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DEMONETIZATION and its Impact on INDIAN ECONOMY
A Dissertation submitted to CCS University, Meerut for the partial fulfillment MA ECONOMICS degree
M.A. ECONOMICS
Submitted By:
Gorav Gopal Singh
RG1501910133
Submitted to:
DR. RENU TYAGI MAM
Department of Economic
M.M.H. COLLEGE, GHAZIABAD
2016-2017
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TABLE OF CONTENTS
DEMONETIZATION and its Impact on INDIAN ECONOMY ............................................................................1
CERTIFICATE..................................................................................................................................................3
ACKNOWLEDGEMENT...................................................................................................................................4
CHAPTER 1 DISSERTATION ...........................................................................................................................5
ABSTRACT..................................................................................................................................................6
INTRODUCTION.........................................................................................................................................7
OBJECTIVES OF PAPER...........................................................................................................................8
RESEARCH METHODOLOGY ..................................................................................................................8
CHAPTER 2 DEMONETISATION (What, Why, How, Where?)........................................................................9
MEANING................................................................................................................................................10
OBJECTIVES OF DEMONETIZATION.........................................................................................................11
HISTORY IN INDIA....................................................................................................................................12
THE EXPERIENCES FROM SOME COUNTRIES ..........................................................................................13
CHAPTER 2.2 Impact of INDIAN ECONOMY ................................................................................................15
PROCEDURE FOR EXCHANGE OLD NOTES ..............................................................................................16
THE SHORT-TERM Vs. THE LONGER-TERM IMPLICATIONS.....................................................................17
IMPACT ON INDIAN STOCK MARKET ......................................................................................................18
THE SECTORAL IMPACTS.........................................................................................................................20
THE PROBABLE CONSEQUENCES OF THE DEMONETISATION.................................................................21
CONCLUSION...........................................................................................................................................25
CHAPTER 3 ..................................................................................................................................................26
SOURCES .................................................................................................................................................27
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CERTIFICATE
This is to certify that thesis entitled “Demonetization and Its Impact on Indian Economy “
submitted for the award of the MA Degree in Economics, to the is an original record of bonfire research
work, carried out by Gorav Gopal Singh, under my supervision and guidance.
This is candidate’s own work and I recommend that the Dissertation be forwarded to the examiners for
evaluation.
Date:
Dr. Renu Tyagi MAM
(Professor)
DECLARATION
This Dissertation entitled “Demonetization and Its Impact on Indian Economy” embodies
my original work for submission to the Department of Economics, CCS UNIVERSITY, Meerut is for
MA Degree. Further, I declare that this work, either in part or in full, has not been submitted to any
other university for the award of any other degree. Any contribution made to the research by
colleagues, with whom I have worked at, during my candidature, is fully acknowledged.
I also declare that the intellectual content of this Dissertation is the product of my own work,
Date:
Gorav Gopal Singh
Department of Economics
MMH COLLEGE, GHAZIABAD
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ACKNOWLEDGEMENT
With Regard to this Dissertation, I would like to thank each and every one who offered help, guideline
and support whenever required. They have been my consistent source of strength during my M.A.
Economics Study.
First & Foremost, I would like to thank Associate Professor DR. RENU TYAGI Mam for guiding me
during the project. Her unquenchable thirst for excellence also taught me immensely about approaching
research problems in common.
I would also like to thanks my team and Friends in this report , Kanchan, Irfan, Aditya & Purnima,
Shivali , Deepak , Pooja, Pragati , Raj Kumari, and Shabana who were always present to help me
out whenever I got struck during project completion and keep me motivated to do better.
My whole hearted gratitude to My Parents and Nisha, Manisha , My Family Members for their
constant encouragement, love, wishes and support.
Above all, I thank Almighty Krishna who bestowed his blessings upon me.
This Project wouldn’t have been possible without you all, thank you very much.
Gorav Gopal Singh
M.A. Economics 4th
Sem
Roll No. (RG1501910133)
FATHER’S NAME: Gopal Singh
M.M.H. College, Ghaziabad
DATE: 22/May/2017
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CHAPTER 1
Dissertation
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ABSTRACT
India has amongst the highest level of currencies in circulation at 12.1% of GDP. Cash on hand is an
estimated at around 3.2% of household assets, higher than investment in equities, or roughly around $
220 billion. Of this cash, 87% is in the form of Rs 500 and Rs 1,000 notes or roughly Rs 14 lakh crore
($190 billion).A significant portion of the household cash on hand is generated by economic transactions
that are not reported to tax authorities or generated through corruption. Scrapping the higher
denomination money would either result in these being brought into the system or the money just
disappearing. The present paper highlights the probable consequences of this decision on various
economic variables and entities.
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INTRODUCTION
Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs
1000 notes as an official mode of payment. Demonetization is the act of stripping a currency
unit of its status as legal tender. On 28 October 2016, the total currency in circulation in India
was Rs. 17.77 lakh crore (US$260 billion). In terms of value, the annual report of Reserve Bank
of India of 31 March 2016 stated that total bank notes in circulation valued to Rs.16.42 lakh
crore (US$240 billion) of which nearly 86% (i.e. Rs. 14.18 lakh crore (US$210 billion)) was 500
and 1000 rupee notes. In terms of volume, the report stated that 24% (i.e. 2,203 crore) of the
total 9,026.6 crore banknotes were in circulation
In an important move, the Government of India declared that the five hundred and one
thousand rupee notes will no longer be legal tender from midnight, 8th November 2016. The
RBI will issue Two thousand rupee notes and new notes of Five hundred rupees which will be
placed in circulation from 10th November 2016. Notes of one hundred, fifty, twenty, ten, five,
two and one rupee will remain legal tender and will remain unaffected by this decision. This
measure has been taken by the PM in an attempt to address the resolve against corruption,
black money and counterfeit notes. This move is expected to cleanse the formal economic
system and discard black money from the same. The reasons of it are as under:
• To tackle black money in the economy;
• To lower the cash circulation in the country which is directly related to corruption in our
country;
• To eliminate fake currency and dodgy funds which have been used by terror groups to
fund terrorism in India;
• The move is estimated to scoop out more than more than Rs 5 lakh crore black money
from the economy.
Similar measures have been taken in the past. In January 1946, currency notes of 1000 and
10,000 rupees were withdrawn and new notes of 1000, 5000 and 10,000 rupees were
introduced in 1954. The Janata Party coalition government had again demonetized notes of
1000, 5000 and 10,000 rupees on 16 January 1978 as a means to curb forgery and black money.
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OBJECTIVES OF PAPER
To study the experience of impact of demonetization in various countries in past
years;
To analyze the current the immediate impact of demonetization on Indian economy;
To work out the probable consequences of the demonetization.
RESEARCH METHODOLOGY
The paper is based on secondary data. The data has been collected from internet. Graph and
percentile method has been used to analyze the data.
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CHAPTER 2
DEMONETIZATION
(What, Why, How, Where?)
