The large denomination notes were demonetized and almost 86% of all cash in circulation was demonetized. The aim of the move was to prevent fake currency from circulating, weed out black money, curb illegal and terrorist activities and curb corruption. Though there shall be short term costs due to this move there shall also be long term benefits.
The cost of this move was borne by the informal sector that deals with cash transactions but the impact of this on the GDP shall not be evident as the National income accounts do not estimate these properly.
However even these sector shall benefit due to the lowered interest rates and low inflation that shall make purchases cheaper.
The move of demonetization shall have a greater impact on GDP as the financial savings shall enter into formal channel, better tax compliance, lower corruption and black money and so greater tax revenues.
The Government now needs to move swiftly to ensure that lower denomination notes enter into the system rapidly, tax administration is stopped from being over zealous, land and real estate are brought under GST and taxes and stamp duties are reduced.
Government has taken a bold step in bringing the "Insolvency and Bankruptcy code" and thus ensuring that the Sick firms are closed and stakeholders can get back their dues as soon as possible. This addresses the "Lack of exit mechanisms or reluctant market-ism" problem highlighted in last years economic survey.
Monetary policy committee shall also ensure that the task of bringing inflation under control is done by a stable body and so monetary policy won't be affected by individual whims and fancies.
The Government has taken steps to boost the Textile manufacturing sector which is both export oriented and labor intensive and has the capacity to improve female participation in the labor force. Challenges are being made from East Asian countries like Vietnam and so the this sector needs to be strengthened.
Although the macro economic fundamentals like inflation, debt to GDP are strong the credit agencies ratings is still stagnant.
Unified Payment Interface - BHIM App has been launched by National payment Corporation of India and this has made mobile to account transfer possible. The app promotes inter-operability and so makes the Jan Dhan - Aadhar - Mobile [JAM trinity] stronger.
India has got a poor rating of BBB- and this hasn't been revised even though its fiscal deficit target has narrowed, debt is declining although still high at 67% and per capita GDP is growing [although this is low too]. Amongst the emerging markets the country has been a bright spot and becoming the fastest growing economies and a favored destination for FDI.
On the other hand China which is going through a tough phase of declining GDP growth has got a ratings upgrade in 2010 and this hasn't been revised since.
Ratings agencies have made dubious decisions in the past as they had assigned high ratings of AAA to mortgage backed securities even though the underlying assets were toxic. This ultimately led to a recession and a collapse of the economy. It also failed to forecast financial crisis and downgraded ratings post facto i.e. after the event has occurred.
The Aggregate supply shock as due to shortage of supply of cash, the cash intensive sector like agriculture labor is affected.
Uncertainty shock as the duration of cash shortage causes reduction in discretionary spending and firms to scale back investments.
Aggregate demand shock as it affects supply of money and reduces private wealth.
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