels as developers rebalance
ties. Further, however, to the extent that households have
their prices (probably charging more on cheque pay-
held on to these funds for emergency purposes in their
ment).
home, there would be withdrawals at the second stage.
Boost deposit base and savings Positive effect on GDP
Effect on GDP will be deep rooted. The GDP formation could
A rough estimates of Global agencies have pegged the size
be impacted due to, reduction in the consumption demand.
of the parallel economy in India a more then to 23% . Basis
this, we estimate unaccounted cash in the economy, of which However with the recent rise in festival demand is expected
to offset this fall in overall impact. Moreover, this expected
a certain significant proportion will make its way to the banks,
impact on GDP may not be significant as some of this de-
thus boosting deposit base as well as financial savings.
mand will only be deferred and re-enter the stream once
Effect on Online Transactions and alternative the cash situation becomes normal again.
modes of payment :
Create room for further monetary accommoda-
Reduction in cash transactions, no doubt, alternative forms tion
of payment will see a sudden surge in demand. Digital trans-
action systems, E wallets and apps, online transactions us- With improved monetary transmission in the economy, eco-
ing E banking, usage of Plastic money (Debit and Credit
Cards), etc. will definitely see substantial increase in their
demand. This should eventually lead to strengthening of such
systems and the infrastructure required.

Effect on Money Supply
Effect on money supply will impact positively the Bharats
economy. The older 500 and 1000 Rupees notes being
scrapped, until the new 500 and 2000 Rupees notes get
widely circulated in the market, money supply is expected
to reduce in the short run. To the extent that black money
(which is not counterfeit) does not re-enter the system,

32 | 2016 | DECEMBER | BANKING FINANCE

Copyright@ The Insurance Times. 09883398055 / 09883380339