Demonetization and its impact in Indian Economy

1. Dr.G.KARTHIKEYAN,M.Com., M.Phil.,M.B.A., UGC-
NET.,Ph.D.,
Assistant Professor,
PG & Research Department of Commerce,
A.V.C.College (Autonomous),
Mannampandal – 609 305.
Presented by

2.  “Demonetization is the withdrawal of a particular form of currency
from circulation.”
 It 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 old unit of currency must be retired and replaced with a new
currency unit.
What Is Demonetization ?

3. • On 8th November 2016 (8.00 p.m), Government of India had announced
that from today onward rupees 500 and 1000 rupee note will not be a
legal tender.
• This means that 500 and 1000 rupee note will be accepted by anyone
except the organisation declared by government.
• They can change the currency from the banks and post offices till 30th
December 2016.
What Happened on Demonetization in India?

4. Demonetization Historyand Background In India?
 This is not the First time, When Indian Currency is Demonetized in India
 Earlier it was done in 1946 with the complete ban of Rs. 1000 and Rs. 10000
Notes to deal with the unaccounted money i.e. Black Money.
 Second time, it was done in 1978 by Govt headed by Morarji Desai when
Rs. 1000, Rs. 5000 and Rs. 10000 Notes were demonetized.

5. Demonetization Background In India?
There is a background to the current decision of demonetization of 500 and 1000
rupee notes. The government has taken few steps in this direction much before its
November 8, 2016 announcement.
1. Government had urged people to create bank accounts under Jan Dhan Yojana.
They were asked to deposit all the money in their Jan Dhan accounts and do their
future transaction through banking methods only.
2. Government initiated was a TAX DECLARATION SCHEME of the income and had
given October 30, 2016 deadline for this purpose. Through this method, the
government was able to mop up a huge amount of undeclared income.
3. However, there were many who still hoarded the black money, and in order to
tackle them; the government announced the demonetization of 500 and 1000 currency
notes.

6.  The plan to demonetize the ₹500 and ₹1000 banknotes was initiated between six and ten months before it was
announced, and was kept confidential.
 In April 2016, a report by the SBI analyzed possible strategies and effects demonetization.
 In May 2016, the RBI had started preparing for new banknotes and confirmed the design of ₹2000 banknotes in
August 2016.
 The printing of new banknotes started in October 2016 when the news stories of forthcoming new banknotes
appeared in the media.
 On 21 October 2016, The Hindu Business Line had also published a report on forthcoming ₹2000 banknote.
 On 27 October 2016, the Hindi daily Dainik Jagran published a report quoting RBI sources speaking of the
forthcoming of ₹2000 banknotes alongside withdrawal of ₹500 and ₹1000 banknotes.
 The Union Cabinet was informed about the plan on 8 November 2016 in a meeting in the evening called by the
Indian Prime Minister Narendra Modi.
 Soon after the meeting, Modi announced the demonetization in an unscheduled live national televised address at
20:15 IST.
 He declared circulation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as invalid effective from the
midnight of the same day, and announced the issuance of new ₹500 and ₹2000 banknotes of the Mahatma Gandhi
New Series in exchange for the demonetized banknotes.
Demonetization Preparation and announcement In India

7. Demonetization in other countries

8. Objectives behind demonetization In India?
The government’s stated objective behind the demonetization policy are as follows;
1) Attempt to make India corruption free.
2) To curb black money,
3) To control escalating price rise,
4) To stop funds flow to illegal activity,
5) To make people accountable for every rupee they possess and pay income tax return.
6) Finally, it is an attempt to make a cashless society and create a Digital India.

9. “undeclared financial emergency”
Amartya Sen Leading economist, Noble Laureate called
the move authoritarian. He came down heavily on the
exercise claiming this as anti-people.
Many leading economists opinion about Demonetization
Manmohan Singh eminent economist, former Prime
Minister and governor of the apex bank of India called
demonetization an organized loot, legalized plunder and
monumental mismanagement.
Arun Shourie former economist at World Bank claimed
that black money hoarders do not hold black money in
form of cash. He viewed that the entire exercise was ill
planned
There were also views that supported the efforts of the government. There has been a widespread criticism on
economist view of demonetization because the effect on economy can only be felt in the long run. Economy as
such is complex and cannot be predicted clearly. It is complicated hence only in the long run we get to know
what exactly happens to the economy.

