Foreword

On the 8th of November, 2016 when the sun had descended below the horizon and the light
of day had completely faded, when people were returning back home from a long day at
work, a misty light of a new economy was brewing over the country. All 500 and 1000
banknotes of the Mahatma Gandhi Series ceased to be legal tender in India from 9 November
2016.

The government claimed that the demonetisation was an effort to stop counterfeiting of the
current banknotes allegedly used for funding terrorism, as well as a crackdown on black
money in the country. The move was described as an effort to reduce corruption, the use of
drugs, and smuggling.

However, in the days following the demonetisation, banks and ATMs across the country faced
severe cash shortages. Also, following Modi's announcement, the BSE SENSEX and NIFTY
50 stock indices crashed for the next two days.

The term demonetisation has become much more than a household name since the old Rs 500
and Rs 1,000 notes were pulled out of circulation. While as per dictionary demonetisation
means "ending something (e.g. gold or silver) that is no longer the legal tender of a country",
one needs to understand that there is much more than the literal meaning to the word.

One need to understand that 80% of India's labour force is employed in the informal sector,
which comprise of 45% of the GDP of our country. Over 60% of population of India lives in
below the international poverty threshold line of 1.9$ per day. Since our economy is an under
banked economy, present demonetisation move, would no doubt cause a severe social
experiment, across the segment of our population. At the first place, and on a short term basis
this move would benefit the Government, which shall effectively deploy its resources to
percolate the impact to the poor and needy of our country.
Demonetization.!!!!

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs
whenever there is a change of national currency: The current form or forms of money is
pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes,
a country completely replaces the old currency with new currency.

The opposite of demonetization is remonetization, in which a form of payment is restored as

legal tender.

BREAKING DOWN 'Demonetization'

There are multiple reasons why nations demonetize their local units of currency:

to combat inflation

to combat corruption and crime (counterfeiting, tax evasion)

to discourage a cash-dependent economy

to facilitate trade

Exchange of old notes

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following
deposit of demonetised currency notes in bank on 15 November 2016.

The Reserve Bank of India stipulated a window of fifty days until 30 December 2016 to
deposit the demonetised banknotes as credit in bank accounts. The banknotes could also be
exchanged over the counter of bank branches upto a limit that varied over the days:

Initially, the limit was fixed at 2,000 per person from 8 to 13 November.

This limit was increased to 4,500 per person from 14 to 17 November.

The limit was reduced to 2,000 per person from 18 November.

All exchange of banknotes was abruptly stopped from 25 November 2016.

International airports were also instructed to facilitate an exchange of notes amounting to a
total value of 5,000 for foreign tourists and out-bound passengers.

Advantages of Demonetization

1. The biggest advantage of demonetization is that it helps the government to

track people who are having large sums of unaccounted cash or cash on which
no income tax has been paid because many people who earn black money keep
that money as cash in their houses or in some secret place which is very difficult
to find and when demonetization happens all that cash is of no value and such
people have two options one is to deposit the money in bank accounts and pay
taxes on such amount and second option is to let the value of that cash reduced
to zero.

2. Since black money is used for illegal activities like terrorism funding,
gambling, money laundering and also inflating the price of major assets classes
like real estate, gold and due to demonetization all such activities will get
reduced for some time and also it will take years for people to generate that
amount of black money again and hence in a way it helps in putting an end this
circle of people doing illegal activities to earn black money and using that black
money to do more illegal activities.

3. Another benefit is that due to people disclosing their income by depositing

money in their bank accounts government gets a good amount of tax revenue
which can be used by the government towards the betterment of society by
providing good infrastructure, hospitals, educational institutions, roads and many
facilities for poor and needy sections of society.

Disadvantages of Demonetization

1. The biggest disadvantage of demonetization is that once people in the country

gets to know about it than initially for few days there is chaos and frenzy among
public as everybody wants to get rid of demonetized notes which in turn
sometimes can lead to law and order problem and chaotic situation especially in
banks and ATMs which are the only medium to change the old currency units to
new currency units.

