demonetisation

1. Name: Basudeb Manna
Class: XI , Sec: D , Roll no.: 47
Topic: A Paper on Demonetisation introduced by Government of India
 Demonetisation: Demonetisation is an economic term which is used to mean the
'scrapping' of old currency notes and stripping them off their status of legal
tender, usually when a new currency note or currency is being introduced in the
economy of the country.
This is validated by the heads of the Central Banks of the nation and in case of India, by
the Governor of Reserve Bank of India. This "status" of legal tender can be scrapped for a
currency note, which means that the instrument seizes to be a "legal" mode of monetary
transactions and in effect looses the value associated with that instrument. In other
words, until and unless the old currency is legally exchanged at the designated centers,
they are equivalent to nothing more than scraps of paper.
Demonetization of Indian Rs. 500 and Rs. 1000 Notes :
In a surprise move, the Indian Prime Minister, Shri Narendra Modi in his address to the
nation on November 8, 2016 declared the demonetization of the Indian Rs. 500 and Rs.
1000 currency notes with effect midnight of November 8. This move sent the entire
nation in a dizzy. The Hon'ble Prime Minister stated the decision as a step to counter
terrorism which was being funded by counterfeit money as well as a decisive strike
against the black money being hoarded by the citizens of the country. The decision
scrapped the legal tender status of the high value currency notes of INR 500 and 1000
with immediate effect and introduced new Rs. 500 and Rs. 2000 notes. After the address,
the Economic Affairs Secretary, Mr. Shaktikanta Das further explained the method and
means by which the old currency notes would be exchanged for new notes. It was further
assessed that people should not worry about their money as demonetisation does not
mean that their money has no value. All it means is that it must be exchanged for the
new notes.
Barring some public utilities like petrol pumps, hospitals, railways and airports as well as
cremation and burial grounds, the use of old 500 and 1000 rupee note was discontinued.

2. All the banks were shut for one day to effectively carry out the exchange of old currency
and the ATMs across the nation were closed for two days. The government also imposed
a limit of withdrawals from ATMs to Rs. 2000 per card and from banks to Rs. 10,000 per
account per day upto Rs. 20,000 withdrawals per week. The limits were later revised to
Rs. 2500 ATM withdrawals per day and Rs. 24,000 bank withdrawals per account per
week. The use of old currency notes were also extended for use at Delhi Metro recharge
counters as well as payment of property taxes and electricity bills. The government
intends to exchange the old currency notes by December 30, 2016. After the date, the
exchange of the old currency notes would only be possible at designated counters of RBI
after submitting a declaration form to the same effect.

3.  Effects of Demonetisation in Indian Currency :
The immediate effect of the announcement saw countrymen lining up at the ATMs to
withdraw 100 rupee notes to tide over the impending cash crunch. As per figures
provided by the RBI, the banned currency constituted 86 percent of the currency in
circulation in the country at the time.
The banks and ATMs opened to long queues of citizens lined up to exchange, withdraw
and deposit the old currency notes. Reports were received from various part of the
country about chaos regarding decline in essential services. The government has released
further measures and actions and continues to do so in order to make this as convenient
to the common man as possible. The Income Tax Department and the Ministry of
Finance has further clarified that since it had given affair chance to all to declare their
income by September 30 under the voluntary disclosure schemes, no further concessions
would be given to people depositing large amounts in their accounts and all such large
transactions would attract Tax scrutiny and penalty as per the law. As the drive to
exchange the old currency notes continue, measures are being put in place to make the
transition as smooth as possible. However, it can be judged that the sheer quantum of
the money that needs to be exchanged (given the population and the amount of notes
already in circulation) makes this a logistical juggernaut and would continue to cause
discomfort. The Government and RBI are constantly working towards making this as
comfortable as possible. Some of the measures include increasing the limits of withdrawls
and scrapping Toll on National Highways till November 18 , 2016.

