RESEARCH PAPER

ON
EFFECTS OF DEMONETIZATION IN INDIA

Submitted To: - Submitted By:-

Dr. Ritu Gupta Deepika

(Assistant Professors.) Roll No.H50217025

Faculty Commerce & Management Studies dept. MBA 2nd sem
 EFFECTS OF DEMONETIZATION IN INDIA
Deepika
M.B.A., 1st year, PDM University, Bahadurgarh

ABSTRACT:

The present government took an enormous step to terminate Rs 500 and Rs 1000 notes with prompt effect
on 8th November 2016. Proceed was aimed to control the fake currency circulation, black money and
terror financing movements in the country. India has the highest level of currency in circulation at nearly
13% of GDP. The act of demonetization is expected to have a marked impact on various sectors. The
sectors which are based on cash transactions will witness more disturbances. Therefore an attempt has
been made to analyses the impact of demonetization on various prominent sectors of Indian economy that
are automobile, pharmaceutical, agriculture and consumer market sector etc. Also compare performance of
the sectors for pre and post period of demonetization.

Key Words: Demonetization, Fake Currency

Introduction

When a currency note of a particular denomination ceases to be a legal tender, it is termed as Demonetization. It
occurs whenever there is a change of national currency. The current form or forms of money is pulled from
circulation and retired, often to be replaced with new notes or coins and sometimes a country completely
replaces the old currency with new currency.

Such a step for example was taken when the European Monetary Union Nations in 2002 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 demonetization. In 2015 the Zimbabwean government demonetized its dollar
as a way to combat the country’s hyperinflation, which was recorded at 231,000,000%. The three month process
involved expunging the Zimbabwean dollar from the country’s financial system and solidifying the U.S dollar,
the Botswana pula and the South African rand as the country’s legal tender in a bid to stabilize the economy.
Fiji, Singapore and Philippines were other countries to have opted for currency demonetization.

In India, The government has implemented a major change in the economic environment by demonetizing the
high value currency notes – of Rs. 500 and Rs. 1000 denomination. These ceased to be legal tender from the
midnight of 8th of November 2016. People have been given up to December 30, 2016 to exchange the notes
held by them. The proposal by the government involves the elimination of these existing notes from circulation
and a gradual replacement with a new set of notes. In the short term, it is intended that the cash in circulation
would be substantially squeezed since there are limits placed on the amount that individuals can withdraw. In
the months to come, this squeeze may be relaxed somewhat. The reasons offered for demonetization are
twofold: one, to control counterfeit notes that could be contributing to terrorism, in other words a national
security concern and second, to undermine or eliminate the “black economy”.
Review of literature

 Gupta (2016) had studied about the payment banks and demonetization. To explain the research point,
researcher firstly explained about the Indian banking sector. Payment banks are generally niche banking
set up by RBI, that payment banks provides small saving accounts and payment services mainly for low
income household, small businesses etc. Then explained about the overall impact of demonetization
move. According to the Reserve Bank Of India (RBI) figures, as of March 2016 currencies in circulation
amounted to Rs.16,415 billion of this 500 notes were of around 47.8%in value and 1000 were of 38.6%
in value. Jointly they had 86% value in the economy. Many banks like HDFC, ICICI and AXIS are
exploring to launch the contact less debit and credit card. It will allow the customers to use card without
swipe.

 Kumar (2016) explained that Demonetization is an act of declaring currency as not valid wherein old
notes are withdrawn and replaced by new currency notes. The act of demonetization is not new in the
history as it is being adopted by various countries. Gahanna demonetized its 50 cedi currency notes to
check corruption. Myanmar demonetized 80% of its currency to track black money.

 Mohammed (2016) studied about the significance as well as challenges of demonetization of currency
notes. Secondary data was used for this study collected from various newspapers as well as websites.
The researcher concluded through the study made that no doubt this move was going to disturb the
routine life of ‘Aam Aadmi’(common man of India) influencing largely the unorganized sector
including organized sector up to a limited extent but the real consequences of move will have bigger
implications on the Indian economy as a whole in the long run.

