PROJECT ON

Effect of Demonetization on Employment Generation in India

SUBMITTED BY-
Prince Todi
ROLL NO. 106
BA LLB (HONS)
SEMESTER- I
SECTION “C”

SUBMITTED TO-
Mrs. Eritriya Roy
(FACULTY ECONOMICS)

HIDAYATULLAH NATIONAL LAW

UNIVERSITY,
RAIPUR, CHHATTISGARH
SUBMITTED ON- 5th October 2017

Certificate of Declaration

I hereby declare that this research work titled “Effect of Demonetization on Employment Generation in

India” submitted to HNLU, Raipur is my own work and represent my own ideas, and where others’ ideas or
words have been included, I have adequately cited and referenced the original sources. I also declare that my

work is in accordance with the all the said guidelines provided by the faculty.
Prince Todi

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 Acknowledgements

I feel highly elated to work on the topic “Effect of Demonetization on Employment Generation In

India”. I would like to take this opportunity to express my deep sense of gratitude towards my course

teacher, Mrs. Eritriya Roy for giving me constant guidance and encouragement throughout the course of

the project. I would also like to thank the University for providing me the internet and library facilities

which were indispensable for getting relevant content on the subject, as well as subscriptions to online

databases and journals, which were instrumental in writing relevant text.

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 Table of Contents
 Acknowledgements……………………………………….................3
 Introduction …………………………………………………………5
 Objectives of Study…………………………………………………...6
 Research Methodology………………………………………………..6
 Demonetization
a. Meaning of Demonetization…………………………………….7
b. Reasons for Demonetization…………………………………….8
c. History of Demonetization in India………………………………10
 Impact of Demonetization on Employment in India……………………..11
a. Impact on Unorganized Sector…………………………………….13
b. Impact on Organized Sector………………………………………..15
 Conclusion…………………………………………………………………17
 References…………………………………………………………………..18

Introduction
On November 08, the sudden announcement to de-monetization the high denomination currency notes of Rs.
1000 and Rs. 500 sent tremors all across the country. Given the timing, and socio-economic and political
repercussions of the decision, many termed it a ‘financial emergency’. Given high proportion of these notes
in circulation (over 86 percent), ‘demonetization’ led to most economic activities, particularly employment,
affected in a big way. Given the nature of huge informal employment, more than 95 percent of total
transactions in India are in cash form (Live Mint, January, 01, 2017). The decision of sudden
‘demonetization’ therefore led the labour market dynamics changed significantly by rendering millions of
workers exposed to increased uncertainty in employment.
There has doubtless been a lot of negative impact on employment, especially in the unorganized sector. So
will this impact persist? The short answer is yes. Crisis of employment opportunities will arise in the near
future in India. If we take into account the Indian economy we know that it is cash based economy reason
being cash transactions are far more than the total number of electronic transactions (14% in 2015) done on
a daily basis. The unorganized sector, which dominates the economy will fill the pinch much harder than the
organized sector.

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Since in the short run there will be an obvious decline in GDP of the country owing to this move , even a
unit decline in growth rate results a decline in employment growth rate, a concept called as employment
elasticity (EE) of output. So, labour market, particularly informal in nature, will be most affected by the
move.
The following project deals with the meaning and history of demonetization , reason behind resorting to
such moves and its after effects prominently focusing on how employment generation is affected . The
project also deals with the future repercussions of the move.

Objectives of Study
 The main objective of the project is to explore as to how demonetization i.e. withdrawal of currency

notes leading to cash crunch affected employment generation in India.

 To study reasons behind the current demonetization move.
 To study the future repercussions of this move.

Research Methodology
This research is descriptive and analytical in nature. Secondary and Electronic resources have been largely

used to gather information about the topic. Books and other references as guided by Faculty of Economics

have been primarily helpful in giving this project a firm structure. Websites, dictionaries and articles have

also been referred. Footnotes have been provided wherever needed to acknowledge the source.

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 Demonetization

1. Meaning of Demonetization

Demonetization refers to an economic policy where a certain currency unit ceases to be

recognized or used as a form of legal tender. In other words, a currency unit still loses its

legal tender status as a new one comes into circulation.

The government can take such decisions to stop the circulation of a denomination of notes or

coins in the economy.

The currency unit that has been demonetized is withdrawn from circulation. During the

implementation of this policy, the currency unit that has lost its status as a legal tender is

deposited with the banks or other authorized financial institutions and replaced with units that

still have legal tender status.

