1

IMPACT OF DEMONETIZATION IN INDIA

Submitted to University of Delhi

By

ROLL NO. :

B.COM(Hons.)- III YEAR

Of

Department Of Commerce

Kirorimal College

University Of Delhi
Delhi

Under The Guidance Of

Mr.Pushpender Kumar

(Assistant Professor)

2017
 ACKNOWLEDGEMENT

This project has been a truly wonderful learning experience for me.I am extremely
grateful to Kirorimal College , University Of Delhi for providing me with this
opportunity.

I am thankful to my supervisor Mr.Pushpender Kumar for his guidance , review of

my work and for his prompt attendance to my queries.

It would be unfair on my part to not acknowledge the role of technology played in

this project , since the scope of the project , the same would have not been feasible
but for the modern wonder that internet is.

Further , it has been a great an enriching study not only in terms of the academic
discipline but also in terms of my own personal self development , by providing me
with an opportunity to delve into the intricacies of one of the most important social of
our time.I , remain eternally grateful to you.

Pragati Singh Sadhak

 DECLARATION

I the undersigned , Ms.Pragati Singh Sadhak , hereby declare that this project
entitled ,”Impact Of Demonetization In India” is a result of my own research work
and has not been previously submitted to any other University for any other
examination.I , hereby , further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical conduct.

Signature:

Name:

College Roll NO. : 31422820 / 14036204064

Year 2016-17

Date of Submission:
Kirorimal College

University Of Delhi

Delhi

CERTIFICATE

This is to certify that Ms.Pragati Singh Sadhak has worked and completed her Project
Work for the degree of B.Com(Hons) on “Impact Of Demonetization In India”under
my supervision.

Name of Guide:

….…………………………………………………………………………….

Date of Submission:

….…………………………………………………………………………….

Name of Teacher in charge:

….…………………………………………………………………………….
 TABLE OF CONTENT

1. ABSTRACT...............................................................................................6

2. INTRODUCTION...............................................................................................7

3. HISTORY AND BACKGROUND......................................................................8

4. REASONS FOR DEMONETIZATION...............................................................9

5. TITLE , OBJECTIVE AND METHODOLOGY...............................................10

6. LITERATURE REVIEW....................................................................................11

7. ANALYSIS OF IMPACT OF DEMONETIZATION..........................................12

8. CONCLUSION....................................................................................................21

9. REFERENCE.......................................................................................................22
ABSTRACT

Demonetization is the process of withdrawal of a particular form of currency from

circulation.On 8th November 2016 , Prime Minister Narendra Modi announced the
Demonetization of all Rs 500 and Rs 1000 banknotes of the Mahatma Gandhi Series.

My project entitled “Impact Of Demonetization In India”endeavors at studying the

impact of recent Demonetization in India on different sectors of economy.The impact
of recent Demonetization in India was analysed by reading newspapers , journals ,
articles , magazines etc.Although the analysis finds that some sectors have been
affected by Demonetization postively while some sectors have been affected by
Demonetization negatively.This project elucidates the impact of recent
Demonetization on banking , agriculture, industries , real estate , black money , stock
market and business.

KEY WORDS

Demonetization , Impact , India , Government of India , Currency , Economy

INTRODUCTION

Demonetization is a process in which a particular form of currency is ceased from

circulation as a legal tender.

On November 8th,2016 evening, Prime Minister Narendra Modi announced that the
notes of Rs.500 and Rs.1000 “will not be legal tender and these will be just worthless
pieces of paper”.

The plan to demonetize the old Rs 500 and Rs 1000 notes began six to ten months
prior and was kept confidential with only about 10 people being completely aware of
it.The logistical processes and preparations for printing of the new Rs 500 and Rs
2000 notes began in early may.The cabinet was informed about the Demonetization
on November 8th 2016 in a meeting called by the Prime Minister , Mr.Narendra
Modi which was followed by his public announcement of the Demonetization in a
televised address.

The Reserve Bank Of India has ceased the old notes of Rs.500 and Rs.1000 as an
official mode of payment.A new redesigned series of Rs 500 and Rs 2000 banknote is
in circulation since 10th November 2016.