2. Another disadvantage is that destruction of old currency units and printing of

new currency new units involve costs which has to be borne by the government
and if the costs are higher than benefits then there is no use of demonetization.

3. Another problem is that majority of times this move is targeted towards black
money but if people have not kept cash as their black money and rotated or used
that money in other asset classes like real estate, gold and so on then there is no
guarantee that demonetization will help in catching corrupt people.
 IMPACTS
1. Demonetization is not a big disaster like global banking sector crisis of 2007;
but at the same time, it will act as a liquidity shock that disturbs economic activities.
2. Liquidity crunch (short term effect): liquidity shock means people are not
able to get sufficient volume of popular denomination especially Rs 500. This
currency unit is the favourable denomination in daily life. It constituted to nearly 49%
of the previous currency supply in terms of value. Higher the time required to
resupply Rs 500 notes, higher will be the duration of the liquidity crunch.
Current reports indicate that all security printing press can print only 2000 million
units of RS 500 notes by the end of this year. Nearly 16000 mn Rs 500 notes were in
circulation as on end March 2016. Some portion of this were filled by the new Rs
2000 notes. Towards end of March approximately 10000 mn units will be printed and
replaced. All these indicate that currency crunch will be in our economy for the next
four months.
3. Welfare loss for the currency using population: Most active segments of
the population who constitute the base of the pyramid uses currency to meet their
transactions. The daily wage earners, other labourers, small traders etc. who reside
out of the formal economy uses cash frequently. These sections will lose income in
the absence of liquid cash. Cash stringency will compel firms to reduce labour cost
and thus reduces income to the poor working class.
There will be a trickle up effect of the liquidity chaos to the higher income people with
time.
4. Consumption will be hit: When liquidity shortage strikes, it is consumption
that is going to be adversely affected first.

Consumption Production Employment Growth Tax revenue

5. Loss of Growth momentum- India risks its position of being the fastest
growing largest economy: reduced consumption, income, investment etc. may
reduce Indias GDP growth as the liquidity impact itself may last three -four months.
6. Impact on bank deposits and interest rate: Deposit in the short term may
rise, but in the long term, its effect will come down. The savings with the banks are
actually liquid cash people stored. It is difficult to assume that such ready cash once
stored in their hands will be put into savings for a long term. They saved this money
into banks just to convert the old notes into new notes. These are not voluntary
savings aimed to get interest. It will be converted into active liquidity by the savers
when full-fledged new currency supply take place. This means that new savings with
banks is only transitory or short-term deposit. It may be encashed by the savers at
the appropriate time. It is not necessary that demonetization will produce big savings
in the banking system in the medium term. Most of the savings are obtained by
biggie public sector banks like the SBI. They may reduce interest rate in the
short/medium term. But they can't follow it in the long term.
7. Impact on black money: Only a small portion of black money is actually stored in
the form of cash. Usually, black income is kept in the form of physical assets like
gold, land, buildings etc. Hence the amount of black money countered by
demonetization depend upon the amount of black money held in the form of cash
and it will be smaller than expected. But more than anything else, demonetization
has a big propaganda effect. People are now much convinced about the need to
fight black income. such a nationwide awareness and urge will encourage
government to come out with even strong measures.
8. Impact on counterfeit currency: the real impact will be on counterfeit/fake
currency as its circulation will be checked after this exercise.
Demonetization as a cleaning exercise may produce several good things in the
economy. At the same time, it creates unavoidable income and welfare losses to the
poor sections of the society who gets income based on their daily work and those
who doesnt have the digital transaction culture. Overall economic activies will be
dampened in the short term. But the unmeasurable benefits of having more
transparency and reduced volume of black money activities can be pointed as long
term benefits.