The government from time to time formulates fiscal policies that are meant to spur economic

growth. A lot of black money circulates in the economy, and most of it is unaccounted for

because the sources of income are not known to the government. It can be money generated

through illegal trade or unauthorized funding. To mop up this money out of circulation, the

government can demonetize so that the money holders are forced to deposit the cash with the

banks or lose their wealth. It is a strategy that has worked quite well for some countries. There

are several economic as well as social impacts of demonetization. It can reduce inflation,

improve the economy, and result in financial behavior change among citizens. However, if not

managed well, it may cause a lot of economic hardships to the people. How the process is

managed immensely determines its effects on the economy of a country.

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2. Reasons for Demonetization

As per the Government , the recent demonetization move was taken because of the following main

reasons :

A. Curbing the finances for terrorist activities temporarily:

One of the funding for terrorist organisations is printing fake currency. There is approximately

Rs.400 crore worth of fake curreny circulating in India and Rs.70 crore worth of fake currency

pumped each year. (Source: The Hindu). By demonetisation, the new money which is being

pumped into the India will be stopped temporarily. The money which is in stock with those

terrorist organizations also rendered useless with this move. But the fake money which is

already in circulation only be removed by demonetisation. So those terrorist organisations take

some time to redesign their machines to print new fake money. Because the recent Rs.500 fake

notes are so perfect that common man may not find any difference. So they already have the

technology to re-create the security features.

If this is the case why this move helps reduce terrorism? As the creation of new fake money

takes time, those leaders of the terrorist organizations find it difficult to manage their teams. It is

difficult to recruit new people and maintain existing people. So we are simply cutting one arm

of the demon.

B. Unearthing Black money :

Let us understand why black money is bad for an economy. Black money is simply the money

on which taxes are not paid. For general understanding, let us take taxation in India is 30%.

This means for each Rs.100, Rupees 30 should go to the exchequer. Then the question arises

why we have to pay tax on the money we earned? As we live in society, we use many services

of the society without notice. Just imagine if there is no police patrolling in nights? Any one can
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 rob you in the night when you are coming from night show. Just imagine, if there are no street

lights. Parks, roads, dams, power stations,.... like many services are provided by the

government and it needs money to provide all services. If it won't get sufficient taxes, like any

business it runs into trouble. Then why can't a government print money on its own? This leads

to inflation .

C. Moving Towards a Cashless Economy :

Reducing Indian economy’s dependence on cash is desirable for a variety of reasons. India has

one of the highest cash to gross domestic product ratios in the word, and lubricating economic

activity with paper has costs. According to a 2014 study by Tufts University, The Cost Of Cash

In India, cash operations cost the Reserve Bank of India (RBI) and commercial banks about

Rs21,000 crore annually. Also, a shift away from cash will make it more difficult for tax evaders

to hide their income, a substantial benefit in a country that is fiscally constrained.

D. Countering the nuisance of Counterfeit Currency :

Since India is a cash-based economy with its unorganized sector wholly dependent on cash there

always runs a threat of infusion of counterfeit currency. Hence to curb the circulation of this

counterfeit currency the move of demonetising the currency notes was initiated by the

Government of India .

3. History of Demonetization in India

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Going by the history, Indian governments had demonetized bank notes earlier in January 1946,

when banknotes of Rs 1,000, Rs 5,000, and Rs 10,000 denomination were taken out of

circulation. All three notes were reintroduced in the year 1945.

Then, at the stroke of the hour on midnight of 9 th November 2016, India lost 86% of its monetary

base as Modi Government announced its decision to tender 86% of the 16 trillion Indian rupees

illegal. While IMF and EU welcomed the scheme, few economists, with first hand understanding

of the menaces, like, Dr. Raghuramrajan and Dr. Kaushik Basu did express their reservations on

the demonetization move. On 28 October 2016 the total banknotes in circulation in India was

Rs.17.77 trillion 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 trillion of which nearly 86% were

Rs.500 and Rs.1,000 banknotes. They were taken out of circulation from 2016.

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 Impact of Demontization on Employment in India

The enormously smart move of declaring Rs 1000 and Rs 500 denomination currency notes to curb the

menace of black money, corruption, counterfeit currency and economic terrorism is praiseworthy and far

sighted and bears a host of political and economic benefits in the long run. The immediate effect is that of

utter chaos. 86% of the economy became defunct as an immediate aftermath post announcement at

midnight.

The move has caused rippling effects in many sectors leaving them crippled due to unanticipated

liquidity crunch. The drive impacted both organised and unorganised sectors as well as the overall

economic fabric of the nation .

Before, evaluating the employment impact of the recent move of ‘demonetization’, it is imperative to

summarize the labour market in India. Following the Report on Fifth Annual Employment and

Unemployment Survey (2015-16), a couple of points are worth mentioning. First, among all, very few

households (20 percent) with monthly income less than or equal to Rs. 10,000 have bank account.

