2. 2
ITRODUCTION
On 8 November 2016, India’s Prime Minister Narendra Modi announced the Government of
India’s decision to cancel the legal tender character of Rs 500 and Rs 1,000 banknotes with
effect from 9 November 2016. He also announced the issuance of new Rs 500 and Rs 2,000
banknotes in exchange for the old banknotes.
While the announcement essentially rendered the Rs 500 and Rs 1,000 banknotes invalid from 9
November 2016, the Ministry of Finance has been monitoring the implementation of these
measures in a number of ways:
• Exchange of old currency notes for new Rs 500 and Rs 2,000 currency notes has been
permitted until 31 December 2016 (i.e. 50 days from the date of the announcement).
• Such currency exchanges have been limited to certain specified amounts announced from time
to time and excess amounts are required to be deposited with banks subject to applicable KYC
requirements
• Cash withdrawals have been limited to ensure adequate supply of new currency notes
• Usage of old currency notes has been permitted for certain specified periods and purposes,
such as at hospitals and pharmacies, gas stations and foreign currency exchange for tourists.
The demonetization of the highest denomination currency notes is part of several measures
undertaken by the government to address tax evasion, counterfeit currency and funding of illegal
activities. The requirement to deposit currency notes in excess of specified limits directly into
bank accounts has resulted in the declaration of hitherto unaccounted income, subject to higher
tax and other penalties.
4. 4
POLITICAL CONTEXT
• The political impact of the move is huge across the whole country with majority of the
educated people offering support to the demonetization. The sentimental speeches against black
money made by Prime Minister Modi are drawing huge crowds turning into vote banks for BJP.
There is a growing support for BJP from the educated mass and especially the youth for the bold
step taken to curb black money.
• The opposite political parties however oppose the demonetization drive. The continuous
adjournment of both the houses indicates this scenario. The ever silent Dr. Manmohan Singh,
previous prime minister has said this move as unlawful and against democracy. His statement
came out of the blue in the Rajya Sabha in the presence of Mr. Narendra Modi, Prime minister of
India. Dr. Manmohan Singh further added that nowhere in the world, people are restricted to
withdraw only 2,000 rupees from their account. Opposition parties strongly oppose the
demonetization implementation process.
6. 6
SOCIAL IMPACT
• The information on demonetization was released suddenly and the worst affected was the
common man. The social impact was drastic with marriages facing severe issues with cash
transactions in marriages coming to a standstill. Currently, People conducting marriages must
produce the marriage invitation to withdraw 2, 50,000 and above. This has caused great hassles
among the public.
• The impact on the health care sector was huge with hospitals refusing to accept the old
currency. The issue was faced by the Union Minister Mr. Sidharamaiah in Bengaluru when the
hospital administration refused to accept the old currency to retrieve his brother's dead body. The
common man faced severe issues transacting in the hospitals with old currencies and several
cases of death have been registered for not attending the patients due to demonetization
• The impact on education sector was minimal and all universities and colleges have been
instructed to enable online transactions in their website for the convenience of the students and
parents. However, a lot of black money was retrieved from the educational institutions through
income tax raids which was received as donations from students and hoarded as black money.
• Salaried people faced the issue on the opening day of the month with their salaries credited in
the bank account but were able to withdraw only 2,000 rupees from the ATM machines. Many
salaried people have gone to the bank branch to withdraw their full salary amount with loss of
pay.
• Social problems in the form of road blockades and quarrels arouse with people waiting in
long queues before the banks and ATM machines. People become restless spending an entire day
to withdraw money. Several deaths have been registered as a result of waiting in long queue.
Pensioners are worst affected with no special provisions made for senior citizens in banks.
ECONOMIC IMPACT
• Demonetization is viewed as a measure of sterilizing the money. RBI plays the pivotal role in
this demonetization drive. All the banking experts welcome this demonetization measure.
Considering the banking sector, both public and private sector banks are facing the severe issue
of Non-Performing Assets (NPA) or Bad loans to the tune of 10 lac crore including the stressed
assets according to RBI sources. This demonetization measure will help banks to recover some
bad loans and improve their financial position.
• Considering the entire economy of India as a whole, demonetization will make most of the
transactions to be done through the formal banking sector. This will increase the transparency
with people and corporate paying tax properly. Income Tax department has reported that only 4
7. 7
percent of the individuals pay income tax while this figure has to be increased to 28 percent. The
demonetization will help achieve this target of the Income tax department.
• When black money within India gets curbed, it will result in the overall economic
development of the nation. This was revealed in the demonetization when terror financing and
other sources of illegal financing was curbed. However, demonetization does not address the
black money stashed abroad and the illegal foreign transactions taking place through the
participatory notes. Corruption, fraudulent practices and broker menace remain areas of concern
in carrying out the mass demonetization in an efficient manner.
9. 9
DISPOSAL OF NOTES
• Disposal of almost 20,258.25 tons of 500 and 1000 rupee notes which have been declared as
illegal would be pose a big challenge.
The data collected by the Reserve Bank of India (RBI) shows that about 86 percent of the Rs
17.77 lac crore that was in circulation till March 31 this year was in the form of Rs 500 and Rs
1000 currency notes in terms of value.
A total of 9026.6 crore bank notes were in circulation across the country in terms of volume till
March 31. Around 24 percent or 2,203 crore of those notes were of Rs 500 and Rs 1000 currency
notes.
The RBI will now need to dispose of the 2,203 crore currency notes of Rs 500 and Rs 1,000
denominations since the government has demonetised them. The officials have said that they
would dispose of the notes according to the guidelines for the disposal of soiled notes, India
Today reported.
Once the notes are shredded, they will be converted to briquettes weighing about 100 grams
which will then be sold for industrial use through a tender that the RBI invites. The destroyed
currency will then be recycled into products like paper weights, calendars and files.
• How many trees will be cut for replacing these notes?
Using thumb rule of 20 adult trees providing 1000 kgs of paper, the total number of needed to be
cut to print 2203 crore 500 and 1000 rupee notes will be around 389950.
So a total of 389950 (Three Lakh Eighty-nine Thousand Nine Hundred Fifty) trees needed to
be cut to get the paper for printing the new currencies. Cutting of this huge quantity of trees
means wiping out a big forest.
That is the environmental impact of printing those new notes due to the Modi government’s
decision of demonetization.
11. 11
Problem Analysis
• Modi came to power in 2014 promising to boost growth, create jobs for India’s youthful
population, and encourage investment. His poorly conceived demonetization has made a
mockery of these objectives, while bruising his reputation as an efficient and competent
manager. How long it will take for India to recover is anyone’s guess.
• Many Modi supporters claim that the demonetization policy’s problems are a result of inept
implementation. But the truth is that its design was fundamentally flawed. There was no “policy
skeleton,” no cost-benefit analysis, and no evidence that alternative policy options were
considered. Judging by the blizzard of policy tweaks since the announcement, it seems clear that
no impact study was carried out.
• Yet, rather than recognize the mounting risks of the non-transparent policy environment he
has created, Modi has been discussing going even further, moving India to an entirely “cashless
society.” Does he not know that more than 90% of financial transactions in India are conducted
in cash, or that over 90% of retail outlets lack so much as a card reader? Is he unaware that over
85% of workers are paid in cash, and that more than half of the population is unbanked?