 Patil (2016) studied that due to demonetization the credit cost dropped quickly which led to increase in
raising money for investment purpose. As Rs 500 and Rs1000 notes were declared invalid people were
forced to deposit their currency in banks to get it changed with new currency notes. Thus they were able
to raise loan to be used for investment in business.

 RBI (2016) stated in favor of demonetization its main objective is to analyze the impact of
demonetization on Indian economy. Study showed the impact of such a move on the availability of
credit, spending, and level of activity and government finances.

Objectives of the Study

 To study the Pros and Cons of Demonetization on economy.

Research Methodology

It is a doctrinal and descriptive research based on the study of Books, Reports, Journals, Magazines, Legislative
and Judicial pronouncements, declarations, conventions, treaties and information available on internet etc.

Meaning of demonetization
Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a
change of national currency: The current form or forms of money is pulled from circulation and retired, often to
be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new
currency. The opposite of demonetization is remonetization, in which a form of payment is restored as legal
tender.

Demonetization is the act of removing the current currency from the economy and replacing it with the new
one. It is the step taken up by the Government generally with the motive of removal of corruption. Moreover it
is the act of depriving of value of currency for official payment. It does not only include the currency but also
include the precious metals. Originally Demonetization is the French word “demonetiser” dating back to 1850-
55.

The reasons for the Demonetization are. To fight with inflation, to beat the corruption, to remove counterfeit
currency and to discourage the cash system. Developing country like India has to find the solution of problems
like this for betterment of country.

Effects of Demonetization in India

In an important move, the Government of India declared that the five hundred and one thousand rupee notes
will no longer be legal tender from midnight, 8th November 2016. The RBI has issued Two thousand rupee
notes and new notes of Five hundred rupees which have been placed in circulation from 10th November 2016.
This measure has been taken by the PM in an attempt to address the resolve against corruption, black money
and counterfeit notes. This move is expected to cleanse the formal economic system and discard black money
from the same. The present study highlighted the probable consequences of this decision on various economic
variables and entities.

Pros/the good things

 Elimination of counterfeit currency

It is not rocket science to understand that counterfeit currency is generally circulated in highest
denomination notes to impact most. So, by demonetizing the highest currency notes India could
almost eliminate 100% fake currency out of circulation in one stroke.
 Abolish black money
People having black money generally keep their black money in highest denomination currency
notes. This step would abolish black money from the economy as the owners will not be in a
position to deposit the same in the banks.
This step would make black money kept in cash which generally used to create chaos and terror or is
lying with terrorists, Maoists, naxalites, scrap.
 Strengthen Indian Banking System
This will automatically lead to more amounts being deposited in Savings and Current Account cash
laying out of economy flow is now coming into circulation. This in turn will enhance the liquidity
position of the banks, which can be utilized further for lending purposes.
 Financial inclusion for Jan Dhan account holders
Government opened Jan Dhan accounts for financial inclusion purpose, but people were reluctant to
keep money in the bank, but after this step of government, people will start depositing their cash into
 banks thereby strengthening Indian banking system, citizen are and will become beneficiaries of
financial inclusion!
 Higher Tax Collection
This led to higher tax collection as business men are depositing cash lying with them as current year
income with advance tax. Defaulters of bank, property tax, electricity bills and telecom bills are
clearing their long pending bills and thus utilizing their old currency notes.
 Deflation
Price level is expected to be lowered only marginally and temporarily due to moderation from
demand side. Small vendors who generally deals in cash would now start using cashless modes for
transactions or digital methods.
 Price cut in Real estate
As we all know the hype in real estate prices is because of the circulation of black money in this
market. Now from this step almost all that black money would get out of circulation from this sector.
Eventually the sky touching prices of properties will come down to the reach of a common man.
Finally a common man can buy his dream home soon. Hopefully!

 A Speed Breaker for Corruption

This step of government will subdue corruption up to a certain level and for a considerable time
period which in return will attract foreign investor to Indian market. Indian market has been the first
choice of investors considering its large size and huge number of consumers. Till now they were
reluctant to invest in India because of prevalent corruption and red-tapism. Now we can say that
India has overcome both the barriers.
 Bank Rate Cut
Larger the money in circulation results in better the conditions of banks now banks no longer for a
considerable time from now face liquidity issues. That will result into lower Bank rates. You will
have to pay less interest on EMIs.

