What is main reason behind "Demonetization" and what are the problems faced my general public.

1. Effects of Demonetization
HARIGANESH SEKAR
1
ABSTRACT
Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization is necessary whenever there is a change of national currency. The old unit of
currency must be retired and replaced with a new currency unit.
In the backdrop of the recent Demonetization circulated by the PM on the night of 8th Nov,
2016. This paper attempts to put together the opposing views among economists, highlight
the direction in which cash is headed and also lists the way ahead for India to emerge as a
cleaner and transparent marketplace.
The argument made-up in favour of Demonetization is that the cash that would be
extinguished as “black money” and hence, should be rightfully extinguished to set right
obstructive incentive structure in the economy. While the facts are not available to anybody,
it would be foolhardy to argue that this is the only possibility. Therefore, it is imperative to
evaluate the short run and medium-term impacts that such a shock is expected to have on the
economy. Further, the impact of such a move would vary depending on the extent to which
the government decides to remonetise. This paper elucidates the impact of such a move on
the availability of credit, spending, level of activity and government finances. 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.

2. Effects of Demonetization
HARIGANESH SEKAR
2
WHAT IS DEMONETIZATION?
Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization is necessary whenever there is a change of national currency. The old unit of
currency must be retired and replaced with a new currency unit.
Introduction
The government has implemented a major change in the economic environment by
demonetising the high value currency notes – of Rs 500 and Rs 1000 denomination. These
ceased to be legal tender from the midnight of 8th of November 2016. People have been
given up to December 30, 2016 to exchange the notes held by them .The proposal by the
government involves the elimination of these existing notes from circulation and a gradual
replacement with a new set of notes. In the short term, it is intended that the cash in
circulation would be substantially squeezed since there are limits placed on the amount that
individuals can withdraw. In the months to come, this squeeze may be relaxed somewhat.
The reasons offered for Demonetization are two-fold: one, to control counterfeit notes that
could be contributing to terrorism, in other words a national security concern and second, to
undermine or eliminate the “black economy”.
There are potentially two ways in which the pre-Demonetization money supply will stand
altered in the new regime: one, there would be agents in the economy who are holding cash
which they cannot explain and hence they cannot deposit in the banking system. This part of
the currency will be extinguished since it would not be replaced in any manner. Second, the
government might choose to replace only a part of the currency which was in circulation as
cash. In the other words, the rest would be available only as electronic money. This could be
a mechanism used to force a transition to cashless medium of exchange. The empirical extent
of these two components will be unravelled only over the next six months. These two would

3. Effects of Demonetization
HARIGANESH SEKAR
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have different effects on the economy in the short term and in the medium term, as will be
explored below.
To understand the effects of these dimensions, it is important to first understand what is it
that cash does in the economy? There are broadly four kinds of transactions in the economy:
accounted transactions, unaccounted transactions, those that belong to the informal sector and
illegal transactions. The first two categories relate to whether transactions and the
corresponding incomes are reported for tax purposes or not. The third category would consist
largely of agents who earn incomes below the exemption threshold and therefore do not have
any tax liabilities. Finally, there would be demand for cash for illegal purposes like bribes in
elections, spending over sanctioned limits, dealings in crime and corruption. If one takes a
snapshot of the location of cash at any given point of time, it is difficult to predict what the
breakup of the cash according to these categories would be, but it would be safe to say that
each of these components would be represented in that snapshot.
When this happened
On 8 November 2016, Prime Minister of India Narendra Modi announced the
Demonetization in an unscheduled live televised address to the nation at 20:15 IST. In the
announcement, Modi declared circulation of all Rs500 and Rs1,000 banknotes of the
Mahatma Gandhi Series as invalid effective from the midnight of the same day, and
announced the issuance of new Rs500 and Rs2,000 banknotes of the Mahatma Gandhi New
Series in exchange for the old banknotes
Exchange of old notes
 The Reserve Bank of India stipulated a window of fifty days until December 30, 2016
to deposit the demonetised banknotes in bank accounts. The banknotes could also be
exchanged over the counter of bank branches up to a limit that varied over the days:
 Initially, the limit was fixed at Rs 4,000 per person from 8 to 13 November.

4. Effects of Demonetization
HARIGANESH SEKAR
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 This limit was increased to Rs 4,500 per person from 14 to 17 November.
 The limit was reduced to Rs 2,000 per person from 18 November.
 All exchange of banknotes was abruptly stopped from November 25, 2016
 International airports were also instructed to facilitate an exchange of notes
amounting to a total value of Rs 5,000 for foreign tourists and out-bound passengers
Reactions of general public
Strikes
 As the Demonetization was opposed in both houses of the parliament, it triggered
organised nationwide strikes across India
 The Opposition involving parties like Indian National Congress, BSP,DMK, JD(U),
AIADMK, Nationalist Congress Party, Left, Rashtriya Janta Dal and the
Samajwadi Party decided to observe ‘Akrosh Diwas’ as, a protest campaign day on
November 28 and launch protests in front of banks, demanding that money be
returned to people
Support
 The decision met with mixed initial reactions. Several bankers like Arundhati
Bhattacharya (Chairperson of State Bank of India) and Chanda Kochhar (MD &
CEO of ICICI Bank) appreciated the move in the sense that it would help curb black
money. Infosys founder N.R. Narayna Murthy praised the move
 Finance Minister Arun Jaitley said that Demonetization would clean the complete
economic system, increase the size of economy and revenue base
Criticism
 The Indian Supreme Court while hearing one among a slew of cases filed against the
sudden Demonetization decision in various courts, observed that it "appears to be
carpet bombing and not surgical strike" which government repeatedly claims it to be.