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MEANING
The dictionary meaning of DEMONETIZE is “To deprive (a metal) of its capacity as a monetary
standard” or “To withdraw from use as currency” So, demonetization is the act of stripping a
currency unit of its status as legal tender. It is the act or process of removing the legal status of
currency unit. A currency on which Governor of RBI on behalf of Central Government
guarantees by making statement “I promises to pay the bearer, the sum of money ……” which
empowers it a legal status. From the date of demonetization, all old currencies which are
demonetized will cease to be a legal tender. Such currency cannot be used as money to do any
transaction henceforth, but to replace with a new currency.
In popular parlance, the unofficial economy goes by the name of black money and the official of
white money. Black and white are also variously substituted by number two and number one,
unaccounted and accounted, unreported and reported, unrecorded and recorded and so on…”
“It is stripping a currency unit of its status as legal tender. Demonetization is the old unit of
currency must be retired and replaced with a new currency unit”.
Money is the life blood of every economy. With the growth of civilization and mankind, the
needs of human beings increased. In order to fulfill humans unlimited wants barter system
emerged. But over a period of time, the invention of money became a strong pillar to build an
economy. Money exchange appears to be more convenient than barter because it obviates the
“double coincidence of wants” and is capable of sustaining relatively complex economy. Money
exchange facilitates ease of doing business, facilitates taxation and national integration. All
activities such as production, exchange, distribution, services etc. form an economy. It is called
formal economy. An informal economy is neither economic activity/activities that is neither
taxed nor monitories by Government, contrasted with a formal economy. Presence of
corruption, black money, counterfeit currency, poor governance etc. promotes and establishes
parallel economy.
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OBJECTIVES OF DEMONETIZATION
 To promote a Cashless economy
 To eradicate counterfeit currency
 Eliminate black money
 To combat corruption
 To combat inflation
 Crackdown on terrorism and Naxalism
 To promote a cashless economy.
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HISTORY IN INDIA
India had an experience of demonetization of its currency twice before. The first was when
Rs.1000, Rs. 5000 and Rs 10000 notes were taken out of circulation on 12th January 1946, a 1 ½
year before the Independence. The highest denomination note ever printed by RBI in India was
Rs. 10000 note introduced for the first time in the year 1938. However all three of Rs. 1000, Rs
5000 and Rs. 10000 notes were again reintroduced in 1954. The second phase of
demonetization was done on 16th January 1978 when an ordinance was promulgated to phase
out notes with denomination of Rs. 1000, Rs 5000 and Rs. 10000.
On 12th January 1946 demonetization was resorted to but the Direct Tax Enquiry Committee in
its interim report observed, “Demonetization was not successful then, because only a very
small proportion of total notes in circulation were demonetized in 1946 and its worth was Rs.
1,235.93 crores”. On 16th January 1978, demonetization of high denomination notes was
introduced. The high demonetization notes as on that day amounted to Rs. 146 crore and total
notes tendered to RBI amounted to Rs. 125 crore as per data available till August 1981.
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THE EXPERIENCES FROM SOME COUNTRIES
Russia:
On its last legs, the country under Mikhail Gorbachev in January 1991 withdrew large-ruble bills from
circulation in a move to take on the black economy. The reform failed to halt inflation, and instead
served mainly to accelerate a slide in public confidence in the government. As political infighting
combined with economic collapse, Gorbachev faced a coup attempt that August which destroyed his
authority and led to the Soviet break-up the following year. Learning lessons, Russia's 1998
redenomination of the ruble, when it removed three zeroes, went altogether more smoothly.
North Korea:
In 2010, the regime of then-dictator Kim Jong-Il mounted a reform that knocked off two zeros from the
face value of the old currency in an effort to tighten control of the economy and close black markets.
Combined with a poor harvest, the measure left the country with severe food shortages, according to
reports at the time. Surging rice prices stoked unrest that prompted an unusual apology from Kim, and --
reports suggested -- the execution of the ruling party's head of finance.
Zaire:
Dictator Mobutu Sese Seko faced increasing economic disruptions in the early 1990s, when his
administration mounted successive banknote reforms. A plan to withdraw obsolescent currency from
the system in 1993 saw a surge in inflation and a collapse in the exchange rate against the dollar. After a
civil war, Mobutu was ousted in 1997
Myanmar:
In 1987, the country's military junta invalidated as much as 80 per cent of the value of money in
circulation, according to reports at the time -- as in other such initiatives, it was directed at curbing the
black market. One result was the first student demonstrations in years. Deepening economic unease
helped trigger mass protests across the nation the following year that led to a government crackdown
that killed thousands of people.
Ghana:
The country in 1982 got rid of its 50 cedi note to crack down on tax evasion, address corruption and mop
up excess liquidity. The move eroded confidence in the banking system as people turned to foreign
currency or physical assets instead. The black market for currency flourished.
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As rural dwellers had to walk miles to the nearest banks to exchange their money, and after the deadline
passed, there were accounts of bundles of notes abandoned as worthless.
Nigeria:
In 1984, the military government led by Muhammadu Buhari instituted an anti-corruption crackdown
that involved issuing new banknotes with a different color, forcing the replacement of old ones within a
limited period.The move was one of a series that failed to fix a debt-burdened and inflation-ridden
economy. Buhari, who is now in power again, was eventually ousted in a coup the following year.
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CHAPTER 2.2
Impact
On
INDIAN ECONOMY
(ANALYSING DEMONATIATION 2016)
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PROCEDURE FOR EXCHANGE OLD NOTES
The Reserve Bank of India laid down a detailed procedure for the exchange of the demonetized
banknotes with new Rs.500 and Rs.2000 banknotes of the Mahatma Gandhi New Series and Rs.100
banknotes of the preceding Mahatma Gandhi Series. Following are the key points:
• Citizens will have until 30 December 2016 to tender their old banknotes at any office of the RBI
or any bank branch and credit the value into their respective bank accounts.
• Cash withdrawals from bank accounts will be restricted to Rs.10, 000 per day and Rs.20,000 per
week from 9 November 2016 till 24 November 2016.
• For immediate cash needs, the old banknotes of value up to Rs.4000 per person can be
exchanged for the new Rs.500 and Rs.2000 banknotes as well as Rs.100 banknotes over the
counter of bank branches from 10 November 2016 by filling up a requisition form along with a
valid ID proof.
• All ATMs will dispense bank notes of only 50 and 100 rupee denominations.
• Banks will provide all cash withdrawal transactions at their ATMs free of cost to their customers
till 30 December 2016. Cash withdrawals from ATMs will be restricted to Rs.2000 per day per
card up to 18 November 2016 and the limits will be raised to Rs.4000 per day per card from 19
November 2016.
However, exceptions were given to petrol pumps, CNG stations, government hospitals, train and airline
booking stations, state-government recognized dairies, ration shops, and crematoriums to accept the
500 and 1000 rupee notes until 14 November. International airports were also instructed to facilitate an
exchange of notes amounting to a total value of Rs.5, 000 (US$74) for foreign tourists and out-bound
passengers.