Cons/through the glasses of pessimism

 Adverse impact on informal sector
Players of informal sector as they mainly deals in cash only are facing tough time due to this
Demonetization scheme already. Sudden removal of cash from market put their business on a
dormant phase.
It is important to understand that their income is not black as they don’t come under income tax slab
because of less income which has become even lesser now.
 Plight of Primary Producers
Lack of liquidity would result in distress to primary producers who don’t have much money, so that
they could hold their produce for long and on the other side due to lack of currency in flow they are
offered very less by the buyers in the market.
 Non-acceptance of Old currency regardless Government Orders
Many prescribed business houses and establishments are not accepting old currency notes from
common people, thus leaving them helpless. The fact that such people have no remedy against such
people/business houses make the situation worst. Milk Booths, Chemists, Petrol Pumps and Safal
Stores etc. are among others. These are dealing with basic necessities of common people.
 Possibility of breaking Riots
 There are many anti-state elements present in the society who are trying to spread unrest in the
society. They can exploit the situation and incite those disheartened people to make a platform to
break riots.
 Excessive burden on bank employees
This is a clear fact that there is an excessive burden on bank employees to cope up with the
situation and even after working so hard they are not able to satisfy the need of people.
 Decrease in demand
This is a fact that black economy do support the real economy from demand side, that is to say black
money used by the consumers to buy goods or services increases demand for those. Although you
may say this is unethical or wrong but it is beneficial from economy’s point of view.
 Violation of rule by general public
Many people are entering ATMs and using 3-4 different ATM cards and withdrawing 4X
cash than the prescribed limit for one person, thus violating the limit prescribed by the government.
 Chances of incarnation of De facto currency
De facto currency is a currency that is not recognized by the government as legal tender, but is
accepted by a majority of the population. The US Dollar, for example, is accepted in Cambodia as
a de facto currency. Similarly if required money is not injected into the circulation there are chances
that people belonging to different regions would start using old currency as de facto currency.
I would like to conclude by saying Black money is like ‘Asura Raktabija’ which cannot be abolished
with just one blow. We have to strike on its weak point again and again and have to ensure that it
should not born again to completely destroy it.

In spite of the initial hiccups and disruptions in the system, eventually this change will prove
beneficial for the nation in long run.

Conclusion

The Demonetisation undertaken by the government is a large shock to the economy. The impact of the shock in
the medium term is a function of how much of the currency will be replaced at the end of the replacement
process and the extent to which currency in circulation is extinguished. While it has been argued that the cash
that would be extinguished would be “black money” and hence, should be rightfully extinguished to set right
the perverse incentive structure in the economy, this argument is based on impressions rather than on facts.
While the facts are not available to anybody, it would be foolhardy to argue that this is the only possibility. In
other words, while the cash was mediating in legitimate economic activity, if this currency is extinguished there
would be a contraction of economic activity in the economy and that is a cost that needs to be factored in while
assessing the impact of the demonetisation on the economy and its agents. It is likely that there would be a spurt
in the banking deposits. While interpreting the phenomenon, however, one has to keep in mind that a large part
of their deposits were earlier used for transactional purposes

Refrences

 Bumra, S. & Kumar, S. (2017). Demonetization in India: pre and post effects on Indian industry.
International Journal of Scientific & Engineering Research, 8(7).266-267.
 Dhara, A. (2017). A study on impact of demonetization over the banking sector. International Journal of
Marketing & Financial Management, 5(3).21-23.
 Sunil. (2017). Demonetization at glance in Indian scenario. International Journal of Applied Research,
3(2).4-7.
 Veerakumar, K. (2017). A study on people impact on Demonetization. International Journal of
Interdisciplinary Research in Arts and Humanities (IJIRAH), 2(1) 9-10.
 Retrieved from https://www.quora.com/in/What-are-positive-and-negative-effects-of-demonetization