According to PM Narendra Modi the decision of Demonetization was taken to curb

the various illegal activities which were conducted by using the high denomination
currency in our country.

After the euphoric stage , now the question arises : Is Demonetization really effective?
What is the impact of Demonetization on various sectors of economy?What are the
costs of Demonetization? Is there any positive impact of Demonetization? What
about black money? We will explore answers to these questions in this research
project.
HISTORY AND BACKGROUND

It is very interesting to note that the unexpected move to demonetize Rs. 500 and Rs.
1000 currency notes taken by the Prime Minister Narendra Modi on 8 th November ,
2016 was not the first time the Government of India has gone for the Demonetization
of high value currency.

Firstly , it was implemented in 1946 when the Reserve Bank Of India demonetized
the then circulated Rs.1000 and Rs.10000 notes.The Government Of India then
introduced higher denomination banknotes in Rs.1000 , Rs.5000 and Rs.10000 in a
fresh avatar eight years later in 1954 before the Moraji Desai Government
demonetized these notes in 1978.

In January 1978 , the Indian Government demonetized Rs.1000 , Rs.5000 and

Rs.10000 notes which was quite substantial at the point of time.The move was
inacted under the High Denomination Bank Note (Demonetization) Act , 1978.The
demonetization that took place in 1978 did not have much effect on the lives of the
people and only affected the privilege few while the recent move of Demonetization
has affected different sectors of economy.The recent move of Demonetization has
taken aback the whole country.
REASONS OF DEMONETIZATION

There could be an enormous number of reasons for Demonetization such as accepting

a new currency to meet the world currency standards.However , the reasons as given
by PM Narendra Modi in his televised speech on the historic day of 8 th November ,
2016 were as follows :

 To tackle the huge amount of black money existing in the economy.

 To lower the cash circulation in the economy which is directly related to the deep
rooted corruption in the country.

 To eliminate fake currency and dodgy funds which have been used by the terror
groups to fund terrorism in India.

 The move is estimated to scoop out more than 5 lakh crore of black money from
India as said by Baba Ramdev , a staunch supporter of present PM.
 10

TITLE

The title of the project is Impact of Demonetization in India.

OBJECTIVE

Anything and everything has two fold effects that is, positive and the negative
effect.So is the case of Demonetization.The project aims at studying the positive and
negative impacts of recent Demonetization in India on different sectors of economy.

METHODOLOGY

The project work is based on the secondary data.The secondary data was collected
from various published sources like newspapers , reports , journals , magazines
etc.The attempt was made to analyse the impacts of recent Demonetization in India
on different sectors of the economy.
LITERATURE REVIEW

Prof.Sandeep Kaur (November 2016) :

In this research paper , he examines the impact of Demonetization in India.This

research paper concluded that the unexpected move to demonetize Rs 500 and Rs
1000 notes will definitely fetch results in the long term.Demonetization in India will
strive for sustained economic growth in the longer term by banishing fake currency ,
reducing corruption , improving tax compliance , improving fiscal balance and by
reducing inflation. [1]

Rahul Deodhar (November 2016) :

In this research paper , he examines the impact of recent Demonetization in India on

“Black Money”.This research paper concludes that the step taken by the Government
of India to Demonetize Rs 500 and Rs 1000 notes is not enough to fight against the
problem of “Black Money”.This research paper also discussed about various other
steps that the Government of India should take to remove “Black Money” from the
country.Massive amount of cash received by the banking system is an achievement in
itself and it should be properly utilized to generate revenue. [2]

K.Veerakumar (2017) :

In this research paper , he examines the impact of recent Demonetization in India on

the public.This research paper concludes that the step of Demonetization was taken
for several measures such as tax evasion , counterfeit currency and funding of illegal
activities.This research paper also discussed about the increased usage of alternative
payment methods , such as , e-wallets , online transactions using e-banking , debit
and credit cards etc. striving towards a cashless economy. [3]

Geeta Rani (2016) :

In this research paper , she examines the impact of recent Demonetization in India ,
on “Retail Outlets”.This research paper concludes that initially the impact of
Demonetization on market was painful.But Demonetization has encouraged the
shopkeepers as well as the consumers to adopt cashless means such as paytm , debit
card , internet banking etc.The impact of Demonetization will be positive in coming
time.An approach towards a cashless economy will certainly help to keep a vigil on
black money. [4]
ANALYSIS OF IMPACT OF DEMONETIZATION

1. Monetary Indicators :

The initial impact of Demonetization on monetary indicators has been shown through
following charts:

Chart 1 depicts that currency in circulation plunged a huge 20.18% in the week to 18
November, after falling marginally in the previous week.