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THE SHORT-TERM Vs. THE LONGER-TERM IMPLICATIONS
The Short-term Impacts: There will be a disruption in the current liquidity situation as households are
likely to get affected by the note exchange terms laid by the government. Though clarity is unfolding on
this, commodity transactions and general cash market transactions are likely to feel an immediate
impact. Unorganized sector proceedings, including small trade market activities, will remain volatile in
the short-term. Roadside vendors, cab drivers, kirana stores, etc., have already stopped accepting Rs
500 and Rs 1,000 notes. It is important to note that a significant percentage of the Indian workforce is
employed in this sector, which is likely to be affected by immediate liquidity issues. Overall, negative
impact on disposable income is expected along with likely disruption in the consumption patterns of the
general populace. It is estimated that there will be a negative GDP impact in the current quarter as
consumption gets a shock in the immediate term. However, quantum and degree of this impact cannot
be ascertained at this time.
The Longer-term Implications:
This essentially represents a change in regime for the real and financial economy. Domestically, there
could be some turmoil as the effect will be disproportionately felt by the lower and upper income
classes. Internationally, the government is likely to get thumbs up for the move and more countries
could potentially see this as a viable option to curb black money and stem illegal financial activity. Last,
though this move by the government may not be a first, having being tried by earlier governments as a
tool to fight corruption. Such an action achieves larger significance for a globally connected India as it
shows boldness in tackling an issue which has remained a thorn in the growth success story of this
generation.
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IMPACT ON INDIAN STOCK MARKET
AND ASIAN STOCK MARKET IN PRESENT SCENARIO
At the time of writing, the Indian markets have fallen a bit more than other emerging markets in Asia.
The S&P BSE Sensex is down 3.8%, which is more than more or less all other Asian emerging markets.
The possibility of a Donald Trump win is keeping markets on the edge worldwide. The extra fall in the
Indian markets compared to others could be due to many factors, including high valuations, but it’s very
likely that the demonetization effect is mainly responsible for the fall.
That is clearly seen if we dig a little deeper. The Sensex is made up of very large companies which may
not be impacted as much by the demonetization process. BSE’s mid-cap and small-cap indices have
fallen by over 6% each at the time of writing. And in truth, the largest impact of the government’s move
will be in the unorganized sector, which isn’t represented in the
markets.
The true picture is reflected in sectoral indices such as the BSE Realty index, which is down as much as
15% at the time of writing. Some stocks such as DLF Ltd are down nearly 20%. This industry is known to
entertain cash transactions of large magnitude. Similarly, stocks of jewellery companies such as Titan
Industries Ltd have fallen by around 11% as well, perhaps because a lot of gold purchases are through
cash. Besides, stocks of mid- and smallsized finance companies which collect payments in cash have
fallen by 8-10%.
Information technology stocks, for now, are down around 3%, which is more or less in line with the
broad markets. While these companies will be unaffected by the demonetization process, this reflects a
concern about a Trump presidency and a possibility of anti-outsourcing measures.
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THE SECTORAL IMPACTS
While sectors with linkages to the unorganized economy are likely to be affected, technology and
financial services are expected to gain in the medium to long term. On a sectoral basis, the commodities
and agricultural sector, including the market for consumer durables and non-durables is expected to feel
the heat. In the short to medium term, large denomination purchases will likely be made via electronic
purchases rather than through brick and mortar outlets. This will impact the retail sector adversely.
The real estate sector is likely to see a significant negative impact in the medium- to long-term,
particularly in the repurchase market. There are expectations of a revaluation of current real estate
transactions across the board representing possible losses to players in the sector. The luxury goods
market is also likely to get affected as this move represents an erosion of real wealth to a large Areas of
sub-sectoral impact will be felt in luxury cars, SUVs, gems, jewelry, gold and high-end branded products.
The real estate sector is likely to see a significant negative impact in the medium- to long-term,
particularly in the repurchase market. There are expectations of a revaluation of current real estate
transactions across the board representing possible losses to players in the sector. The luxury goods
market is also likely to get affected as this move represents an erosion of real wealth to a large number
of people.
On the positive side, there is likely to a reset of spending patterns as this move represents indirectly a
significant push towards a cashless economy. Businesses in the fin-tech sector, including payment
banks, mobile wallets, electronic transfer providers, etc., are expected to see gains.
Positives Negatives
E-commerce and Fintech
1) Payment gateways
2) Cards
Agriculture
Luxury goods
Real Estate
Commodities
3) Mobile wallets
4) Online retail
5) Net and payment banks
6) e-marketplace
Traditional Retail
1) Consumer durables
2) Consumer non-durables
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THE PROBABLE CONSEQUENCES OF THE DEMONETISATION
The following likely impacts on the economy will be observed if a substantial portion of the cash is either
reported or is consumed in the economy.
Tax: Having closed the voluntary disclosure window for undisclosed money, it has been reported that
government will keep a close watch on deposits over Rs 2 lakh in cash. This would mean increased tax
net, higher tax collection and a better tax to GDP ratio. Philips Capital in a report says that the extent of
parallel economy, which was 23.2% of GDP, is now around 25-30% of GDP. As the money gets accounted
and more taxes are collected, government might be tempted to reduce tax rates going forward.
Interest rates: One of the biggest impacts of demonetization would be high value transactions,
especially land and gold. This would result in lower inflation, tempting the central bank to reduce
interest rates. But the bigger impact on interest rates will be the liquidity with which banks will be
flushed. CLSA’s points out that banks would benefit with higher CASA (current account savings account)
growth as a part of the $ 190 billion cash pile gets deposited with them. Higher deposit growth and
continuing weak credit growth would create opportunities for lending rate cuts and investment activities
to pick-up.
Liquidity: Movement of goods and money will be hit in the short. A Bank of America Merrill Lynch note
says that wholesale channel forms over 40% of the sales for the Indian consumer firms. This channel
works mainly on cash transactions and will likely witness liquidity constraints in the near term. This
could disrupt the supply chain and impact growth in the December quarter. The report further adds that
consumer firms typically provide tight credit terms (<7 days) to the distributors, who in turn provide
credit to the wholesalers/ outlets on their own accounts. Due to overall tightening of the cash-liquidity
in the supply chain, consumer firms may be forced to offer easier credit terms to the distributors in the
near term. As a result we expect an increase in their receivables in the December quarter.
GST: Demonetization comes at an important as the country heads to a new tax regime with the
implementation of GST. Demonetization would increase the tax net and along with GST result in
reduction of black money generation. Along with GST, demonetization will lead to a higher tax/GDP
ratio, says CLSA.
Financial Assets: As money lying idle comes in the main economy it would move to higher yielding and
liquid assets. Money is likely to move to financial assets from gold, precious metals, real estate and plain
cash. Equities might reflect the panic in the economy in the short term, but the move is will be beneficial
in the long run say most of the broker’s report and expert comments.
Effect on parallel economy: The removal of these 500 and 1000 notes and replacement of the same
with new 500 and 2000 Rupee Notes is expected to - remove black money from the economy as they
will be blocked since the owners will not be in a position to deposit the same in the banks, - Temporarily
stall the circulation of large volume of counterfeit currency and - curb the funding for anti-social
elements like smuggling, terrorism, espionage, etc.