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 Nobel laureate Indian economist Amartya Sen, severely criticised the Demonetization
move calling it a "despotic action" among other things.
 Former Senior Vice-President and Chief Economist of the World Bank, Kaushik
Basu, called it a 'major mistake' and said that the 'damage' is likely to be much
greater than any possible benefits
Reasons for demonetization in India
 We knew terrorism is a big threat, but who funds these terrorists? Our enemies they
use the fake currency to sponsor terror-this was proven many a times
 Control the supply of black money in the economy
 Corruption and black money are the major obstacles in our country. It is weakening
the efforts to remove poverty. Our country is rapidly increasing in terms of growth
and we are in No.1 position in terms of growth but we are ranked 76 in Global
Corruption Perception ranking. It clearly shows how corruption and black money
have spread their tentacles

6. Effects of Demonetization
HARIGANESH SEKAR
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Facts and figures
It has been reported that 97% of the demonetised notes are back in banks and banks
have received Rs 14.97 trillion ($220 billion) as of December 30 out of the 15.4 trillion
rupees that were demonetised. The return of 97% of money back in bank have a negative
impact on government's move against black money
15.5
1.5
2.5
4
6
9.2
0
5
10
15
20
Currency
demoetised on 8-
11-16
Currency issued
as of 18-11-16
Currency issued
as of 28-11-16
Currency issued
as of 7-12-16
Currency issued
as of 21-12-16
Currency issued
as of 10-01-17

7. Effects of Demonetization
HARIGANESH SEKAR
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Percentage share of currency notes before demonetization
Impact of Demonetization on the economy
On GDP growth
 India’s GDP which grew at 7.6% in FY 2015-16 is likely to slow down by 0.5% to
1.5% as per reports of various agencies. This is due to less availability of cash in
cash-intensive sectors like manufacturing and real estate. Even the automobile
industry which was growing rapidly earlier has seen a contraction in the October-
December quarter of 2016. Purchasing power of consumers has been negatively
affected due to cash not being readily available
 We need to remember that Indian economy is largely cash driven with more than
90% transactions taking place in cash and digital transactions accounting for just
the remaining 10 percent
 Banks have also been focusing on the single task of deposit and withdrawals with the
result that their core function of issuing loans has been adversely affected. Also
current account customers, who are largely business owners, need large amounts of
0%
2% 1% 1%
9%
48%
39%
Rs 2 & 5
Rs 10
Rs 20
Rs 50
Rs 100
Rs 500
Rs 1000
The percentage are calculated in INR

8. Effects of Demonetization
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cash at short notice have not been able to access cash and credit owing to restrictions
on withdrawals and inability of banks to focus on the task of issuing loans
On tax compliance
 India’s tax-to-GDP ratio is quite low at 16.6% compared to other emerging
economies. It is estimated that since more money, including black money, gets
accounted for this will lead to better tax compliance owing to better targeting of
income. The positive impact could be lower tax rates as the tax base widens and more
people start paying taxes. The digital push of the government will also result in higher
indirect tax revenue for the govt. in the form of service tax. Moreover businesses that
under-reported their revenue earlier, will have to make proper disclosure, especially,
of revenue received through digital or cashless means.
On small and medium-sized enterprises (SMEs)
 The small and medium-sized enterprise (SME) sector, as we understand, is a big
chunk of the economy, contributing to eight percent of the GDP whilst employing
more than 80 million people year on year
 The labour wages in this sector are largely paid in cash and wages have been
adversely affected by the Demonetization move. Unemployment has also been
reported owing to decline in demand of SME goods as the purchasing power of the
consumers has contracted in the short term. Other sectors within the SME space like
restaurants and transport operators have also been negatively impacted since
economic activity has declined and also due to the fact that there is high tendency in
this segment to accept payments through cash only
 Wholesale vegetable markets have been witnessing declining demand and prices of
tomatoes and other food items have fallen drastically making it economically unviable
for the farmers to produce these crops. Which takes us to the next point