Chart 2 depicts that how year on year , the growth in bank deposit has increased
sharply in the week to 11 November , while the growth in money supply and in
bank credit has slowed down in the week to 11 November.
It is interesting to note that even before the Demonetization was announced in India ,
the growth in bank credit and in money supply has been slowing down.

Between 10 November 2016 and 27 November 2016 , there was exchange and
deposits of demonetized banknotes worth Rs 8.45 trillion(US$130 billion) (exchange
of Rs 339.48 billion (US$5.0 billion) and deposits of Rs 8.11 trillion(US$120
billion)).During this period , people had withdrawn an amount of Rs 2.16 lakh crore
(US$32 billion) from their bank accounts.

Between 28 October 2016 and 23 December 2016 , there was increase in bank
deposits from around Rs 107 lakh crore to 112.6 lakh crore.In just two months , there
was an increase of about Rs 5.5 lakh crore.
With this rate of money deposited , there was a huge surge in liquidity after
Demonetization.Because of this , major banks in India have lowered interest rates.For
fixed deposit between 390 days to 2 years , ICICI bank has lowered interest rate up to
7.10% from 7.25% while HDFC bank has made a reduction of interest rates up to
deposits one year to 6.75% from 7% and to 6.5% from 6.75% on maturities ranging
from one year to years.SBI has also announced reduction of interest rates on deposits
for select tenors.

2. Black Money :

Black is the “illicit” money.Black money is earned through illegal activities which
has been kept hidden from Government so as to evade the transaction cost(usually tax)
in the legitimate economy.The main aim of Demonetization was to eliminate black
money from from the Indian System.

India Ratings and Research estimated that :

 The baffling move of Demonetization taken by the Government is likely to

destroy about Rs 4 lakh crore worth of cash held in black and fake currency.

 This constitute about 12% of the black economy in India , leaving 88%of the
black money to remain in the system.

It was reported that , as of 4 th January 2017 , Rs 14.97 lakh crores in old notes have
been deposited in the banks after 8 November 2016.Actually we don’t know how
much of this is black money as there is no official estimate but experts say that only
3-6% of the total black money is in cash and the remaining is in gold , stock , real
estate , foreign exchange etc.And of the total currency in circulation , only 0.002%
currency is fake.This is statistically insignificant percent.These are some of the
reasons why the Government has changed its rhetoric from “a movement to curb
black money” to “a digital and cashless revolution”.

3. Stock Market Crash :

The baffling move of Demonetization had a huge impact on stock market.The day
after the Demonetization announcement,BSE SENSEX crashed nearly 1,689 points
and NIFTY 50 plunged by over 541 points.Just a week after Demonetization was
announced , the NSE NIFTY 50 registered as 5.1% drop in daily closing price as
opposed to what was there on November 8. By the end of the intraday trading section
on 15th November 2016, the BSE SENSEX index was lower by 565 points and the
NIFTY 50 index was below 8100 intraday.

The data from National Stock Exchange showed the negative impacts of
Demonetization on various sectors and the result was that the worst hit sectors are
realty , consumers and automobile.
 fig.1

Fig 1 shows the summarized data of impact of Demonetization on India stock market
till the date 18 December 2016.