Effect 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
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short run. 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.
Effect on Demand: The overall demand is expected to be affected to an extent. The demand in
following areas is to be impacted particularly: November 09, 2016 I Economics: Policy View Economic
consequences of demonetization of 500 and 1000 Rupee Notes Contact: Madan Sabnavis Chief
Economist madan.sabnavis@careratings.com 91-022 -6754 3489 Anushka Sawarkar Associate Economist
anushka.sawarkar@careratings.com 91-022-6754 3609 Mradul Mishra (Media Contact)
mradul.mishra@careratings.com 91-022-6754 3515 Disclaimer: This report is prepared by the
Economics Division of Credit Analysis &Research Limited [CARE Ratings]. CARE Ratings has taken utmost
care to ensure accuracy and objectivity while developing this report based on information available in
public domain. However, neither the accuracy nor completeness of information contained in this report
is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views
or for results obtained from the use of information contained in this report and especially states that
CARE Ratings has no financial liability whatsoever to the user of this report Economics I Economic
consequences of demonetization of 500 and 1000 Rupee Notes 2 Consumer goods Real Estate and
Property Gold and luxury goods Automobiles (only to a certain limit) All these mentioned sectors
are expected to face certain moderation in demand from the consumer side, owing to the significant
amount of cash transactions involved in these sectors.
Effect on Prices: The Price level is expected to be lowered due to moderation from demand side. This
demand driven fall in prices could be understood as follows:
• Consumer goods: Prices are expected to fall only marginally due to moderation in demand as use of
cards and cheques would compensate for some purchases.
• Real Estate and Property: Prices in this sector are largely expected to fall, especially for sales of
properties where major part of the transaction is cash based, rather than based on banks transfer or
cheque transactions. In the medium term, however the prices in this sector could regain some levels
as developers rebalance their prices (probably charging more on cheque payment)The Indian real
estate market which is largely fragmented and unorganized has had a reputation of being a safe
haven for black money and therefore we expect to see impact on the sector. The impact is likely to be
seen in secondary markets thereby making real estate more "illiquid" for a period of time till the
market adjusts to a new normal. It will not have any impact on the primary residential segment as the
buyers in this sector are driven by mortgage. The impact will be felt in the secondary market and the
unorganized developers’ community where there were still cash dealing. Prices coming down to more
reasonable levels in the housing market cannot be ruled out. In the immediate future, the sector will
be under serious pressure with volume and number of transactions in residential and land markets
seeing a substantial downward trend. This decision along with real estate regulatory law, GST and
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Real Estate Investment Trusts would further improve transparency and increase investor confidence
in the real estate market.
Effect on Various Economic Entities: With cash transaction lowering in the short run, until the new
notes are spread widely into circulation, certain sections of the society could face short term disruptions
in facilitation of their transactions. These sections are:
Agriculture and related sector
 Small traders
 SME
 Services Sector Households
 Political Parties
 Professionals like doctor, carpenter, utility service providers, etc
 Retail outlets
 Economics I Economic consequences of demonetization of 500 and 1000 Rupee Notes 3 The
nature, frequency and amounts of the commercial transactions involved with these sections of
the economy necessitate cash transactions on more frequent basis. Thus, these segments are
expected to have the most significant impact post this demonetization process and the
introduction of new notes in circulation.
Effect on GDP: The GDP formation could be impacted by this measure, with reduction in the
consumption demand. However with the recent rise in festival demand is expected to offset this fall in
overall impact. 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.
Effect on Banks: As directed by the Government, the 500 and 1000 Rupee notes which now cease to be
legal tender are to be deposited or exchanged in banks (subject to certain limits). This will automatically
lead to more amounts being deposited in Savings and Current Account of commercial banks. This in turn
will enhance the liquidity position of the banks, which can be utilized further for lending purposes.
However, to the extent that households have held on to these funds for emergency purposes, there
would be withdrawals at the second stage.
Effect 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 should eventually lead to strengthening of
such systems and the infrastructure required. CARE’s View In spite of the initial hiccups and disruptions
in the system, eventually this change will be well assimilated and will prove positive for the economy in
the long run
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 Black money hoarders will definitely lose out, eventually boosting the formal economy in the
long run.
 Short term fall in real estate prices might benefit middle class citizens.
 This move by the Government along with the implementation of the GST will eventually make
the system more accountable and efficient.
Demonetization and Its Impact on Indian Economy | MA Economics 4th
Sem
#GoravGopalSingh 25 | Page
CONCLUSION
Now let’s address the big question: will it work?
Given the fact that black money is stored in various forms such as Gold, real estate, overseas tax
havens and cash, demonetizing currency notes of Rs. 500 and Rs. 1000 will only curb black
money that is in the form of physical/ hard cash. But since this form of black money, after this
step, is the only form we can tackle right now, there does not seem to be a reason why we
shouldn’t.
In other words, if the plan does not seem to address all facets of the problem, it does not
necessarily mean that it is an inadequate solution. This is all the more legitimate in the face of
lack of alternatives. According to the World Bank 2010 report, black money formed about 23.2
percent of India’s GDP in 2007. Given such a state, we cannot afford to wait for a better
comprehensive solution.
Last Few Words
Economists are busy in listing out many more merits and demerit of this policy. The government
is saying that there are only advantages of demonetization policy and this will be seen in the long
term. Former Prime Minister Manmohan Singh who is a noted economist, former RBI governor
and former Finance Minister of the country, dubs the demonetization move as an ‘organized loot
and legalized plunder’.
However, if we compare the merits verses demerits, it will be safe to conclude that the former
outweighs the latter.
Even though there is suffering and agony among the masses right at the moment but the forecast
is that its benefits will be seen in the long run.
The government is taking all the necessary steps and actions to meet the currency demand and
soon the trial and tribulations of the people will be over with the smooth flow of the new
currency.
If the money disappears, as some hoarders would not like to be seen with their cash pile, the economy
will not benefit. On the other hand if the money finds its way in the economy it could have a meaningful
impact. However experiences from different countries shows that the move was one of the series that
failed to fix a debt-burdened and inflation-ridden economy.
