Answered: Do you think that the demonetization move by government would hurt private consumption and impact sectors like real estate and automobile? Discuss.


Demonetization- scrapping the legal tender status of a currency i.e. now Rs 500 and Rs 1000 denomination notes by the Government-  has led to withdrawal of about 86 per cent currency in circulation. Due to inadequate replacement it has led to short term liquidity shock i.e. shortage of currency in circulation which has following on private consumption including real estate and automobile sector.

 

Private consumption

 

  • Notable dip in private consumption: In a cash led economy like India, cash crunch has led to decreased demand due to lowered household consumption.
  • Unorganised sector and farming activities have taken a hit leading less cash availability with the people, leading to lower spending.

Real Estate

 

  • Demand has dampened especially in repurchase segment as significant transactions are carried out in cash . Moreover, revaluation expectations has led people to defer purchase.
  • Property prices have eased, thus in a way making way for affordable housing.

Automobile industry

  • In short term automobile industry especially the luxury cars, SUVs would see lower demand.
  • But segments where vehicles are mostly financed and cash component is small would have less impact like passenger vehicles.

Therefore, demonetization in short term private consumption has decreased impacting demand in many sectors. In the mean time private sector pushing for for cashless transactions in the form of BHIM App, Private wallets, net banking etc the stumbles are likely to be staved off. But in the long run the move has potential to transform the economic order in India, which has commensurate positive effects for impacted industries.


 

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