2. Historical Background
1. January 1946 - Rs1,000, Rs5,000, and Rs10,000 notes were taken out of
circulation.
• All three notes were reintroduced in 1954.
2. Jan 16,1978 (Morarji Desai Government) - The High Denomination Bank
Notes (Demonetization) Act.
• Rs1,000, Rs5,000 and Rs10,000 notes declared illegal for the second time.
3. Nov 8,2016 (Modi Government) – Rs500 and Rs1000 will not be a legal
tender.
• Public can change the currency from banks and post offices.
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3. Background
Initially there were certain clues on the breaking of black money momentum,
this can be seen when:
• Black Money and Imposition of Tax Act 2015 : The disclosure of foreign
black money within three months by paying 60% tax was passed.
• The Income Deceleration Scheme : Citizens were allowed to declare their
undisclosed income and pay the tax, surcharge and penalty amounting to
45% of the declared income.
• Pradhan Mantri Jan Dhan Yojana : Access to bank was made feasible.
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4. Need of Demonetization
• To eradicate circulation of fake currency, black money, terrorism and
smuggling.
• Low tax to GDP ratio – In assessment year 2012-13, 39 lakh people bought
a three wheeler or a four-wheeler but only 4 lakh paid income tax above 5
lakh.
• Massive rise in currency in circulation over the past one year. While the
real GDP rose by 7.56 per cent and inflation rose at 6 per cent, the
currency in circulation rose by 15 per cent.
• Lack of transparency in financial dealings.
• High degree of correlation between crime and currency level in an
economy
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5. Implications of Demonetization
• A parallel black economy would collapse.
• Of the Rs17 lakh crore of total currency in circulation in the country,
black money is estimated at mindboggling Rs3 lakh crore.
• Counterfeit currency: Death blow to the counterfeit Indian currency
syndicate operating both inside and outside the country.
• On Employment : A large part of the Indian economy is still outside the
banking system. So, the cash shortage will hurt the informal sector that
does most of its transactions in cash.
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6. Implications of Demonetization
• Real estate cleansing: An unexpected dip in land and property prices.
• On elections : It will reduce the Vote-for-Note politics making elections more
clean and transparent.
• Cashless economy :
• The demand for point of sales (POS) or card swipe machines increased. E-payment
options like PayTM and Instamojo Payment Gateway, PayUMoney also saw a rise.
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7. Implications of Demonetization
• On security:
• Terror financing: Terror financing is sourced through counterfeit currency
and hawala transactions.
• Kashmir unrest: The four-month-long unrest in Kashmir valley is on a
backburner.
• North-East insurgency and Maoists: Black money is the oxygen for Maoists
collected through donations, levy and extortions. The illicit money is
used to purchase arms and ammunition.
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8. Demonetization and the Growth
• Demonetization alone was not responsible for slow GDP growth.
• Demonetization slow downed growth rate in short and medium term because
people having less money in hands resulted in lower demand, i.e. it hampered
growth rate. But as soon as people get money, markets get back on track.
• Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓
• India is a cash based economy and demonetization resulted in temporarily decrease
in liquidity. Decreased liquidity lead to decreased demand which resulted in
decreased productivity causing a slowdown in consumer market.
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9. Criticism
• Lack of Proper Planning and implementation of public policy
• Population that does not have access to banking facility will face major
inconvenience.
• Huge rush at the banks.
• Shortage of money for the common people
• Replacing all the Rs.500 and Rs.1000 denomination notes, as ordered by the
government, could cost the RBI at least Rs12000 crore.
• The big players could go scot-free.
• Marriage season
• Stock Market - Sensex lost 1600 points at open
• Short term inflation – cost push inflation.
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10. Conclusions
• Demonetization has both sorts of effects (i.e. positive and negative) over the
economic as well as social atmosphere of the country. The bad effects last
long only for short term and On the other hand, the positive effects will
continue to contribute in the improvement of the economy as well as socio-
political scenario of the country.
• The advantages are much dominating and it will be in the long term interest
of our country comfortably overweighing the disadvantages.
• Almost all the sectors have recovered from the shock of Demonetization.
• India is back on the Track again to be the Fastest Growing Economy
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