Demonetization and Its Impact on Indian Economy | MA Economics 4th
Sem
#GoravGopalSingh 26 | Page
CHAPTER 3
Bibliography
Demonetization and Its Impact on Indian Economy | MA Economics 4th
Sem
#GoravGopalSingh 27 | Page
SOURCES
 Websites
o www.RBIBanK.org , Primary Data Sources
o www.wikipedia.org ,
o www.Slideshare.com,
 Articles
 http://www.business-standard.com/article/economy-policy/five-likely-effects-
of-demonetisation-on-economy-116110901411_1.html
o http://www.business-standard.com/article/economy-policy/five-likely-effects-of-
demonetisation-on-economy116110901411_1.html
o http://economictimes.indiatimes.com/articleshow/55348597.cms?utm_source=content
ofinterest&utm_medium= text&utm_campaign=cppst
o http://www.financialexpress.com/economy/history-of-demonetisation-when-morarji-
desai-government-ceasedrs-500-rs-1000-and-rs-
 Newspapers:
o The Economics Time, August –September, 2016
o The Business Line, July- September, 2016
 Guidance and Instruction :
 Respectful , Dr. Reenu Tyagi mam and Other Teacher of Economics Department of MMH
COLLEGE , GHAZIABD

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Ecoonomics 4th sem demonetization and its impact on indian economy

  • 1. DEMONETIZATION and its Impact on INDIAN ECONOMY A Dissertation submitted to CCS University, Meerut for the partial fulfillment MA ECONOMICS degree M.A. ECONOMICS Submitted By: Gorav Gopal Singh RG1501910133 Submitted to: DR. RENU TYAGI MAM Department of Economic M.M.H. COLLEGE, GHAZIABAD 2016-2017
  • 2. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 2 | Page TABLE OF CONTENTS DEMONETIZATION and its Impact on INDIAN ECONOMY ............................................................................1 CERTIFICATE..................................................................................................................................................3 ACKNOWLEDGEMENT...................................................................................................................................4 CHAPTER 1 DISSERTATION ...........................................................................................................................5 ABSTRACT..................................................................................................................................................6 INTRODUCTION.........................................................................................................................................7 OBJECTIVES OF PAPER...........................................................................................................................8 RESEARCH METHODOLOGY ..................................................................................................................8 CHAPTER 2 DEMONETISATION (What, Why, How, Where?)........................................................................9 MEANING................................................................................................................................................10 OBJECTIVES OF DEMONETIZATION.........................................................................................................11 HISTORY IN INDIA....................................................................................................................................12 THE EXPERIENCES FROM SOME COUNTRIES ..........................................................................................13 CHAPTER 2.2 Impact of INDIAN ECONOMY ................................................................................................15 PROCEDURE FOR EXCHANGE OLD NOTES ..............................................................................................16 THE SHORT-TERM Vs. THE LONGER-TERM IMPLICATIONS.....................................................................17 IMPACT ON INDIAN STOCK MARKET ......................................................................................................18 THE SECTORAL IMPACTS.........................................................................................................................20 THE PROBABLE CONSEQUENCES OF THE DEMONETISATION.................................................................21 CONCLUSION...........................................................................................................................................25 CHAPTER 3 ..................................................................................................................................................26 SOURCES .................................................................................................................................................27
  • 3. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 3 | Page CERTIFICATE This is to certify that thesis entitled “Demonetization and Its Impact on Indian Economy “ submitted for the award of the MA Degree in Economics, to the is an original record of bonfire research work, carried out by Gorav Gopal Singh, under my supervision and guidance. This is candidate’s own work and I recommend that the Dissertation be forwarded to the examiners for evaluation. Date: Dr. Renu Tyagi MAM (Professor) DECLARATION This Dissertation entitled “Demonetization and Its Impact on Indian Economy” embodies my original work for submission to the Department of Economics, CCS UNIVERSITY, Meerut is for MA Degree. Further, I declare that this work, either in part or in full, has not been submitted to any other university for the award of any other degree. Any contribution made to the research by colleagues, with whom I have worked at, during my candidature, is fully acknowledged. I also declare that the intellectual content of this Dissertation is the product of my own work, Date: Gorav Gopal Singh Department of Economics MMH COLLEGE, GHAZIABAD
  • 4. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 4 | Page ACKNOWLEDGEMENT With Regard to this Dissertation, I would like to thank each and every one who offered help, guideline and support whenever required. They have been my consistent source of strength during my M.A. Economics Study. First & Foremost, I would like to thank Associate Professor DR. RENU TYAGI Mam for guiding me during the project. Her unquenchable thirst for excellence also taught me immensely about approaching research problems in common. I would also like to thanks my team and Friends in this report , Kanchan, Irfan, Aditya & Purnima, Shivali , Deepak , Pooja, Pragati , Raj Kumari, and Shabana who were always present to help me out whenever I got struck during project completion and keep me motivated to do better. My whole hearted gratitude to My Parents and Nisha, Manisha , My Family Members for their constant encouragement, love, wishes and support. Above all, I thank Almighty Krishna who bestowed his blessings upon me. This Project wouldn’t have been possible without you all, thank you very much. Gorav Gopal Singh M.A. Economics 4th Sem Roll No. (RG1501910133) FATHER’S NAME: Gopal Singh M.M.H. College, Ghaziabad DATE: 22/May/2017
  • 5. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 5 | Page CHAPTER 1 Dissertation
  • 6. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 6 | Page ABSTRACT India has amongst the highest level of currencies in circulation at 12.1% of GDP. Cash on hand is an estimated at around 3.2% of household assets, higher than investment in equities, or roughly around $ 220 billion. Of this cash, 87% is in the form of Rs 500 and Rs 1,000 notes or roughly Rs 14 lakh crore ($190 billion).A significant portion of the household cash on hand is generated by economic transactions that are not reported to tax authorities or generated through corruption. Scrapping the higher denomination money would either result in these being brought into the system or the money just disappearing. The present paper highlights the probable consequences of this decision on various economic variables and entities.
  • 7. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 7 | Page INTRODUCTION Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as an official mode of payment. Demonetization is the act of stripping a currency unit of its status as legal tender. On 28 October 2016, the total currency in circulation in India was Rs. 17.77 lakh crore (US$260 billion). In terms of value, the annual report of Reserve Bank of India of 31 March 2016 stated that total bank notes in circulation valued to Rs.16.42 lakh crore (US$240 billion) of which nearly 86% (i.e. Rs. 14.18 lakh crore (US$210 billion)) was 500 and 1000 rupee notes. In terms of volume, the report stated that 24% (i.e. 2,203 crore) of the total 9,026.6 crore banknotes were in circulation In an important move, the Government of India declared that the five hundred and one thousand rupee notes will no longer be legal tender from midnight, 8th November 2016. The RBI will issue Two thousand rupee notes and new notes of Five hundred rupees which will be placed in circulation from 10th November 2016. Notes of one hundred, fifty, twenty, ten, five, two and one rupee will remain legal tender and will remain unaffected by this decision. This measure has been taken by the PM in an attempt to address the resolve against corruption, black money and counterfeit notes. This move is expected to cleanse the formal economic system and discard black money from the same. The reasons of it are as under: • To tackle black money in the economy; • To lower the cash circulation in the country which is directly related to corruption in our country; • To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India; • The move is estimated to scoop out more than more than Rs 5 lakh crore black money from the economy. Similar measures have been taken in the past. In January 1946, currency notes of 1000 and 10,000 rupees were withdrawn and new notes of 1000, 5000 and 10,000 rupees were introduced in 1954. The Janata Party coalition government had again demonetized notes of 1000, 5000 and 10,000 rupees on 16 January 1978 as a means to curb forgery and black money.
