PROJECT ON

CONTEMPORARY ECONOMICAL ISSUE:

“DEMONETISATION”

SUBMITTED BY: SUBMITTED TO:

POULOMI BARIK DR. AMAR KR. MOHANTY
BA.LLB, 1783068
 INTRODUCTION
The Indian government had demonetised bank notes on two prior occasions—once in 1946 and
once in 1978—and in both cases, the goal was to combat tax evasion via "black money" held
outside the formal economic system. In 1978, the Janata Party coalition government demonetised
banknotes of 1000, 5000 and 10,000 rupees, again in the hopes of curbing counterfeit money and
black money.

On 8 November 2016, the Government of India announced the demonetisation of all ₹500

and ₹1000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new
₹500 and ₹2000 banknotes in exchange for the demonetised bank notes. The government
claimed that the action would curtail the shadow economy and reduce the use of illicit and
counterfeit cash to fund illegal activity and terrorism. The announcement of demonetisation was
followed by prolonged cash shortages in the weeks that followed, which created significant
disruption throughout the economy. People seeking to exchange their banknotes had to stand in
lengthy queues, and several deaths were linked to the rush to exchange cash.

According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the
demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had
been demonetised, were deposited with the banking system. The banknotes that were not
deposited were only worth ₹10,720 crore (107.2 billion),leading analysts to state that the effort
had failed to remove black money from the economy. The BSE SENSEX and NIFTY 50 stock
indices fell over 6 percent on the day after the announcement. The move reduced the
country's industrial production and its GDP growth rate.

Initially, the move received support from several bankers as well as from some international
commentators. The move was also criticised as poorly planned and unfair, and was met with
protests, litigation, and strikes against the government in several places across India. Debates
also took place concerning the move in both houses of parliament.

The term demonetisation has become a household name since the government pulled the old Rs
500 and Rs 1,000 notes out of circulation. While as per dictionary demonetisation means "ending
something (e.g. gold or silver) that is no longer the legal tender of a country", one needs to see if
there is anything more to the word. Demonetization for us means that Reserve Bank of India has
withdrawn the old Rs 500 and Rs 1000 notes as a official mode of payment.

The demonetisation of ₹500 and ₹1,000 banknotes was a policy enacted by the Government of
India on 8 November 2016, ceasing the usage of all ₹500 (US$7.40) and ₹1,000 (US$15)
banknotes of the Mahatma Gandhi Series as legal tender in India from 9 November 2016. This is
usually done whenever there is a change of national currency, replacing the old unit with a new
one. Such a step, for example, was taken when the European Monetary Union nations decided to
adopt Euro as their currency.
However, the old currencies were allowed to convert into Euros for a period of time in order to
ensure a smooth transition through demonetisation. Zimbabwe, Fiji, Singapore, Philippines were
other countries to have opted for currency demonetisation. In India‘s case, the move has been
taken to curb the menace of black money and fake notes by reducing the amount of cash
available in the system. It is also interesting to note that this was not the first time the
Government of India has gone for the demonetisation of high-value currency. It was first
implemented in 1946 when the Reserve Bank of India demonetised the then circulated Rs 1,000
and Rs 10,000 notes.

The government then introduced higher denomination banknotes in Rs 1000, Rs 5000 and Rs
10000 in a fresh avatar eight years later in 1954 before the Morarji Desai government
demonetised these notes in 1978. On November 8 evening, Prime Minister Modi, in his televised
address to the nation, made Rs 500 and Rs 1000 notes invalid, saying that it was aimed at
curbing the ―disease‖ of corruption and black money which have taken deep root. People
holding notes of Rs 500 and Rs 1,000 can deposit the same in their bank and post office accounts
from November 10 till December 30. All notes in lower denomination of Rs 100, Rs 50, Rs 20,
Rs 10, Rs 5, Rs 2 and Re 1 and all coins continued to be valid, and new notes of Rs 2,000 and Rs
500 were introduced. There was no change in any other form of currency exchange be it cheque,
DD, payment via credit or debit cards etc.

The government‘s move to demonetise, even then, was to tackle the issue of black money
economy, which was quite substantial at that point of time. In January 1978, the Indian
government demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes which was quite substantial at
that point of time. The move was enacted under the High Denomination Bank Note
(Demonetisation) Act, 1978. Under the law all ―high denomination bank notes‖ ceased to be
legal tender after January 16, 1978. People who possessed these notes were given till January 24
the same year — a week‘s time — to exchange any high denomination bank notes. The main
difference between then and now is that currency of higher denomination was barely in
circulation, unlike the Rs 500 and Rs 1000 note today. 