Fig.1 depicts that the Indian markets have fallen a bit more than the other emerging
markets in Asia.The S&P BSE Sensex is down by 3.8%.The fall in Indian stock
markets could be due to many reasons like Donald Trump win , high valuation etc.But
the effect of Demonetization is mainly responsible for the fall.
If we go a little deeper , fig.1 depicts that the BSE Realty Index is down by over
15%.Some stocks such as DLF Ltd , known to entertain cash transactions at a large
scale , are down nearly by 20%.Stocks of jewellery companies such as Titan
Industries Ltd have decreased by around 11%as well , may be because a lot of gold
purchases are through cash basis only. BSE Small cap and Small midcap have fallen
by over 6% each.Stocks of mid and small sized finance companies which collect
payments in cash have fallen by 8-10%.
And the truth is that the largest impact of Demonetization in India was on
unorganised sector which isn’t represented in the market.

4. Business :

The unexpected and baffling move of Demonetization had affected Micro , Small and
Medium Enterprises (MSMEs) adversely.These are enterprises which carry out their
business transactions through cash only.As there was shortage of cash in hand , the
demand of their products decreased leading to a loss for their enterprises.

In India , Bloomberg data shows that the share of cash in the volume of consumer
transactions is 98%.Much of the cash transactions are in rural area.

.Sectors like steel , fertilizer and agrochemical were hit by Demonetization

adversely.By the second week after Demonetization , India witnessed a fall of 30-
40% in cigratte sales.Because of shortage of cash in hand , e-commerce companies
saw up to a 30% decline in Cash On Delivery(COD) orders.

5. Auto and Auto Ancillary :

The Automobile industry accounts for 7.1% of the country’s Gross Domestic
Product(GDP).
After Demonetization of Rs 500 and Rs 1000 notes, the sale of passenger vehicles
was not affected much while the sale of two wheelers, commercial vehicles and
tractors were affected after the next few months of Demonetization in India.

The following chart shows the year-on-year volume growth of various segments
during April-October (before Demonetization) as compared to November’s figures.
The above chart shows that the sales of two wheelers , commercial vehicles and
tractors declined after Demonetization , while the sales of passenger vehicle and
private car were flat as compared to the months preceding November.

Analysts at Kotak Institutional Equities say that the retail sales of 2 wheelers have
been decreased by 30-50% year on year in various parts of our country due to
shortage of cash in hand for customers.

Maruti Suzuki , India’s largest automaker , said that domestic car sales increased by
14% in November compared with a year earlier.Usually , the people of India take
loans to buy small cars , so many people who were in the market for a new ride could
still take a plunge even if they were facing the problem of shortage of cash.

Mahindra and Mahindra , another auto giant reported that they saw a 33% year on
year drop in passenger car sales in November.The company also reported that the
company sold 21% fewer tractors in November than it did a year earlier.
6. Industrial Output :

There was a reduction in industrial output as industries were hit by the cash crisis.The
Purchasing Managers’ Index(PMI) fell to 46.7 in November from 54.5 in
October,recording its sharpest reduction in three years.A reading above 50 indicates
growth and a reading below shows contraction.This indicates the slowdown in both,
manufacturing and services industries.The PMI report also showed the reduction in
inflation in November was due to shortage in money supply.

The growth in eight crore sectors such as cement, steel and refinery products, which
constitute 38% of the Index of Industrial Production (IIP) was only to 4.9% in
November as compared with 6.6% in October.

The presentation conducted by Ultra Tech Cement showed that :

 Due to recent move of Demonetization taken by Government of India , the GDP

of FY17 may shrink.

 Demonetization will have a negative impact on the demand of cement but only
for short term.

 Industry is expected to grow by 7-8% in longer term.

7. Agriculture :

The unexpected move of Demonetization was taken at the crucial stage. At the stage
when the kharif harvest was about to reach the market and the rabi sowing had just
begun.The impact of Demonetization on agriculture sector has been shown below:

 Effect on sown area: According to tentative estimates provided by Ministry of

Agriculture , rabi sowing was completed on 14.6 million hectare area.During the
week ending 30th December , 2016 , net sown area under rabi crop exceeded the
normal area by 2.77% and area sown last year by 6.86%.This data clearly depicts
that , as far as sowing of major crops is concerned , there is absolutely no adverse
effect of Demonetization.