  • 8. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 8 | Page OBJECTIVES OF PAPER To study the experience of impact of demonetization in various countries in past years; To analyze the current the immediate impact of demonetization on Indian economy; To work out the probable consequences of the demonetization. RESEARCH METHODOLOGY The paper is based on secondary data. The data has been collected from internet. Graph and percentile method has been used to analyze the data.
  • 9. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 9 | Page CHAPTER 2 DEMONETIZATION (What, Why, How, Where?)
  • 10. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 10 | Page MEANING The dictionary meaning of DEMONETIZE is “To deprive (a metal) of its capacity as a monetary standard” or “To withdraw from use as currency” So, demonetization is the act of stripping a currency unit of its status as legal tender. It is the act or process of removing the legal status of currency unit. A currency on which Governor of RBI on behalf of Central Government guarantees by making statement “I promises to pay the bearer, the sum of money ……” which empowers it a legal status. From the date of demonetization, all old currencies which are demonetized will cease to be a legal tender. Such currency cannot be used as money to do any transaction henceforth, but to replace with a new currency. In popular parlance, the unofficial economy goes by the name of black money and the official of white money. Black and white are also variously substituted by number two and number one, unaccounted and accounted, unreported and reported, unrecorded and recorded and so on…” “It is stripping a currency unit of its status as legal tender. Demonetization is the old unit of currency must be retired and replaced with a new currency unit”. Money is the life blood of every economy. With the growth of civilization and mankind, the needs of human beings increased. In order to fulfill humans unlimited wants barter system emerged. But over a period of time, the invention of money became a strong pillar to build an economy. Money exchange appears to be more convenient than barter because it obviates the “double coincidence of wants” and is capable of sustaining relatively complex economy. Money exchange facilitates ease of doing business, facilitates taxation and national integration. All activities such as production, exchange, distribution, services etc. form an economy. It is called formal economy. An informal economy is neither economic activity/activities that is neither taxed nor monitories by Government, contrasted with a formal economy. Presence of corruption, black money, counterfeit currency, poor governance etc. promotes and establishes parallel economy.
  • 11. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 11 | Page OBJECTIVES OF DEMONETIZATION  To promote a Cashless economy  To eradicate counterfeit currency  Eliminate black money  To combat corruption  To combat inflation  Crackdown on terrorism and Naxalism  To promote a cashless economy.
  • 12. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 12 | Page HISTORY IN INDIA India had an experience of demonetization of its currency twice before. The first was when Rs.1000, Rs. 5000 and Rs 10000 notes were taken out of circulation on 12th January 1946, a 1 ½ year before the Independence. The highest denomination note ever printed by RBI in India was Rs. 10000 note introduced for the first time in the year 1938. However all three of Rs. 1000, Rs 5000 and Rs. 10000 notes were again reintroduced in 1954. The second phase of demonetization was done on 16th January 1978 when an ordinance was promulgated to phase out notes with denomination of Rs. 1000, Rs 5000 and Rs. 10000. On 12th January 1946 demonetization was resorted to but the Direct Tax Enquiry Committee in its interim report observed, “Demonetization was not successful then, because only a very small proportion of total notes in circulation were demonetized in 1946 and its worth was Rs. 1,235.93 crores”. On 16th January 1978, demonetization of high denomination notes was introduced. The high demonetization notes as on that day amounted to Rs. 146 crore and total notes tendered to RBI amounted to Rs. 125 crore as per data available till August 1981.
  • 13. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 13 | Page THE EXPERIENCES FROM SOME COUNTRIES Russia: On its last legs, the country under Mikhail Gorbachev in January 1991 withdrew large-ruble bills from circulation in a move to take on the black economy. The reform failed to halt inflation, and instead served mainly to accelerate a slide in public confidence in the government. As political infighting combined with economic collapse, Gorbachev faced a coup attempt that August which destroyed his authority and led to the Soviet break-up the following year. Learning lessons, Russia's 1998 redenomination of the ruble, when it removed three zeroes, went altogether more smoothly. North Korea: In 2010, the regime of then-dictator Kim Jong-Il mounted a reform that knocked off two zeros from the face value of the old currency in an effort to tighten control of the economy and close black markets. Combined with a poor harvest, the measure left the country with severe food shortages, according to reports at the time. Surging rice prices stoked unrest that prompted an unusual apology from Kim, and -- reports suggested -- the execution of the ruling party's head of finance. Zaire: Dictator Mobutu Sese Seko faced increasing economic disruptions in the early 1990s, when his administration mounted successive banknote reforms. A plan to withdraw obsolescent currency from the system in 1993 saw a surge in inflation and a collapse in the exchange rate against the dollar. After a civil war, Mobutu was ousted in 1997 Myanmar: In 1987, the country's military junta invalidated as much as 80 per cent of the value of money in circulation, according to reports at the time -- as in other such initiatives, it was directed at curbing the black market. One result was the first student demonstrations in years. Deepening economic unease helped trigger mass protests across the nation the following year that led to a government crackdown that killed thousands of people. Ghana: The country in 1982 got rid of its 50 cedi note to crack down on tax evasion, address corruption and mop up excess liquidity. The move eroded confidence in the banking system as people turned to foreign currency or physical assets instead. The black market for currency flourished.
  • 14. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 14 | Page As rural dwellers had to walk miles to the nearest banks to exchange their money, and after the deadline passed, there were accounts of bundles of notes abandoned as worthless. Nigeria: In 1984, the military government led by Muhammadu Buhari instituted an anti-corruption crackdown that involved issuing new banknotes with a different color, forcing the replacement of old ones within a limited period.The move was one of a series that failed to fix a debt-burdened and inflation-ridden economy. Buhari, who is now in power again, was eventually ousted in a coup the following year.
  • 15. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 15 | Page CHAPTER 2.2 Impact On INDIAN ECONOMY (ANALYSING DEMONATIATION 2016)
  • 16. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 16 | Page PROCEDURE FOR EXCHANGE OLD NOTES The Reserve Bank of India laid down a detailed procedure for the exchange of the demonetized banknotes with new Rs.500 and Rs.2000 banknotes of the Mahatma Gandhi New Series and Rs.100 banknotes of the preceding Mahatma Gandhi Series. Following are the key points: • Citizens will have until 30 December 2016 to tender their old banknotes at any office of the RBI or any bank branch and credit the value into their respective bank accounts. • Cash withdrawals from bank accounts will be restricted to Rs.10, 000 per day and Rs.20,000 per week from 9 November 2016 till 24 November 2016. • For immediate cash needs, the old banknotes of value up to Rs.4000 per person can be exchanged for the new Rs.500 and Rs.2000 banknotes as well as Rs.100 banknotes over the counter of bank branches from 10 November 2016 by filling up a requisition form along with a valid ID proof. • All ATMs will dispense bank notes of only 50 and 100 rupee denominations. • Banks will provide all cash withdrawal transactions at their ATMs free of cost to their customers till 30 December 2016. Cash withdrawals from ATMs will be restricted to Rs.2000 per day per card up to 18 November 2016 and the limits will be raised to Rs.4000 per day per card from 19 November 2016. However, exceptions were given to petrol pumps, CNG stations, government hospitals, train and airline booking stations, state-government recognized dairies, ration shops, and crematoriums to accept the 500 and 1000 rupee notes until 14 November. International airports were also instructed to facilitate an exchange of notes amounting to a total value of Rs.5, 000 (US$74) for foreign tourists and out-bound passengers.