 
Issue/ statement

 Objective of Demonitization

 Black money: Demonetization was a significant step taken by the government of India to
restrain black money and one that will have the deep impact on the par. People with black
money can be spotted with this move. Certain businesses like property dealers, jewellers,
foreign currency dealers, private money lenders usually retain huge amounts of
unaccounted money in form of currency notes. Such unaccounted money gave rise to a
parallel economy in the country. Such illegal money has reached the bank accounts
through direct or indirect sources.

 To hit the fake currency rackets: Fake Currency Notes have been reduced to zero by the
demonetisation. Withdrawing highest currency notes out of the economy will have a
serious impact on the fake currency syndicates, thus putting an end to the terror funding
in Jammu and Kashmir, Naxalite hit states and North-eastern states. The fake currency
with racketeers have been left in vain, and new currency notes with high security; making
a counterfeit impossible. 

 Online transactions: Demonetization's target was to make people use the digital economy.
More and more cash-less or less-cash transactions will lead to more disclosure of income
which will increase the direct tax collections. With a reduction in cash transactions,
alternative forms of payment will more in demand. Electronic mode of payment like
online transaction, payment through applications, E-wallets E-banking, usage of debit
and credit cards etc. will surely see the substantial increase in demand.

 To hit Maoists: This step actually made money with Maoists worthless. As reported
Maoists had hoarded over Rs.7000 cores with them at Baster in Chhattisgarh. All such
currency is now nothing but mere paper pieces. 

 Rise in GDP: Though demonetization has negatively impacted sectors such as real estate
and property, construction, and household consumption in general, it is believed that
long-term benefits for GDP growth will outweigh the short-term transitional impact. We
are now heading towards a 9% GDP growth by FY2018-19.

 
 Result of demonetization on different sectors of economy

 Real estate and Property: This sector would be one of the most affected sectors by note
ban. Demonetization has finished the businesses of the majority of the builders as a major
portion of their transaction depends on cash rather than based on banks transfer or cheque
transactions. As other sectors, marginal builders are adversely impacted reason being the
high involvement of cash component in payment in this sector. Unorganised builders
have been most affected. Builders will face a cash crunch due to the unexpected drop in
sales, in order to attract buyers; builders are required to introduce lucrative offers & other
benefits. Demonetisation will have a direct impact on resale and land segment as cash
plays a major role in these transactions. Most of the accounted cash have been pulled out
by demonetisation from the system. 

 Gems & Jewellery: The substantial portion of the payment by customers involves cash
for purchasing jewellery so the impact of demonetisation in this sector is quite high.
Demonetisation made people with less cash available in their hands for fulfilling their
daily needs let alone purchasing jewellery. Smaller retailers in the unorganised sector
were the most to be impacted which reduce the demand for jewellery. Many jewellers
started selling gold at more than their market price to take advantage of banned notes
which resulted in income tax raids on such jewellers. Notices have also been issued to
many jewellers. This sector is seriously hit by demonetisation as buyers prefer to pay in
cash.

 Banks: Banks have proved to be the backbone of this entire process of demonetisation
and also the biggest beneficiaries. As on the direction of government, old notes have to
be exchanged with the new one, this resulted in increased liquidity position of banks
which could be utilised for lending. Both deposit and lending rates have been cut by
many banks.

 Media and Entertainment industry: Currency ban adversely impacted the media and
entertainment industry as it resulted in lesser number of viewers. The major portion of the
drop has been seen in lower middle class. The sudden decision of demonetisation affected
the film industry as well. This brought the production of films to a halt. Also, the new and
small players in the industry are most affected by demonetisation.  

 Hospitality and tourism: Due to demonetisation Indian tourism industry have been
severely impacted as the majority of spending is in cash. Most of the luxury foreign trips
are sponsored by black money has come to a halt. Due to the cash crunch, local tourism
will also get affected The unorganised sector is most impacted with the inability to make
 payment in cash, Further, the slowdown is also faced by the restaurant's businesses with
the inability of cash.

 Luxury items: Demonetisation will have a drastic impact on this sector. Majority of the
people spend their unaccounted money on luxuries. After the note ban, luxury segments
and allied business like clothing, electronics, luxury car will have a huge setback. 

 Automobiles: Demonetisation has also affected automobile industry The major decline in
demand has been seen in twowheelers business as compared to four wheelers/luxury cars
because buyers prefer to pay in cash for buying a two-wheeler. The used car industry is
another segment affected by a demonetisation wherein sudden decrease in sales has been
reported by several dealers. In this industry, payments are not regulated.  