Lead Indicators of Economic Activity

(y-o-y growth in per cent)
Sr No. Apr-Oct Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
I. Macro indicators
1 M3 6.4# 10.4 8.5 6.6 6.4 6.5^
2 Currency in 6.9# 17.2 -23.6 -39.9 -37.8 -28.2^
circulation
(CIC)
3 Bank credit 1.8# 8.4 6.2 4.9 4.7 4.5^
$
4 Indirect tax 24.7 23.4 36.5 20.2 13.9 15.3
collections
@
5 Service tax 25.2 29.6 43.9 13.1 12.1 5.3
collections
by the
centre @
II Sectoral indicators
1 Agriculture
2016-17 N.A.
a. Foodgrains production 8.1 N.A.
Apr-Oct Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
2 Industry
a. PMI 52 54.4 52.3 49.6 50.4 50.7
manufacturi
ng (index)
b. IIP -0.3 -1.9 5.7 -0.1 2.7 N.A.
i. Mining -0.2 -0.9 3.7 5.5 5.3 N.A.
Coal 0.7 -1.6 6.4 4.4 4.8 N.A.
Crude oil -3.3 -3.2 -5.4 -0.8 1.3 N.A.
Natural gas -4.0 -1.4 -1.7 0.0 11.9 N.A.
ii. Manufacturi -1.0 -2.4 5.5 -1.7 2.3 N.A.
ng
iii. Electricity 4.5 1.1 8.9 6.3 3.9 N.A.
3 Services
i. PMI 52.6 54.5 46.7 46.8 48.7 50.3
services
ii. Automobile 15.0 8.1 -5.5 -18.7 -4.7 0.9
sales
iii. Commercial 6.9 11.9 -11.6 -5.1 -0.7 7.3
vehicles
sales
iv. Passenger 11.0 4.5 1.8 -1.4 14.4 9.0
vehicles
sales
v. Three 11.8 4.4 -25.9 -36.2 -28.2 -21.4
wheelers
sales
vi. Two 16.0 8.7 -5.9 -22.0 -7.4 0
wheelers
sales
vii. Cargo 6.3 13.2 10.2 12.9 3.6 N.A.
handled at
major ports
viii. Railway -1.7 -2.6 5.5 -0.1 0.3 N.A.
freight
traffic
ix. Tourist 10.8 10.4 9.2 13.6 16.4 N.A.
arrivals
x. Cement 4.8 6.2 0.5 -8.7 -13.3 N.A.
production
xi. Steel 2.7 0.3 5.0 5.3 3.1 N.A.
consumptio
n
xii. Civil 7.5 10.6 -0.6 7.5 10.1 N.A.
aviation:
domestic
cargo traffic
xiii. Civil 9.2 15.6 15.4 12.6 16.0 N.A.
aviation:
internationa
l cargo
traffic
xiv Civil 9.1 7.4 7.7 7.7 8.8 N.A.
aviation:
internationa
l passenger
traffic
xv. Civil 22.5 23.6 22.0 23.9 25.6 N.A.
aviation:
domestic
passenger
traffic
xvi. Bank 6.4# 9.3 15.7 14.9 13.5 12.6^
deposits
growth
xvii Insurance 31.1 22.4 72.1 21.1 32.1 -4.5**
premium*
xviii Merchandis 0.2 9.0 2.4 5.5 4.3 N.A.
 e exports
xix Merchandis -9.8 8.3 9.4 0.1 10.7 N.A.
e imports

Impact of Demonetisation on various sectors:-

Banking

A State Bank of India branch remained open at night, and a long queue of people waited
outside the ATM to withdraw money

In the first four days after the announcement of the step, about 3 trillion (US$45 billion) in
the form of old 500 and 1,000 banknotes had been deposited in the banking system and
about 500 billion (US$7.4 billion) had been dispensed via withdrawals from bank accounts,
ATMs as well as exchanges over the bank counters. Within these four days, the banking
system has handled about 180 million (18 crore) transactions. The State Bank of
India reported to have received more than 300 billion (US$4.5 billion) in bank deposit in
first two days after demonetisation. A spike in the usage of debit card and credit card post
demonetisation was also reported.