  • 17. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 17 | Page THE SHORT-TERM Vs. THE LONGER-TERM IMPLICATIONS The Short-term Impacts: There will be a disruption in the current liquidity situation as households are likely to get affected by the note exchange terms laid by the government. Though clarity is unfolding on this, commodity transactions and general cash market transactions are likely to feel an immediate impact. Unorganized sector proceedings, including small trade market activities, will remain volatile in the short-term. Roadside vendors, cab drivers, kirana stores, etc., have already stopped accepting Rs 500 and Rs 1,000 notes. It is important to note that a significant percentage of the Indian workforce is employed in this sector, which is likely to be affected by immediate liquidity issues. Overall, negative impact on disposable income is expected along with likely disruption in the consumption patterns of the general populace. It is estimated that there will be a negative GDP impact in the current quarter as consumption gets a shock in the immediate term. However, quantum and degree of this impact cannot be ascertained at this time. The Longer-term Implications: This essentially represents a change in regime for the real and financial economy. Domestically, there could be some turmoil as the effect will be disproportionately felt by the lower and upper income classes. Internationally, the government is likely to get thumbs up for the move and more countries could potentially see this as a viable option to curb black money and stem illegal financial activity. Last, though this move by the government may not be a first, having being tried by earlier governments as a tool to fight corruption. Such an action achieves larger significance for a globally connected India as it shows boldness in tackling an issue which has remained a thorn in the growth success story of this generation.
  • 18. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 18 | Page IMPACT ON INDIAN STOCK MARKET AND ASIAN STOCK MARKET IN PRESENT SCENARIO At the time of writing, the Indian markets have fallen a bit more than other emerging markets in Asia. The S&P BSE Sensex is down 3.8%, which is more than more or less all other Asian emerging markets. The possibility of a Donald Trump win is keeping markets on the edge worldwide. The extra fall in the Indian markets compared to others could be due to many factors, including high valuations, but it’s very likely that the demonetization effect is mainly responsible for the fall. That is clearly seen if we dig a little deeper. The Sensex is made up of very large companies which may not be impacted as much by the demonetization process. BSE’s mid-cap and small-cap indices have fallen by over 6% each at the time of writing. And in truth, the largest impact of the government’s move will be in the unorganized sector, which isn’t represented in the markets. The true picture is reflected in sectoral indices such as the BSE Realty index, which is down as much as 15% at the time of writing. Some stocks such as DLF Ltd are down nearly 20%. This industry is known to entertain cash transactions of large magnitude. Similarly, stocks of jewellery companies such as Titan Industries Ltd have fallen by around 11% as well, perhaps because a lot of gold purchases are through cash. Besides, stocks of mid- and smallsized finance companies which collect payments in cash have fallen by 8-10%. Information technology stocks, for now, are down around 3%, which is more or less in line with the broad markets. While these companies will be unaffected by the demonetization process, this reflects a concern about a Trump presidency and a possibility of anti-outsourcing measures.
  • 19. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 19 | Page
  • 20. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 20 | Page THE SECTORAL IMPACTS While sectors with linkages to the unorganized economy are likely to be affected, technology and financial services are expected to gain in the medium to long term. On a sectoral basis, the commodities and agricultural sector, including the market for consumer durables and non-durables is expected to feel the heat. In the short to medium term, large denomination purchases will likely be made via electronic purchases rather than through brick and mortar outlets. This will impact the retail sector adversely. The real estate sector is likely to see a significant negative impact in the medium- to long-term, particularly in the repurchase market. There are expectations of a revaluation of current real estate transactions across the board representing possible losses to players in the sector. The luxury goods market is also likely to get affected as this move represents an erosion of real wealth to a large Areas of sub-sectoral impact will be felt in luxury cars, SUVs, gems, jewelry, gold and high-end branded products. The real estate sector is likely to see a significant negative impact in the medium- to long-term, particularly in the repurchase market. There are expectations of a revaluation of current real estate transactions across the board representing possible losses to players in the sector. The luxury goods market is also likely to get affected as this move represents an erosion of real wealth to a large number of people. On the positive side, there is likely to a reset of spending patterns as this move represents indirectly a significant push towards a cashless economy. Businesses in the fin-tech sector, including payment banks, mobile wallets, electronic transfer providers, etc., are expected to see gains. Positives Negatives E-commerce and Fintech 1) Payment gateways 2) Cards Agriculture Luxury goods Real Estate Commodities 3) Mobile wallets 4) Online retail 5) Net and payment banks 6) e-marketplace Traditional Retail 1) Consumer durables 2) Consumer non-durables
  • 21. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 21 | Page THE PROBABLE CONSEQUENCES OF THE DEMONETISATION The following likely impacts on the economy will be observed if a substantial portion of the cash is either reported or is consumed in the economy. Tax: Having closed the voluntary disclosure window for undisclosed money, it has been reported that government will keep a close watch on deposits over Rs 2 lakh in cash. This would mean increased tax net, higher tax collection and a better tax to GDP ratio. Philips Capital in a report says that the extent of parallel economy, which was 23.2% of GDP, is now around 25-30% of GDP. As the money gets accounted and more taxes are collected, government might be tempted to reduce tax rates going forward. Interest rates: One of the biggest impacts of demonetization would be high value transactions, especially land and gold. This would result in lower inflation, tempting the central bank to reduce interest rates. But the bigger impact on interest rates will be the liquidity with which banks will be flushed. CLSA’s points out that banks would benefit with higher CASA (current account savings account) growth as a part of the $ 190 billion cash pile gets deposited with them. Higher deposit growth and continuing weak credit growth would create opportunities for lending rate cuts and investment activities to pick-up. Liquidity: Movement of goods and money will be hit in the short. A Bank of America Merrill Lynch note says that wholesale channel forms over 40% of the sales for the Indian consumer firms. This channel works mainly on cash transactions and will likely witness liquidity constraints in the near term. This could disrupt the supply chain and impact growth in the December quarter. The report further adds that consumer firms typically provide tight credit terms (<7 days) to the distributors, who in turn provide credit to the wholesalers/ outlets on their own accounts. Due to overall tightening of the cash-liquidity in the supply chain, consumer firms may be forced to offer easier credit terms to the distributors in the near term. As a result we expect an increase in their receivables in the December quarter. GST: Demonetization comes at an important as the country heads to a new tax regime with the implementation of GST. Demonetization would increase the tax net and along with GST result in reduction of black money generation. Along with GST, demonetization will lead to a higher tax/GDP ratio, says CLSA. Financial Assets: As money lying idle comes in the main economy it would move to higher yielding and liquid assets. Money is likely to move to financial assets from gold, precious metals, real estate and plain cash. Equities might reflect the panic in the economy in the short term, but the move is will be beneficial in the long run say most of the broker’s report and expert comments. Effect on parallel economy: The removal of these 500 and 1000 notes and replacement of the same with new 500 and 2000 Rupee Notes is expected to - remove black money from the economy as they will be blocked since the owners will not be in a position to deposit the same in the banks, - Temporarily stall the circulation of large volume of counterfeit currency and - curb the funding for anti-social elements like smuggling, terrorism, espionage, etc. Effect 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