10. Making India ACash less Society .
Major Aim of Demonetization In India?

11. Promoting Digital India

12. Percentage Share ofDenominations before
Demonetization

13. Share ofDenominations before Demonetization

15. Impact of Demonetization In Indian Economy
Attack On
Black Money
Holders
People who possess huge amounts of black money in hard
cash are at a complete loss now .
Their black money in hard cash is now a pile of trash.
Now if a Black Money holder want to Deposit Money in
Bank Account Than he/she has to Show ID .
There will be 200% Penalty on Income Tax Amount
Only a small portion of black money is actually stored in the form of cash. Usually, black income is kept in the form of
physical assets like gold, land, buildings etc. Hence the amount of black money countered by demonetization depend upon
the amount of black money held in the form of cash and it will be smaller than expected. But more than anything else,
demonetization has a big propaganda effect. People are now much convinced about the need to fight black income. such a
nationwide awareness and urge will encourage government to come out with even strong measures.
Of the Rs 17 lakh crore of total currency in circulation in the country, black money is estimated at mind-boggling
Rs 3 lakh crore.
Black money operators run a parallel economy which shakes the very foundation of the Indian economy. With Modi's
demonetization move, all domestic black money will either be deposited into the banks with heavy penalty or be simply
destroyed.

16. Impact of Demonetization In Indian E c o n o m y
Death
Knell To
Fake
Currency
Rackets
Most of the fake currencies used to be in the denominations of Rs. 500 andRs. 1000
.
By banning Rs. 500 andRs. 1000 notes, Modiji has busted all these unethical rackets
completely
Now There Will be nouse of these Money.
A study conducted by Indian Statistical Institute, Kolkata on behalf of the National
Investigation Agency (NIA) suggests that fake Indian currency notes (FICN) amounting to Rs 400
crore are in circulation in the country at any given point of time and around Rs 70 crore fake notes
are pumped into Indian economy every year. But the actual figure could be much larger.
Fake Indian currency worth Rs 12 lakh crore has pumped into Indian financial system over the
years.
This is an open secret that Pakistan has been printing fake Indian currency at its government
printing press in Quetta and its security press in Karachi. The enemy nation funnels the
counterfeit currency through the frontier at Jammu & Kashmir and via India's porous border with
Bangladesh and Nepal.

17. Impact of Demonetization In Indian Economy
End of
Terrorist
Funding
Huge sums of money especially in hard cash in the denominations
of Rs. 500 and Rs. 1000 was used to fund terrorists , Naxalites.
Now , these Organizations will suffer from shortage of funds .
Most of These terrorist , Maoist Organization used these Funds
for Buying Arms and Weapons.
Buying arms is an extremely difficult task now after this ban .
 Black money is the oxygen for Maoists. According to an estimate, Maoists
manage to raise Rs 300 to Rs 400 crore annually through donations, levy
and extortions. The illicit money is used to purchase arms and ammunition,
food and medicine and daily essentials, apart from distributing it among the
ranks and the cadre.
 Police sources in both Chhattisgarh and Odisha have told the writer that the
Maoists have stashed old high denomination notes to the tune of over Rs 10,000
crore at their dumps in the dense jungles of Odisha- Chattisgarh boarder.
 Maoists are in a state of coma and Maoist activities see a crippling blow. Ever since
the demonetization announcement was made, no major violence was reported from
the Maoist infested states like Chhattisgarh, Odisha, Andhra Pradesh and
Telangana.

18. Impact of Demonetization In Indian Economy
Transparency
Online transaction = More transparency
= Financial Intelligence Unit Will tack
AllOnline
End of Huge
Donations
Huge amounts of donation that is taken in the private
education and healthcare sectors would be stopped .
Schools, engineering and medical colleges and hospitals
( private ones) used to take huge amounts of money as
donations especially in the form of hard cash in the
denominations of Rs. 500 and Rs.1000.
These money-minded people running these institutions
won’t be able to make any easy money now .