Seconds, majority of workers belong to this income group only; 82 percent among self-employed, 60

percent among regular or salaried workers, 87 percent among contract workers, and 96 percent among

casual workers. Third, majority of workers, in all category of employments have no written contract,

65 percent (regular workers), 68 percent (contract workers), 95 percent (casual workers). Fourth,

majority of workers (71.2 percent) receive no social benefits. Fifth, 60 percent of workforce belongs to

just six states, Tamil Nadu, Maharashtra, Andhra Pradesh, Gujarat, Karnataka and Uttar Pradesh.
For quite sometimes, the labour market in India has been witnessing numerous uncertainties including

the problem of world recession, and growing ‘automation’ particularly in the manufacturing sector.

More precisely, in the last one and a half decade, India has emerged a global power in terms of the

development or diffusion of new technology in the form of ICT. ICT intensity, defined as the ratio of

ICT investment to non ICT investment, has increased significantly across industries led to

‘automation’ in most production (and distribution). Its impact on productivity led growth, and direct

employment is well documented. However, its negative employment impact, particularly in the ICT

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using manufacturing sector has largely been ignored. So, in a situation, when the debate, whether the

net employment impact of ICT on the economy as a whole is positive, is still un-conclusive; any major

policy change like ‘demonetization’ is likely to make the employment scenario further volatile by

causing uncertainties to rise in labour market, mainly the informal employment.

The formal and informal sectors that were already grappling with depressed demand and low investment are

now seeing job cuts and hiring freeze. Hiring in FMCG and auto sector witnessed a sharp slowdown. Other

sectors likely to feel backlash of demonetisation are infra, construction and real estate. These three sectors

will see approximately a lakh job cut over the next year.

The unorganised sectors employs a majority of workers and cash being the dominant mode of payment

in this segments, liquidity crunch in such system dynamics can compromise the employment and

livelihood of weaker and low income groups

Impact on Unorganized Sector

Informal employment, which constitute as high as 95 percent of all employment is backed with no (or

least) social security such as health, education or provident fund benefits. Workers are subject to be

fired (or lay-off) at any point of time during the production (or distribution) process. Since majority of

wage payment is made in cash form; they are thus the ones to face misery caused by the recent

announcement of ‘demonetization’. According to Financial Express ,an estimated 4 lakh workers,

largely belonging to this segment were affected by the decision.The effect on employment has been

terrible for the unorganised sector. The impact could go further severe, if cash supply remains

inadequate in the system.

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It is further found that labour intensive units such as food and beverage, tobacco, textile, leather, wood

and jewelry employ nearly half of the total workers in the organized manufacturing sector of the

economy (ASI, 2013-14). Given that nearly 84 percent of total factories have employment in the range

of 0 to 99 are thus prone to be affected by the recent move of the government. Newspaper, electronic

media or social media are flooded with the news on ‘reverse migration’, i.e. lakhs of people are forced

to flee the industrialized state such as Punjab, Haryana, Maharashtra, Gujarat etc., to their place of

origin.
According to a Report by ASI (2010-11), roughly a fifth of the almost 32 million people employed in

the textile and garment sector, are daily wage earners. Hence, any policy change impacting decline in

output growth makes these people be affected more. Further, according to NCEUS, 2009 Report, since

majority of people (78.7 percent) belonging to informal sector are poor, or constituting 90 percent of

casual workers and 75 percent of self-employed people. So, these are the ones who bear the major

burnt of the decision of ‘demonetization’.

A permanent dent has been made to the informal sector by demonetisation. Small businesses are

alreadygetting affected by this decision and facing great inconvenience.

Examples from all over the country:

 A jute mill in west Bengal, Howrah had to close down as management was unable to pay wages to

labourers. All 2,500 of them were rendered jobless.

 Bangle factories of Firozabad, up, have faced similar brunt of the cash crunch with 90 % of the factories

shut down.

 Hundreds have been rendered jobless in diamond and ceramics industry of Gujarat. With 60% ceramic

factories closed down.

 Thousands have lost jobs in tea gardens of west Bengal and Assam.

 The knitwear and hosiery industry of Ludhiana are also winding shops.

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 Impact on Organized Sector
Organised sector is a sector where employment terms are fixed and regular and the employees get

assured work.
Using the principle of employment elasticity (EE), an attempt is made to estimate likely impact

of‘demonetization on employment in the organized manufacturing sector of India.