  • 22. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 22 | Page short run. 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. Effect on Demand: The overall demand is expected to be affected to an extent. The demand in following areas is to be impacted particularly: November 09, 2016 I Economics: Policy View Economic consequences of demonetization of 500 and 1000 Rupee Notes Contact: Madan Sabnavis Chief Economist madan.sabnavis@careratings.com 91-022 -6754 3489 Anushka Sawarkar Associate Economist anushka.sawarkar@careratings.com 91-022-6754 3609 Mradul Mishra (Media Contact) mradul.mishra@careratings.com 91-022-6754 3515 Disclaimer: This report is prepared by the Economics Division of Credit Analysis &Research Limited [CARE Ratings]. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report Economics I Economic consequences of demonetization of 500 and 1000 Rupee Notes 2 Consumer goods Real Estate and Property Gold and luxury goods Automobiles (only to a certain limit) All these mentioned sectors are expected to face certain moderation in demand from the consumer side, owing to the significant amount of cash transactions involved in these sectors. Effect on Prices: The Price level is expected to be lowered due to moderation from demand side. This demand driven fall in prices could be understood as follows: • Consumer goods: Prices are expected to fall only marginally due to moderation in demand as use of cards and cheques would compensate for some purchases. • Real Estate and Property: Prices in this sector are largely expected to fall, especially for sales of properties where major part of the transaction is cash based, rather than based on banks transfer or cheque transactions. In the medium term, however the prices in this sector could regain some levels as developers rebalance their prices (probably charging more on cheque payment)The Indian real estate market which is largely fragmented and unorganized has had a reputation of being a safe haven for black money and therefore we expect to see impact on the sector. The impact is likely to be seen in secondary markets thereby making real estate more "illiquid" for a period of time till the market adjusts to a new normal. It will not have any impact on the primary residential segment as the buyers in this sector are driven by mortgage. The impact will be felt in the secondary market and the unorganized developers’ community where there were still cash dealing. Prices coming down to more reasonable levels in the housing market cannot be ruled out. In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend. This decision along with real estate regulatory law, GST and
  • 23. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 23 | Page Real Estate Investment Trusts would further improve transparency and increase investor confidence in the real estate market. Effect on Various Economic Entities: With cash transaction lowering in the short run, until the new notes are spread widely into circulation, certain sections of the society could face short term disruptions in facilitation of their transactions. These sections are: Agriculture and related sector  Small traders  SME  Services Sector Households  Political Parties  Professionals like doctor, carpenter, utility service providers, etc  Retail outlets  Economics I Economic consequences of demonetization of 500 and 1000 Rupee Notes 3 The nature, frequency and amounts of the commercial transactions involved with these sections of the economy necessitate cash transactions on more frequent basis. Thus, these segments are expected to have the most significant impact post this demonetization process and the introduction of new notes in circulation. Effect on GDP: The GDP formation could be impacted by this measure, with reduction in the consumption demand. However with the recent rise in festival demand is expected to offset this fall in overall impact. 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. Effect on Banks: As directed by the Government, the 500 and 1000 Rupee notes which now cease to be legal tender are to be deposited or exchanged in banks (subject to certain limits). This will automatically lead to more amounts being deposited in Savings and Current Account of commercial banks. This in turn will enhance the liquidity position of the banks, which can be utilized further for lending purposes. However, to the extent that households have held on to these funds for emergency purposes, there would be withdrawals at the second stage. Effect 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 should eventually lead to strengthening of such systems and the infrastructure required. CARE’s View In spite of the initial hiccups and disruptions in the system, eventually this change will be well assimilated and will prove positive for the economy in the long run
  • 24. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 24 | Page  Black money hoarders will definitely lose out, eventually boosting the formal economy in the long run.  Short term fall in real estate prices might benefit middle class citizens.  This move by the Government along with the implementation of the GST will eventually make the system more accountable and efficient.
  • 25. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 25 | Page CONCLUSION Now let’s address the big question: will it work? Given the fact that black money is stored in various forms such as Gold, real estate, overseas tax havens and cash, demonetizing currency notes of Rs. 500 and Rs. 1000 will only curb black money that is in the form of physical/ hard cash. But since this form of black money, after this step, is the only form we can tackle right now, there does not seem to be a reason why we shouldn’t. In other words, if the plan does not seem to address all facets of the problem, it does not necessarily mean that it is an inadequate solution. This is all the more legitimate in the face of lack of alternatives. According to the World Bank 2010 report, black money formed about 23.2 percent of India’s GDP in 2007. Given such a state, we cannot afford to wait for a better comprehensive solution. Last Few Words Economists are busy in listing out many more merits and demerit of this policy. The government is saying that there are only advantages of demonetization policy and this will be seen in the long term. Former Prime Minister Manmohan Singh who is a noted economist, former RBI governor and former Finance Minister of the country, dubs the demonetization move as an ‘organized loot and legalized plunder’. However, if we compare the merits verses demerits, it will be safe to conclude that the former outweighs the latter. Even though there is suffering and agony among the masses right at the moment but the forecast is that its benefits will be seen in the long run. The government is taking all the necessary steps and actions to meet the currency demand and soon the trial and tribulations of the people will be over with the smooth flow of the new currency. If the money disappears, as some hoarders would not like to be seen with their cash pile, the economy will not benefit. On the other hand if the money finds its way in the economy it could have a meaningful impact. However experiences from different countries shows that the move was one of the series that failed to fix a debt-burdened and inflation-ridden economy.
  • 26. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 26 | Page CHAPTER 3 Bibliography
  • 27. Demonetization and Its Impact on Indian Economy | MA Economics 4th Sem #GoravGopalSingh 27 | Page SOURCES  Websites o www.RBIBanK.org , Primary Data Sources o www.wikipedia.org , o www.Slideshare.com,  Articles  http://www.business-standard.com/article/economy-policy/five-likely-effects- of-demonetisation-on-economy-116110901411_1.html o http://www.business-standard.com/article/economy-policy/five-likely-effects-of- demonetisation-on-economy116110901411_1.html o http://economictimes.indiatimes.com/articleshow/55348597.cms?utm_source=content ofinterest&utm_medium= text&utm_campaign=cppst o http://www.financialexpress.com/economy/history-of-demonetisation-when-morarji- desai-government-ceasedrs-500-rs-1000-and-rs-  Newspapers: o The Economics Time, August –September, 2016 o The Business Line, July- September, 2016  Guidance and Instruction :  Respectful , Dr. Reenu Tyagi mam and Other Teacher of Economics Department of MMH COLLEGE , GHAZIABD