 Crop-wise effect: Wheat , which accounts for 47% of total area under reported
rabi crops , showed a big shortfall of 41% in area at the time of
Demonetization.The gap declined to less than 1% by mid December , 2016 and
crossed normal area by 2.12% by the end of December.Area under pulses and oil
seeds is higher than normal for the corresponding period by 11.2% and 1.7%
respectively.The shortfall in area is reported for rabi rice and course cereals.

 Effect on kharif harvest: The kharif foodgrain production increased from 124
million tons in 2015-16 to 135 million tons in 2016-17 , an impressive increase
of 9%.

 Effect on price: Based on Consumer Price Index (CPI) , the overall food
inflation , has come down from 6% in December 2015 to 2% in November 2016.
Despite this sharp downward movement in food prices , the overall growth in the
sector is very likely to be in the range of 4.5 to 5% , largely due to the increase in
kharif production.

8. Gross Domestic Product (GDP) :

Global Analysts cut their forecast of India’s GDP growth rate due to
Demonetization .India’s GDP in 2016 is estimated to be US $2.25 Trillion , hence ,
each 1% reduction in growth rate represents shortfall of US $2.25 Billion (Rs 1.54
Lakhs Crore) for the Indian economy.As per Societe generale , India’s quarterly GDP
growth rate would drop down below 7%.

The Reserve Bank Of India has reduced the GDP growth rate forecast for 2016-17
from 7.6% to 7.1% , the Asian Development Bank has reduced the GDP growth
forecast from 7.4% to 7% , Fitch has reduced the GDP growth forecast from 7.4%
to 6.9% and Bank of America-Merrill Lynch from 7.7% to 7.4% (for calendar2016).
9. Cashless Payment System :

Online Payment Industries have touched a great height after the audacious step taken
by the Government.

Several e-commerce companies including Amazon , Flipkart and Snapdeal

encouraged the move towards a “Cashless Economy” as it will act as an impetus to
an increase in digital payment.As about 70% of the online commerce in India is paid
for by Cash On Delivery (COD) only , so the companies have suffered a loss in short
term

Sanjay Sethi , Chief Executive at shop clues , an e-commerce platform that is backed
by Singapore’s sovereign wealth fund , said that there is rise in card transactions
because of the fall in Cash On Delivery (COD) transactions.Following the
announcement , the overall sales has fallen by 7-8% because the fall in Cash On
Delivery (COD) sales is more than the increase in cards sales.

There was rise in the usage of E-payment options like PayTm , PayUMoney and
Instamojo Payment Gateway.

The demand for Point Of Sales (POS) or card swipe machines has
increased.According to data of Pine Labs the demand for POS machines doubled
after the decision of Demonetization.It also stated that the debit card transactions
increased by 108% and credit card transactions by 60% on 9 November 2016.

Paytm has got tremendous hike.According to the report, it has hit 5 million
transactions in a single day and processing over Rs 24000 crores.Paytm app
download has been increased by 300%.As per report , currently more than 8,50,000
merchants (offline) across the country accept payment via Paytm.
10. Income tax raids and cash seizures :

All the Revenue Intelligence Agencies were instructed by the Finance Ministry to
join the clampdown on foreign exchange traders , hawala operators and jewellers.It
was reported that the Prime Minister’s Office (PMO) and the Prime Minister
Narendra Modi himself were directly coordinating the raids conducted by the Income
Tax , Enforcement Directorate (ED) and other agencies.As of 23 rd December , PMO
received around 700 calls giving information about black money in various parts of
our country and it directly forwarded the information to various law enforcement
agencies for further action.

Various illegal tax evasive businesses were raided by the Income Tax departments in
Delhi , Mumbai , Chandigarh , Ludhiana and other cities that traded with
demonetized currency.Several FEMA notices were issued by Directorate to foreign
exchange and gold traders.Large sum of disused cash was seized in different parts of
our country.In Chhattisgarh , liquid cash worth of Rs 4.4 million (US$65,000) was
seized.
As of December 28 , official sources said that the un-disclosed income of over Rs
4,172 crore was detected by the Income Tax Department.Income Department also
seized new notes worth Rs 105 crore as part of its country-wide operations.Under the
provisions of Income Tax Act , the department carried out a total of 983 search ,
survey and enquiry operations and had issued 5,027 notices to various entities on
charges of tax evasion and hawala like dealings.Cash and jewellery worth over Rs

549 crore were seized by the department and out of which the new currency
seized(majority of them Rs 2000 notes) is valued at about Rs 105 crore.The
department also referred a total of 477 cases to other agencies like the CBI and the
Enforcement Directorate (ED) to scrutinize other financial crimes like money
laundering , disproportionate assets and corruption.

