Article by: Asst.Prof. Suwan Juntiwasarakij, Ph.D., MEGA Tech Senior Editor
On November 8, 2016, Prime Minister Narendra Modi announced the demonetization of Rs. 500 and Rs. 1,000 currency notes. Furthermore, the government gave two months to deposit demonetized notes in any bank. So, what is demonetization? This issue offers an overview of demonetization in India.
IT BEGINS IN INDIA
Demonetization is a process of stripping a currency unit of its status as a legal tender. In simple words, demonetized notes are no longer valid as legal currency. What India benefits from demonetization are:
Increased Savings – As a result of demonetization, people will tend to deposit their cash in the bank rather than at home. This will help them save more.
Source: Based on the data from the RBI- Reserve Bank of India, NTT DATA
Lower lending rates – With currency demonetization, money moves from people to banks and financial institutions. Thus, there is a better circulation of money. This will lead to a lower cost of funds which translates into lower lending rates.
Better economy – As more cash is with the banks, there is a higher circulation of money in the economy. The government receives more taxes and can undertake more development projects. This leads to a better-performing economy.
Curbing anti-social activities – Usually, cash is the mode of transaction for anti-social activities. Thus, demonetization curbs these activities. It also forces anti-social
Source: Based on the data from the RBI- Reserve Bank of India, NTT DATA
Moreover, demonetization also unplugs financing to terrorists, uncovers black money and expands the fiscal space of the government, reduces interest rates in the banking system, and formalizes India’s informal economy by reducing the extent of cash transaction and by moving the country toward cashless economy.
TAKE-HOME MESSAGE
Demonetization has greatly contributed to the staggering growth in digital payments industry. Interestingly, firms like Alibaba in China, which owns about a third of homegrown mobile payment service Paytm in India, also benefit from such growth. Now, let’s imagine what service industries could benefit from demonetization and digitization, especially those who offer public services and those who are in utilities businesses. So, how these businesses will be able to make money from service demonetization? Let’s think about it.