Catastrophic Impact of Demonetisation on Indian Economy

Around 87% of the Currency in circulation – so called High Denomination Notes of Rs. 500 and Rs. 1000 – have been demonetized by our ‘Acche Din’ PM Shri Narendra Modi at the stroke of the midnight hour of 8-9 November 2016 – ostensibly to fight the menace of Dirty Money, Black Money and Fake Indian Currency Notes. (FICN)

Black Economy has often been termed as a PARALLEL economy and a chronic ailment of the Indian Economy. Though there is no proper quantification of Black money in the Indian Economy – all available estimates are at their best guesswork – It can be reasonably stated that 87% of the Indian Economy is NOT BLACK ECONOMY.

What is certainly missed are the interconnections between the WHITE Economy and the BLACK Economy. Take the case of Black Money in Real Estate sector as cited by the Hon’ble PM in his speech (Mann ki baat, anyone?) The cement and steel that form at least around 30% of the construction cost are produced in the organized / formal sector by large industrial units paying all sorts of Taxes / Revenue to Central / State and Local governments. With a crackdown on the Real Estate Sector, a looming correction / contraction in prices widely speculated and the inability to provide wages to daily wage construction labour due to liquidity issues / withdrawal stipulations – front end of off take of steel and cement has virtually come to a standstill. Government will loose revenue which it has been getting before from these sectors. Will the gains from crackdown on tax evasion and reduction in currency liabilities of RBI exceed the opportunity tax & revenue lost due to liquidity crisis in the Indian Economy.

Check for lock-downs and shutdown of production lines in the coming fortnight as there is a massive contraction in purchase of all non-essential goods and services due to an unprecedented and absolutely avoidable liquidity crisis in the Indian Economy.

Key Economic Indicators – Industrial Production (IIP), Indirect Tax Revenue collection from Manufacturing activity, etc for the months of November, 2016 and December, 2016 will be critical to watch and are very likely to show a massive contraction.

The Economy is very much like a heart beat. Demonetization is a cardiac arrest – a sudden sometimes temporary, cessation of function – for the Economy. If it stops, it will be but restarted with great difficulty, pain and may never attain its former stature.

Take my word, Indian people – honest or otherwise, and Indian Economy, are unlikely to be better off in any scenario. ‘Burey Din’ (Bad Days), if there are any, have just started. And don’t worry about prosecution, if you are in prison, it’s Governments worry to feed you, if you are outside, you will have to worry to feed yourselves.

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