Between November 10 and November 27, banks reported exchange and deposits of
demonetised banknotes worth 8.45 trillion (US$130 billion) (exchange of 339.48
billion (US$5.0 billion) and deposits of 8.11 trillion (US$120 billion)). During this period,
an amount of 2.16 lakh crore (US$32 billion) had been withdrawn by people from their
accounts.

In Malda, a district believed to be a transit-point for fake Indian currencies, a large sum of
cash deposits in dormant accounts were also reported. According to The Economic Times,
more than 80 percent of fake currency in India originates from Malda district in West Bengal

Railways

As of November 2016, Indian Railways did not have the option to make payment with cards
at the counters. After the demonetisation move, the government announced to make card
payment options available at railway counters in the country. The railways placed an order for
10,000 card reader machines in January 2017.

Agriculture

Transactions in the Indian agriculture sector are heavily dependent on cash and were
adversely affected by the demonetisation of 500 and 1,000 banknotes. Due to scarcity of
the new banknotes, many farmers have insufficient cash to purchase seeds, fertilisers and
pesticides needed for the plantation of rabi crops usually sown around mid-
November. Farmers and their unions conducted protest rallies
in Gujarat, Amritsar and Muzaffarnagar against the demonetisation as well as against
restrictions imposed by the Reserve Bank of India on district cooperative central banks which
were ordered not to accept or exchange the demonetised banknotes.

The demonetisation led to unavailability of cash to pay for food products. The reduction in
demand that arose in turn led to a crash in the prices of crops. Farmers were unable to recover
even the costs of transportation from their fields to the market from the low prices
offered. The prices dropped as low as 50 paise per kilo for tomatoes and onions. This forced
the farmers across the country to dump their products in desperation. Some farmers resorted
to burying unsold vegetables. Agricultural produce such as vegetables, foodgrains, sugarcane,
milk and eggs were dumped on roads. Some farmers dumped their produce in protest against
the government.
Business

By the second week after demonetisation of 500 and 1,000 banknotes, cigarette sales
across India witnessed a fall of 3040%,[241] while E-commerce companies saw up to a 30%
decline in cash on delivery (COD) orders.[242][243] Several e-commerce companies hailed the
demonetisation decision as an impetus to an increase in digital payments. They believe that it
would lead to a decline in COD returns which is expected to cut down their costs.[244]

The demand for point of sales (POS) or card swipe machines has increased.[245] E-payment
options like PayTM and Instamojo Payment Gateway, PayUMoney has also seen a rise.
[246]
According to data of Pine Labs, the demand for its POS machines doubled after the
decision. Further it states that the debit card transactions rose by 108% and credit card
transactions by 60% on 9 November 2016.[245]

INFRASTRUCTURE
Infrastructure sector is a key driver for the Indian economy. Mr Nitin Gadkari, Minister of
Road Transport and Highways, and Shipping, has announced the governments target of Rs
25 trillion (US$ 376.53 billion) investment in infrastructure over a period of three years,
which will include Rs 8 trillion (US$ 120.49 billion) for developing 27 industrial clusters and
an additional Rs 5 trillion (US$75.30 billion) for road, railway and port connectivity projects.
Infrastructure sector includes power, bridges, dams, roads and urban infrastructure
development. In August 2016, India jumped 19 places in World Bank's Logistics Performance
Index (LPI) 2016, to rank 35th amongst 160 countries.

OIL AND GAS

The oil and gas sector is among the six core industries in India
and plays a major role in influencing decision making for all the
other important sections of the economy. Domestic refiners
import of crude oil increased 9.1 per cent year-on-year to around
18.81 million metric tons during August 2016.

REAL ESTATE