19. Impact of Demonetization In Indian Economy
Towards A
Cashless
Economy
While it is practically impossible to have a 100%
cashless economy, the proportion of hard cash in
the economy will decrease and our economy
will get more digitized .
This will result in greater transparency .
Now government has put Some limitation for Cash
Withdraw from bank Accounts. People Will go
for online payments.
They Will use PayTM Or other online payment to
companies for Buying goods or Making
payments.
More Use of Debit and Credit Card

20. Impact of Demonetization In Indian Economy
Hawala
T
ransactions
End
Most Hawala transactions used to be carried out
in the denominations of Rs.500 and Rs.1000
 With this ban Modiji has delivered a fatal blow to the
unethical Hawala traders as they can’t trade anymore
using denominations of Rs.500 and Rs.1000
 Hawala is a method of transferring money without any
actual money movement. Hawala route is used as a
means to facilitate money laundering and terror
financing. Hawala rackets run again on black money.
 According to an India Today report, one of the hawala
operators in Mumbai has destroyed currency notes
worth about Rs 500 crores.
 The terrorists collect huge donations and then route the money
through hawala transactions

21. Impact of Demonetization In Indian Economy
Impact on
Money
Supply
With the older 500 and 1000 Rupees notes being
scrapped, until the new 500 and 2000 Rupees notes
get widely circulated in the market, money supply
is expected to reduce in the shortrun.
To the extent that black money (which is not
counterfeit) does not re-enter the system, reserve
money and hence money supply will decrease
permanently.
However gradually as the new notes get circulated
in the market and the mismatch gets corrected,
money supply will pick up.

22. Impact of Demonetization In Indian Economy
Impact On
Daily Wage
Workers
A major portion of the Indian workforce is a part of the
informal economy. They use cash to meet all their
expenses and demonetization has resulted in a lot of them
losing their jobs due to unavailability of cash. According to
CMIE’s Consumer Pyramids Household Surveys (CPHS),
approximately 1.5 million jobs were lost during the final
quarter of the financial year 2016-17. The estimated
employment during this period was 405 million as
compared to 406.5 million during the previous four
months.

23. Impact of Demonetization In Indian Economy
Impact on
Demand
The overall demand is to be affected to an extent.
The demand in following areas is to be
impacted particularly:
Consumer goods
Real Estate andProperty
Gold and luxury goods
Automobiles (only to a certain limit)
All these mentioned sectors are faced certain
moderation in demand from the consumer side,
owing to the significant amount of cash
transactions involved in these sectors.

24. Impact of Demonetization In Indian Economy
Impact on
GDP
The GDP formation could be impacted by
this measure, with reduction in the
consumptiondemand.
However with the recent rise in festival
demand is expected to offset this fall in
overallimpact.
Moreover, this expected impact on GDP may
not be significant as some of this demand
will only be deferred and re-enter the
stream once the cash situation becomes
normal.
The GDP growth rate of 8.01% in 2015-2016 fell to 7.11%
in 2016-2017 after demonetization. This was largely due to
less availability of cash in cash-intensive industries like
manufacturing and construction. It has also adversely
impacted the primary function of banks to issue loans and
has put pressure on them as current account holders
demand0 large sums of cash.

25. Impact of Demonetization In Indian Economy
Impact on
Online
Transactions
and
alternative
modes of
payment
With cash transactions facing a reduction,
alternative forms of payment will see a surge in
demand.
Digital transaction systems, E wallets and apps,
online transactions using E banking, usage of
Plastic money (Debit and Credit Cards), etc. will
definitely see substantial increase in demand
This Will Bring More transparency In System And
You can Easily track Online Money Transactions.

26. Impact of Demonetization In Indian Economy
Liquidity
crunch
(short term
effect)
liquidity shock means people are not able to get
sufficient volume of popular denomination
especially Rs 500. This currency unit is the
favourable denomination in daily life. It
constituted to nearly 48% of the previous
currency supply in terms of value. Higher the
time required to resupply Rs 500 notes, higher
will be the duration of the liquidity crunch.

27. Impact of Demonetization In Indian Economy
Welfare loss for the
currency using
population
Most active segments of the population who
constitute the “base of the pyramid‟ uses currency
to meet their transactions. The daily wage earners,
other labourers, small traders etc. who reside out of
the formal economy uses cash frequently. These
sections will lose income in the absence of liquid
cash. Cash stringency will compel firms to reduce
labour cost and thus reduces income to the poor
working class.