*pawankumar@ramjas.du.ac.in Over the past half a decade, owing to numerous reasons including ICT

led automation; employment elasticity has declined perceptibly in most industries. Employment

elasticity, by definition, measures percentage change of labour demand (or employment) due to a

percentage change in output level. Numerically, an EE equal to one (say) means – an output growth

rate of 10 percent (say) resulted in a 10 percent growth in employment, and vice versa. In short, it

measures the employment intensity of a unit of output produced. In the past, some sectors like

construction or ICT witnessed unit level of EE. The same principle of EE is used to measure the extent

of employment loss due to an expected demonetization led decline in output growth rate. According to

Economic Survey (2013-14), for the country as a whole, EE rose marginally from 0.16 during 1994-00

to 0.19 during 2000-12 for all sectors, i.e. including both formal and informal. Using the ASI data, it is

found that during 2010-2014, 21 industries in organized manufacturing sector, 14 percent output

growth rate and 3.2 percent rate of employment growth gave a 0.21 level of EE. Two scenarios are

presented, first assuming an extent of decline of 30 percent lower than expected output growth, and the

second with a decline of 20 percent lesser than expected output in the next year 2017-18. Assuming

the same growth rates of output and employment respectively (or the same level of EE) for next three

years (2015- 2017), scenario one will render nearly 1 million workers unemployed; this is expected to

be nearly 6.4 Lakhs in 2017-18 in these industries alone. It is also found that the employment impact

of de-monetization is not uniform across industries. A fact, well-documented, is that the formal sector

has reached its saturation point of employment; it is thus unable to help in additional employment

generation. Qualitatively also, things are not all rosy here, i.e. the percentage of income spent on social

security has steeply gone down over the years. A tendency of quite a high proportion of contractual

workers is found prevalent in most sectors, for instance, remediation activities and other waste
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management services (100%), Waste collection (91.70 %) and Mining and quarrying (83.89 per cent)

and so on (ASI, 200-10). At factory level, 26.42 per cent factories were reported to have employed

contract workers in 2009-10; found to be highest in public sector (35.02 per cent), 39.56 per cent in

Joint Sector and 26.18 per cent in Private Sector (ASI, 2013-14). At the State level, highest is found to

be in in Tripura (67 percent), 58.50 per cent in Bihar, 47.19 per cent factories in Nagaland and 45.06

per cent factories in Dadra & Nagar Haveli. Under Public Sector, the highest is found in Chandigarh

(around 80 percent) followed by Chhattisgarh (70 percent) and Rajasthan (56 percent)

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 Conclusion

The Demonetisation drive has affected both organised and unorganised sectors as well as the overall

economic fabric of the nation. A permanent dent has been made in the informal sector by demonetisation.

Small businesses are already getting affected by this decision and facing great inconvenience. It is those who

are in the low income groups who are the most affected by this decision.

From the above analysis, it can be easily concluded that employment scenario in the country is not

conducive enough to face any challenge such as the ‘demonetization’ of currency. In a country, when

79 percent of non-agricultural wage workers have no written contract and only one fourth are eligible

for any social security, the decision is certainly a cause of concern. India has the world largest youth

population, so for any developing country like India, it is the time to harness the population dividend

by providing them gainful employment. No doubt, impact of ICT on growth and direct employment is

well documented, but its indirect negative employment impact ICT using manufacturing sectors can-

not be ignored. Given this, the decision of ‘demonetization’ will further destabilize the already volatile

labour market in India.

There has doubtless been a lot of negative impact on employment, especially in the unorganized

sector. Crisis of employment opportunities will arise in the near future in India.

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 References

1. Tax Research Team, Demonetisation: Impact on the Economy, National Institute of Public Finance and

Policy, New Delhi. 2016, 182.

2. Deepali Bhargava. India: Assessing impact on GDP from demonetization – a J-curve effect, Asia Pacific

Fixed Income Research Emerging Markets. 2016.

3. Mohul Ghosh. demonetization will trigger 4,00,000 job cuts, wipe out Rs 8 Lakh from real estate. 2016.

Retreived from : http://trak.in/tags/business/2016/11/25/demonetisation-job-cuts-real-estate-losses/

4. Mr. Swapnil Undale1. One month after demonetization, what people say, GE-International Journal of

Management Research, Special Issue, 2016.

5. Sarkar Sukanta. The parallel economy in India: Causes, impacts & government initiatives”. Economic

Journal of Development. 2010; 11-12(1-2):124-134.

6. Veerakumar K. A Study on People Impact on Demonetization, International Journal of Interdisciplinary

Research in Arts and Humanities, 2017; 2(1):9-12.

7. http://www.investopedia.com/terms/d/demonetization.asp

8. http://indianexpress.com/article/opinion/columns/demonet isation-no-money-atm-cashless-poor-

problem-the-street-vendors-view-4381079/

9. http://www.insightsonindia.com/2016/11/16/big-picture-impact-demonetization/

10. http://www.countercurrents.org/2016/11/16/demonetisatio n-and-the-common-people/

11. http://www.firstpost.com/business/demonetisation-impact-will-it-help-the-economy-and-reverse-jobless-

growth-3154532.html

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