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Demonetization and its Impact on Indian Economy

Introduction

Demonetization is a process by which a series of currency will not be legal tender. The series of currency will not acceptable as valid currency. The Indian government had demonetised bank notes on three occasions—once in 1946 after that in 1978 and 2016. In all three cases, the goal was to combat tax evasion by "black money" held outside the formal economic system. In 1946 pre-independence money hoped demonetization would penalize Indian businesses that were concealing the fortunes amassed supplying the Allies in World War II. In 1978, the Janata Party coalition government demonetised banknotes of 100, 500 and 1000 rupees, again in the hopes of curbing and black money.

The same thing happens with the Rs. 500 and Rs. 1000 note demonetization. The Hon’ble Prime Minister of India, in an unscheduled live televised address to the nation on November 8, 2016 at 20:15 p.m. Indian Standard Time (IST) declared circulation of all INR 500 and INR 1000 banknotes of the Mahatma Gandhi Series as invalid with immediate effect Issuance of new INR 500 and INR 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes was announced With the exchange of new denomination notes of INR 2000 and not INR 1000, the conversion of black money would be curbed.

Need for Demonetisation

High denomination notes were known to facilitate generation/ circulation of black money. Total number of bank notes in circulation rose by 40 percent between 2012 and 2016 and increase in number of notes of INR 500 denomination was 72.65 percent and for INR 1,000 denomination was 111.19 percent during this period.

Currency

2012

2013

2014

2015

2016

Percentage

500

5128.07

5359.50

6702.48

7563.91

8853.75

72.65

1000

3468.81

4299.00

5081.37

6612.45

7325.68

111.19

Source: RBI report 2017

Impact of Demonetization:

(A) Positive Impact

1.       Human trafficking: Nobel laureate Kailash Satyarthi and others working to fight human trafficking said that the note ban had led to a huge fall in sex trafficking. Satyarthi said the demonetisation would be effective in combating exploitation of children as well as corruption and would be a great obstacle to traffickers. However, 2 months later he expressed his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.

2.       Radical groups: The Demonetization has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetization is announced. It is said that the money these organizations have collected over the years have left with no value and it has caused them to reach to this decision.

3.       Hawala: Traditional system of transferring money used in Arab countries and South Asia, whereby the money is paid to an agent who then instructs an associate in the relevant country or area to pay the final recipient.

(B) Negative Effects

1.       Cash shortage: The scarcity of cash due to demonetisation led to chaos, and most people holding old banknotes faced difficulties exchanging them due to endless lines outside banks and ATMs across India, which became a daily routine for millions of people waiting to deposit or exchange the 500 and 1000 bank notes since 9 November.

2.       Deaths: Several people were reported to have died from standing in queues for hours to exchange their old banknotes. Deaths were also attributed to lack of medical help due to refusal of old banknotes by hospitals. As of 15 November 2016, the attributed death toll was 25 and 33 deaths as of 18 November.

3.       Stock market crash: The day after the demonetisation announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index was below 8100 intraday.

4.       Transportation halts: After the demonetisation was announced, about 800,000 truck drivers were affected with scarcity of cash, with around 400,000 trucks stranded at major highways across India were reported. While major highway toll junctions on the Gujarat and Delhi-Mumbai highways also saw long queues as toll plaza operators refused the old banknotes.

Impact on Agriculture: No Harvest, No sale, No cash, No purchase of seeds/ fertilizers as they don’t use NEFT/net banking, debit/credit card, No swipe machines in rural areas, Fields are ready for sowing but farmers are unable to purchase seeds/ fertilizers/diesel for sowing. No further sowing Fruits and vegetables which are perishable in nature are getting unused/un-sell due to no trade in mandis; Farmers are unable to pay to labours.

Advantages of Demonetization

·         The biggest advantage of demonetization is that it helps the government to track people who are having large sums of unaccounted cash or cash on which no income tax has been paid because many people who earn black money keep that money as cash in their houses.

·          Since black money is used for illegal activities like terrorism funding, gambling, and money laundering and also inflating the price of major assets classes like real estate, gold and due to demonetization all such activities reduced.

·          Another benefit is that due to people disclosing their income by depositing money in their bank accounts government gets a good amount of tax revenue.

Disadvantages of Demonetization

·         Banks and ATMs which are the only medium to change the old currency units to new currency units

·         If the costs of printing of new currency are higher than benefits then there is no use of demonetization.

·          If people have not kept cash as their black money and rotated or used that money in other asset classes like real estate, gold and so on then there is no guarantee that demonetization will help in catching corrupt peoples

Conclusions

The advantages are much dominating and it will be in the long term interest of our country comfortably outweighing the disadvantages. Government need to take all the necessary steps so as to ensure that there will be a smooth flow of currency exchanges. It would turn into chaos if government takes no necessary steps to circulate money correctly. It will make a massive change in our economy. We congratulate the entire government and those hidden brains of our democracy who brought this decision.

Reference

Banerjee, Sumanta. (2016). Narendra Modi, Bob Dylan and Demonetisation, Economic and Political Weekly, LI (48): 21-22 (November26).

Boughton, James M. and Elmus R. Wicker. (1979). The Behavior of the Currency-Deposit Ratio during the Great Depression, Journal of Money, Credit and Banking, 11(4): 405-418 (November).

Chaudhuri, Saumitra. (2016). Even as world changes under Trump, India’s currency shortages will stay for months, Economic Times Blogs, November 15, 2016. Retrieved from: http://blogs.economictimes.indiatimes.com/et-commentary/even-as-world-changes-under-trump-indias-currency-shortages-will-stay-for-months/

Dhume, S. (2016, December 15). India’s Demonetization Debacle. Retrieved from Wall Street Journal:http://www.wsj.com/articles/indias-demonetization-debacle- 1481851086

Hardy, Daniel and Ashok K. Lahiri. (1994). Cash Shortage in the Former Soviet Union, International Monetary Fund, WP/94/67, June 1994.

Hindu Business Line (2016). Coming soon to your wallet: Rupee 2,000 notes, October 21, 2016.

Kumar, A. P. (2016). Demonetization and the Rule of Law. Economic and Political Weekly, 19-21.



Writer :: Harkesh Kumar Balai and K.C. Bairwa      Published on :: 26-Dec-2018


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