28. Impact of Demonetization In Indian Economy
Consumption will
be hit
When liquidity shortage strikes, it is consumption that is going to be adversely
affected first.
Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓
Impact on bank
deposits
Deposit in the short term may rise, but in the long term, its effect will come
down.
They saved this money into banks just to convert the old notes into new
notes. These are not voluntary savings aimed to get interest.
It is not necessary that demonetization will produce big savings in the
banking system in the medium term.
Impact on Small Scale
Industries
Businesses like the textile industry, salons, restaurants, and seasonal
businesses are low capital enterprises and work on the basis of liquidity
preference. Demonetization gravely impacted their revenue collection and
threatened their existence to an extent.

29. Impact of Demonetization In Indian Economy
Impact in Indian Stock
Market
Due to currency being sucked out of the market coupled with Trump’s
victory, the mood at the stock market was completely bearish . Sensex
lost 1600 points at open . This can adversely have a negative effect on
trade in general
Problem For House Wives
Many Indian housewives store money secretly so that they could be
of help during times of financial crisis in their households . The
accumulated money of our respected Indian housewives is of no use
now until they exchange in the banks and post- offices
Short Term Inflation
Due to shortage of money in the market , a short-term cost push
inflation will occur. The price of gold has already become sky high.
Prices of vegetables and fruits have also soared burdening the
common man .

30. Impact of Demonetization In Indian Economy
Real estate
cleansing
It is said that real estate is an industry built on black money. The extent of
black money floating around in the sector is huge. According to an estimate at
least 40 per cent of real estate transactions in Delhi-NCR are in black. Modi’s
demonetization move will curtail the flow of black money into the real estate
sector. This will help in making the much needed correction in the sector. The
impact: An unexpected dip in land and property prices
Effects on patients
(Hospital Sector
According to National Family Health Survey-3, the private medical
sector remains the primary source of health care for 70% of
households in urban areas and 63% of households in rural areas. So
its easy to understand that what will be the effects on these 63% and
70% patients.

31. Impact of Demonetization InIndian E c o n o m y
S e c t o r W i s e

32. Short term Impact of Demonetization In Indian Economy
Short term impact on the economy will be
 Fall in GDP due to drop in consumer spending, drop in jobs in the informal sector where unaccounted money was
being used.
 Low consumption level in cash driven sectors like vegetables, fruits, flowers and other perishables due to less cash in
the hands of consumers
 Increasing collection of income taxes and indirect taxes as people would use the unaccounted cash to pay these off
 The deposits in banks increased due to the demonetization

33. Long term Impact of Demonetization In Indian Economy
Long term impact on the economy will be
 Growth of cleaner economy
 More deposits in bank so more loans to public
 Reduced lending rates by bank
 Reduction in taxes due to more money in coffer
 More people coming into tax brackets
 Ease of doing business due to digital transactions
 Lesser unaccounted money in the system
 Less corrupt economy so increase in FDI
 More government spending on infrastructure due to less liabilities

34. Impact of Demonetization In Indian Economy

35. Impact of Demonetization – General Public Opinion

36. Conclusion
 Demonetization as a cleaning exercise may produce several good things in the economy.
 At the same time, it creates unavoidable income and welfare losses to the poor sections of the
society who gets income based on their daily work and those who doesn't have the digital
transaction culture.
 Overall economic activities will be dampened in the short term. But the unmeasurable benefits of
having more transparency and reduced volume of black money activities can be pointed as long
term benefits.
 The country should follow-up the demonetization exercise through constant effort to switch to
digital transactions so that tax collections increase. Efforts should be made consistently to educate
people to adapt to technology for faster growth and more efficient business dealings.

37. Conclusion
Human brain is more creative in focusing on negative aspects at first.
Demonetization has been praised as well as criticized on various grounds. There has been a lot of
opposition regarding the implementation of this policy. In the short run, there have been problems
related to liquidity crunch, unemployment, loss of growth momentum, and a temporary halt to
major economic activities. All this is evident from the data provided by the RBI.
The long term effects of Demonetization are yet to be ascertained. It is expected that it can improve
the Indian economy in the long run by increasing tax compliance, financial inclusion, consequently
improving the state of the economy. It can boost the GDP by increasing the availability of funds for
lending and also by reducing transaction costs if the economy moves to digital modes of payments.