4.  Advantages of demonetization in India :
1. 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 or in some secret place which is very difficult to
find and when demonetization happens all that cash is of no value and such
people have two options one is to deposit the money in bank accounts and pay
taxes on such amount and second option is to let the value of that cash reduced to
zero.
2. Since black money is used for illegal activities like terrorism funding, gambling,
money laundering and also inflating the price of major assets classes like real
estate, gold and due to demonetization all such activities will get reduced for some
time and also it will take years for people to generate that amount of black money
again and hence in a way it helps in putting an end this circle of people doing
illegal activities to earn black money and using that black money to do more illegal
activities.
3. 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 which can
be used by the government towards the betterment of society by providing good
infrastructure, hospitals, educational institutions, roads and many facilities for
poor and needy sections of society.
 Graphical Representation of Demonetisation in India :
 Some thoughts about demonetisation in India :

5. 1. Vamshi Lade,
“Demonetization refers to discontinuing of current currency units and replacing those
currency units with new currency units. It is a major decision and it impacts all the
citizens of the country because overnight all the money you have become a piece of
paper which has no value if you do not exchange it with new currency units or deposit it
in the banks.”
2. Pranay Pushp,
“Demonetization would produce a lot of indirect taxes. Demonetization has made the
common man realize that he was the one who though paid his taxes, ended up playing a
big role in generation of black money. This was because most of his spending were in
cash. Common man is street smart and with this harrowing experience he would change
his bad habit of withdrawing cash from ATM and then spending it on purchases.
Demonetization seeks to bring in a sharp, sudden but long lasting behavior change that
encourages electronic payments. That means a lot many transactions would get reported
and that would lead to a direct increase in income taxes.

6. Demonetization has recapitalized banks in 21 days flat. The total NPA of banking sector is
Rs. 6 Lakh crore. Banks have got low cost deposits of Rs. 11 Lakh crore and still counting.”
 Challenges of Demonetisation:
1. Countries like Ghana ,Soviet Union ,Nigeria , Zimbabwe, also demonetised leading
to devasting economic consequences which eroded confidence in the currency.
2. It is claimed that India’s cash to GDP ratio is around 11–12% of GDP is too high
but china also has approx. 9.5%of GDP similarly Germany .
3. There is no correlation between corruption and the cash to GDP ratio as ,Nigeria
widely regarded as most corrupt country has cash to GDP ratio only 3% being a
cashless country .
4. “Cashless economy” does not ensure “terror free” global research has now found
that terrorist seldom use tax dodgers or hawala agents of target countries as they
known to local agencies.
5. The probe in recent year conducted by the IT department have reportedly
indicated that only 5 to 6% of total money detected was kept as cash. If this is the
case ,the current demonetisation drive would be able to touch only a fraction of
the present stock of black money.
6. Low bank penetration ,coupled with low financial literacy and high cash
dependence in the country have raised a number of concern with recent measures
of demonetisation.
7. There is need for more simplification and rationalisation of tax system .the
government should work more on plugging the loopholes in tax administration.

7. “Demonetization is a deep psychological strike on black money. Demonetization move has
killed the very motivation of those people who have the ability to generate black money.
A person who had black money has already paid more than the effective tax rate just to
convert his black money into legally tender-able currency / assets. Such people are in a
state of shock as though they have already paid tax at a higher effective tax rate but still
their black money has not got converted into legitimate income.
To top it up their wealth has substantially gone down as they have overnight lost more
than 50% value in their real estate holdings.
Demonetization has killed the very motivation of that person to generate black money
and when a person loses his motivation to generate black money it is certain that the
person would not generate black money irrespective of that person’s ability and resources
available at his hand to generate black money. Demonetization would produce a lot of
indirect taxes. Demonetization has made the common man realize that he was the one
who though paid his taxes, ended up playing a big role in generation of black money.
This was because most of his spending were in cash. Common man is street smart and
with this harrowing experience he would change his bad habit of withdrawing cash from
ATM and then spending it on purchases. Demonetization seeks to bring in a sharp,
sudden but long lasting behavior change that encourages electronic payments. That
means a lot many transactions would get reported and that would lead to a direct
increase in income taxes. Demonetization would lead to generation in employment.
Government can now lend massively to infrastructure sector through the recapitalized
Public Sector Banks. This would generate a lot of employment opportunities thereby
moving more people out of poverty. Demonetization is advantageous in short, medium
and long term. Although the demonetization of Indian currency has created numerous
hardships to public and visiting tourists. Sending money to the terrorist outfits in
Kashmir will be impossible. The terrorist cannot wage war with empty belly. The Maoist
are in fix as they are sitting with Rs 7000 black money . They might target the vans
carrying new currency notes. The Havala industry which adjusted the cash at place
against cash at another place has collapsed . The extortion by underworld will be totally
stopped . The Pakistan sponsored machinery of printing of fake notes and it's induction
in Indian economy, will be destroyed on its own. The political parties who believed on
purchasing notes from voters will now need to gain votes on merits and performance.
The voters who sold votes, will either stop coming for casting votes or abstain from
voting or will change themselves .”