 Retail: The cash crunch is leading to low consumer demand for the products. This
ultimately leads to decline in their sales volume. Since cash is the favourable mode of
payment in buying daily needs which in turn result in the number of cash transactions.
The impact of demonetisation on small and the unorganized traders is higher than the
organised sector.

 Agriculture: There are various factors impacting agriculture such as sale, distribution,
marketing and transport, such factors are dominantly cash-dependent. Further,
demonetisation disrupted the supply chains, this sector has severely been impacted by
huge wastage of perishables. The small farmers selling their products on daily basis to the
wholesale centres, mandis and to the consumers have also been impacted by
demonetisation. 

 Labour-intensive sectors: In order to pay daily wage labourers huge amount of cash is
required, they have faced problems buying their routine stuff. Limitations on the
withdrawal amount from the bank is affecting the weekly payment to contract personnel
in mining, textile and leather industries. Additionally, daily requirements of the factory
owners are being affected by the restrictions on cash withdrawal. This is adversely
impacting the procurement and production in this sector. However, the situation will
improve once the cash flow becomes normal

 
 

   ANALYSIS
Impact of demonetisation on Indian Economy: Positives and Negatives
Positives:

Black money: Prime Minister Narendra Modi on a single stroke has choked the black money.
Out of total currency which is Rs 17 lakh crore, Rs 3 lakh crore is estimated as black money.
Operators of black money run a parallel economy which weakens the base of the country’s
economy. Modi’s demonetisation decision resulted in the collection of huge deposits with the
bank, all unaccounted money has either been deposited into the banks with the heavy penalty or
been simply destroyed.  

Economy: This demonetisation has proved to be a turning point for the economy by cleaning-up
the black money which in turn has brought more borrowings to the treasury, improved inflation
outlook and increased GDP of India. Investment opportunities have also been revived and gave a
boost to infrastructure and the manufacturing sector. A huge amount of money deposited in
banks which in turn helped reduces interest rates and lower income tax rate. 

Real estate: It is said that real estate is an industry prospers on black money. The amount of
illegal money involved in this sector is huge. An estimate tells us that in Delhi-NCR at least 40
percent of real estate deals are in black. Modi’s demonetisation move reduced the flow of
unaccounted money into the real estate sector. This will help in curtailing the use of black money
in real estate sector which in turn result in the reduction in the prices of land and property. 

Hawala transactions: Demonetisation was a big thrash to the hawala racketers. In Hawala
money is transferred without its actual movement. Hawala had become the route to facilitate
money laundering and terror funding. Hawala rackets run on black money. The sudden
withdrawal of black money out of the economy was a surgical strike to hawala operations.
Destruction of currency notes by hawala operators have also been reported.

Counterfeit currency: Demonetisation was a mighty blow to the counterfeit Indian currency.
Currency with syndicate operator operating both inside and outside the country has been wasted.
Counterfeit currency is one of the main reasons behind the devaluation of the real worth of
Indian currency. Indian Statistical Institute reported that at any given point of time fake currency
notes amounting to Rs 400 crore were in circulation in the economy and around Rs 70 crore fake
currency notes are pushed into the country every year. But the real number could be much larger.
With Prime Minister Modi’s demonetisation decision to ban old currency notes of Rs 500 and Rs
1,000 notes and replacing them with new one completely sucked the circulation of fake currency.
As new currency notes have come with highly advanced security features which are barely
possible to replicate.
Terror financing: The main source of Terror financing is through counterfeit currency and
hawala. This is how it works. Fake currency is circulated by the network of hawala operators.
These hawala operators have a link with gamblers and smugglers of arms and drugs. Indirectly,
they all end up financing terrorism. In addition, the terrorists obtain huge money by donations
routing such money through hawala transactions. All channels of terror financing are now closed
with the control in the circulation of counterfeit currency and hawala operators.

Maoism: Maoist sympathisers have declared Modi’s demonetization move as “undeclared

financial emergency’. There are reasons for it. Currency ban proved to be a serious attack on the
Maoists movement. Black money is the major source of fund for Maoists. Maoists used to raise
crores of rupees annually through extortions. Such unaccounted money is used to purchase arms
and ammunition. with Modi’s demonetisation move, all those black monies are reduced to pieces
of papers. Ever since note ban, no major incidence of violence took place from the states like
Andhra Pradesh Odisha, Telangana. and Chhattisgarh.

