Scribd
Upload
53 views

Demonetization

Demonetization is the act of stripping a currency unit of its status as legal tender. In November 2016, the Indian government demonetized Rs. 500 and Rs. 1000 banknotes, replacing them with new notes to curb the shadow economy and reduce illicit cash funding illegal activities and terrorism. Positive impacts included reducing black money, fake currency, and boosting bank deposits which could increase GDP. However, the cash shortage also led to liquidity issues, loss of income for many, reduced consumption, and potentially decreased GDP in the short term. Increased deposits may not translate to long term savings or reduced interest rates.

Uploaded by

Goutam Soni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
53 views

Demonetization

Demonetization is the act of stripping a currency unit of its status as legal tender. In November 2016, the Indian government demonetized Rs. 500 and Rs. 1000 banknotes, replacing them with new notes to curb the shadow economy and reduce illicit cash funding illegal activities and terrorism. Positive impacts included reducing black money, fake currency, and boosting bank deposits which could increase GDP. However, the cash shortage also led to liquidity issues, loss of income for many, reduced consumption, and potentially decreased GDP in the short term. Increased deposits may not translate to long term savings or reduced interest rates.

Uploaded by

Goutam Soni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

DEMONETIZATION

What is 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.

On 8 November 2016, the Government of India announced the demonetization of


all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced
the issuance of new Rs.500 and Rs2,000 banknotes in exchange for the
demonetized banknotes. The Prime minister of India, Narendra Modi claimed that
the action would curtail the shadow economy and reduce the use of illicit and
counterfeit cash to fund illegal activity and terrorism.

Impacts of Demonetization:-
Positive:
1. Over Black Money -
Black money is considered as a Cancer in any economy. It is a parallel economy,
which weakens the foundation of any country. It is estimated that in India, the
total amount of black money is Rs. 3 lakh crore. It is huge if we see that the total
money in circulation is only Rs.17 lakh crore. With this single master stroke of
demonetization, all the black money will either come to account book or will be
destroyed.

2. Over Fake Currency -


According to the ISI (Indian Statistical Institute), the circulation of the total
amount of fake currency in India is Rs.400 crore at any given point of time. It is
also estimated that around Rs.70 crore fake currencies are being injected into India
every year.
3. Over Bank Deposits -
It is well-known fact that near about 86 percent currency circulation in India was
composed of 500 and 1000 currency notes. And demonetization of these notes
made people deposit their money which was in the form of 500 and 1000 Rs notes
into the banks. RBI had declared Bank had received Rs 5.12 trillion worth of
deposits until 18th November. This deposit of money can boost Indian GDP by 0.5
to 1.5 percent. India’s largest public sector State Bank of India (SBI) said it had
received Rs.1.27 trillion worth of cash deposits.

4. Over Lending Rates -


This huge cash deposit base will enable banks to cut down the cost of funds
because higher deposits will replace the high cost of borrowing and reduce overall
costs of funds. It can be expected that banks can reduce deposit rates by ~125 bps
over the next six months. The new directives of MCLR (Marginal Cost of Funds
based Lending Rate) will instantaneously take into account the lower cost. This
will pave the way for a decline in lending rates, which will expedite the economic
activity in the medium term.

5. Over Real estate cleansing -


It is repeatedly said that real estate industry is built on black money. The extent of
black money circulation in the sector is huge. According to report at least 40
percent of real estate transactions in Delhi-NCR are being done in black money.
The demonetization move will curb the flow of black money into the real estate
sector.

Negative:
1. Liquidity crisis -

Demonetization gave rise to liquidity problem as people found it difficult to get


sufficient amount of cash to fulfill 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.
2. 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.

3. Consumption -

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.

4. Decrease in GDP -

Withdrawal of highest currency notes reduces the growth rate of the economy.
Demonetization 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.

5. Interest rate and bank deposits -

Deposit of the bank may increase in short-term due to demonetization, 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 demonetization. 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.

You might also like