9. Effects of Demonetization
HARIGANESH SEKAR
9
On agriculture
 This is one sector where all transactions are in cash and, given the values involved,
involve the higher denomination notes. The withdrawal of the old currency notes has
put pressure on the mandis; farmers are having problems in selling their produce as
both the parties have to agree on the mode of payment. Also since there is acute
shortage of Rs 500 denomination notes presently, change for the high denomination
Rs 2000 notes is not readily available with the vegetable and fruit vendors. This is
also taking the buyers away from these vendors to big retail markets thus impacting
the livelihood of the unorganised sector
On employment generation
 Since consumer demand has slowed and consequently industrial production has
declined, employment generation has been adversely impacted by the currency
Demonetization drive. Since the manufacturing sector which accounts for the highest
employment of skilled and semi-skilled labourers, is witnessing slowdown in
production; not only less jobs are being created but lay-offs are also taking place at a
higher rate
 As per this report, Industry is staring at temporary job losses due to Demonetization,
as production gets hit, especially in labour-intensive sectors like textiles, garments,
leather and jewellery. As many as 4 lakh people, mostly daily wagers, may have
either lost their jobs or shunned work temporarily due to the lack of payment so far,
and the number is only going to grow if the cash crunch persists
Impact of Demonetization on cashless transactions
 The cashless transactions account for only 10% of all transactions on daily basis. The
government in order to divert some of the blame for the poor implementation of this

10. Effects of Demonetization
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demonetization exercise announced mid-way that making India a cashless or less cash
economy was one of the important objectives of this demonetization drive. Towards
this end, the Finance ministry, RBI and NITI Aayog announced a host of incentives
to boost cashless transactions. This was also done to ease some of the problems that
have resulted due to acute shortage of cash in the economy
Some of these incentives include
 No Service Tax on cashless transactions below Rs 2000
 Providing cash backs ranging from 0.25-0.75 percent on various transactions like
paying for fuel, govt utility bills, stamp papers, property registrations etc.
 Encouraging use of Point-of-Sale (PoS) machines and mobile wallets like PayTM by
businesses and individuals
 Reducing self-assessment tax from 8% to 6% on businesses with annual turnover of
less than Rs 2 crores
 Announcing monthly jackpots for people using cashless transactions in
govt services
 And other incentives
As a result, use of mobile wallets and cashless transactions, as a whole, has increased by
about 300% since the launch of Demonetization exercise. However we need to remember
that this 300% increase is against a very low base of digital transactions and most of this
increase has been noticed in the urban areas where people have ready access to PoS
machines, internet banking, and mobile wallets.
Cashless transactions are still rarely used in rural areas and in the informal sector like road
side vendors, small shops, buying seeds, wage payments etc

11. Effects of Demonetization
HARIGANESH SEKAR
11
Economic Impact of Demonetizing the Indian rupee
The real impact of the Demonetization process is seen in mid and small sized stocks and
some sectoral indices
BSE 30 Hang Seng
Seoul
Composite
Taiwan
Weighted
Jakarta
Composite
Shanghai
Composite
Market share -3.84 -3.64 -3.07 -2.67 -1.88 -1.32
-6
-4
-2
0
2
4
(%)
-16 -14 -12 -10 -8 -6 -4 -2 0
BSErealty
BSE
consumer
durables
BSE
smallcap
BSEmidcap
BSE
consumer
discretionary
BSE500 Sensex
MarketShare -15.1 -8.2 -6.8 -6.1 -5.9 -4.9 -3.9

12. Effects of Demonetization
HARIGANESH SEKAR
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Indian Economy has far been a victim of black money and corruption. The Indian
system looked incorrigible resulting in crores of unreported money flowing in and out from
the country. The Modi Government, in order to curb the flow of black money came up with
the Income Declaration Scheme (IDS), which gives holders of undeclared wealth
The positive effects of demonetization
Black money: At one stroke the Prime Minister has choked the supply of black
money stacked inside the country. 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 is
nothing but a plunder of the nation. 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
Economy: Demonetization will have a huge resultant effect on the Indian economy.
The clean-up of illegal cash will help turn around the economy. First, it will bring more
borrowings to the exchequer, improve inflation outlook and increase India’s gross domestic
product (GDP). Second, it will revive investment opportunities and give a fillip to
infrastructure and the manufacturing sector. Third, it will help reduce interest rates and lower
income tax rate
Note bank politics: In the run up to the crucial assembly elections in Uttar Pradesh,
Punjab, Goa and Uttarakhand, Prime Minister Modi’s Demonetization announcement has
come as a shock and awe for the political parties and politicians for whom black money is a
lifeline. The pulling out of the old Rs 500 and Rs 1,000 currency notes will help make the
election process clean and transparent. But it has brought tough times for the political parties
and politicians who believe in the idea of purchasing votes in exchange for notes. That is

13. Effects of Demonetization
HARIGANESH SEKAR
13
precisely the reason a rainbow coalition of a galaxy of regional parties and the Congress is
building up against Modi, because their political interests are badly hurt
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
Hawala transactions: Demonetization has crippled the hawala rackets. 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. With black money suddenly being wiped out of the market, thanks to
Demonetization, hawala operations have come to a grinding halt. According to an India
Today report, one of the hawala operators in Mumbai has destroyed currency notes worth
about Rs 500 crores
Conclusion
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.