Kashmir violence: Stone pelting has reduced in Kashmir because of note ban. No stone pelting
has been reported in Kashmir since the withdrawal of highest currency notes from the ecnomy.
As reported by. Intelligence agencies 1,000 crores are sent annually by Pakistan to the separatists
for creating chaos in Kashmir. The money to the separatists is transferred through hawala. With
hawala transactions completely curtailed left separatists curelessly. Modi completely dismantled
the Kashmir unrest with his surgical strike called demonetisation.

Negatives:

Liquidity crisis: Demonetisation gave rise to liquidity problem as people found it difficult to
get sufficient amount of cash to fulfil their basic needs. Marginal section of the society mainly
depends on cash to meet their daily transactions. Out of total currency in circulation 500 rupee
notes constituted nearly 49% in terms of value. More the time is required to resupply Rs 500
notes, the more will be will be the duration of the liquidity crisis. Loss of well-being: Most of the
population who constitute the lower middle and lower class uses currency to meet their daily
transactions. Such class of the society such as daily wage labourers, small traders and other
marginal section of the society use cash more often. These sections of the society have lost their
income in the scarcity of cash. Cash crunch made firms to cut their labour cost and thus reduces
the income of the lower middle class.

Consumption: Cash shortage adversely affected the consumption behaviour of the people in
India. The sales of consumer durables likely to be hampered in short-term, especially sales
through unorganised channels are cash purchases. Most of the purchases by retailers are through
cash which brought down their volume of trade.

Decrease in GDP: Withdrawal of highest currency notes reduces the growth rate of the
economy. Demonetisation reduces consumption pattern, income, investment etc. This may bring
a slowdown in India’s growth rate as the liquidity crisis itself may last three-four months.
Interest rate and Bank deposits: Deposit of the bank may increase in short-term due to
demonetisation, but will come down in long-term. Such liquid cash deposited in the bank by
people may not be assumed that such amount of money once stored in the banks will be invested
for long term. Such money may be saved into banks just to convert the old notes with the new
one. These are not voluntary savings aimed to get interest rather it is because of demonetisation.
It will be withdrawn by the savers as soon as the supply of new currency takes place. This
indicates that new savings are only for short-term which may be encashed at the appropriate time
in future. It may not be said that demonetization will generate big savings in the banking system
in long term, this may reduce interest rates in short but not in the long term  

Black money: One of the main reasons behind demonetisation move was to curb black money
but only a small portion of the black money is actually stored in the form of cash. Most of the
black money is kept in the form of land, gold and buildings etc. Hence the amount of
unaccounted money deposited with the banks is only up to the amount of cash deposited.
Countrywide awareness is created among the people to fight against black money 
 Suggestions
 Limit on cash withdrawal should be removed so that the flow of cash increses and leads to
reduction of queue’s.

 Workshops and seminars should be organized for people of rural areas who are not aware of
net banking system.

 Illeterate people should be given education about the use of debit and credit cards.

 More branches of banks should be opened in rural areas where there is no banking facility.

 Zero balance bank account should also be opened in private banks so that it can attract low
income group or people of rural areas.

 A different tribunal authority should be setup which will deal only cases of net banking
frauds and online payment frauds.

 Discounts should be provided for payment through debit cards, credit cards against cash
payment which will attract huge amount of people.

 Incentives should be provided on the usage of swipe machines by dealers.

 CONCLUSION
The  move by  the government to  demonetise old currency  and replacing it with the  new
one has taken the country by surprise. The move was an effort to handle the threat of illegal
money, corruption, terror funding and counterfeit currency. The decision regarding
demonetising the old currency was considered as a surgical strike against  the undeclared
money in the history  of Indian Economy, it may  be a move towards the cashless
economy. The demonetisation  is followed by a liquidity crunch  in the country, banks and
ATMs across  the country  faced severe  cash shortages  with detrimental  effects on various
small business, agriculture  and transportation. Currency ban by  the government of India
created chaos in short-term as most people with old currency notes faced  difficulties exchanging
them in long queues outside  banks and ATMs across India. The total value of old currency
notes  in the circulation was to the tune of Rs 14.2 trillion, which  constitute about 86% of the
total value  in circulation. The black money has either been accounted by paying heavy taxes
and penalties or has  reached the bank accounts through direct or indirect channels.
Demonetization would bring a positive impact on Indian economy as it encourages the digital
mode of payment like E-wallets and apps, online transactions using E-banking, usage of plastic
money, etc. Demonetization is beneficial for the economy in the medium to long-term.
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