11. Real estate :

Real estate is “property consisting of land and the buildings on it , along with its
natural resources such as crops , minerals or water , immovable property of this
nature ; an interest invested in this (also) an item of real property , (more generally)
buildings or housing in general.Also : the business of real estate ; the profession of
buying , selling , or renting land , building or housing.”

The Indian real estate sector contributes 5-6% of the country’s GDP.

Ashutosh Limaye , head of research and real estate intelligence service at JLL India
told Bloomberg Quint that the sales have slowed down in both primary as well as
secondary market and registrar’s data reflects that.

Jaxay Shah , President-Elect (CREDAI) said that the primary market in comparison
to the secondary market has been stable because the transactions are through financial
institutions and banks.The secondary market , on the other hand has come to a virtual
standstill and , with further policy changes such as RERA (Real Estate Regulatory
Authority) , will have to undergo a complete overhaul in how they conduct their
business so as to ensure functioning in the months.

Fig.1
 20

In Maharashtra , for instance , receipts reported by N.Ramaswamy , Inspector

General of Registration and Controller of stamps in Maharashtra (fig.1) fell from a
high of Rs 1,846.61 crore in October to Rs 1,255.89 crore in November and stood at
Rs 1,227.35 crore in December until the 26th of the month.Roughly 50% of receipts
come from the property sector.A caveat worth mentioning here is that October
registrations were the highest seen so far this fiscal year.After Demonetization ,
registrations fell about 38% in the month of November but in the month of
December , the situation seems to be slightly improving.
CONCLUSION

The step taken by the Prime Minister Narendra Modi on 8 th November , 2016
regarding the move of Demonetization was historic in itself and bold as well as said
by our Honourable President Pranab Mukherjee.In my opinion also , the move was a
bold one to tackle the problems such as black money hoarding and corruption.But it
can be criticised on the ground that most of the black money holders do not hold such
money in the form of cash , rather in the form of gold , bullion or properties.I also
believe that the plan to curb the problem of black money with the help of
Demonetization was a good one but it lacked in terms of its execution as
Demonetization affected some sectors of the economy adversely like cement
industry , steel industry , fertilizer and agro chemical business , stock market , real
estate.Demonetization had a positive impact on some sectors of economy like
banking sector , online payment industries.Government has also done extraordinary
well in terms of synchronisation of its activities with the Income Tax Department , the
Enforcement Directorate (ED) and through the banks for successfully implementing
the plan.

At the end , I would like to conclude by saying that it was mo doubt a bold , terrific
and historic move to curb the deep rooted problems of corruption and black money
holding and also a great push towards making the country a cashless economy by
making it digital.But we should also understand that the country is not now well
prepared or to say digitally literate to convert the economy into a digital and cashless
economy.To say the least while making India a cashless economy , the move ended
making it a less cash economy.
REFERENCE

1. Prof.Sandeep Kaur (November 2016) “Demonetization and its impact in India” ,

International Journal of Research(IJR)

2. Rahul Prakash Deodhar (November 2016) “Black Money and Demonetisation” ,

University of Mumbai

3. K.Veerakumar (2017) “A study of people impact on Demoentization” ,

International Journal of Interdiscipline Research in Arts and Humanities

4. Geeta Rani (2016) “Effects of Demonetization on retail outlets” , International

Journal of Applied Research 2016 ; 2(12) : 400-401

5. http://www.indiatimes.com

6. The Hindu newspaper for articles relating to Demonetization.Used the same

source for collecting informations like impact on GDP.

7. http://www.investopedia.com

8. http://www.careratings.com

9. The Financial express

10. http://www.quora.com

12. http://www.ft.com