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Demonetization and Its Impact On Indian Economy
Demonetization and Its Impact On Indian Economy
INDIAN ECONOMY
GIRNARA MONAR.
ASSISTANT PROFESSOR
MADHURAM, GOPALDHAM,
JUNAGADH-362001
ABSTRACT:
Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization is necessary whenever there is a change of national currency. The old unit of currency
must be retired and replaced with a new currency unit. The opposite of demonetization is
remonetization where a form of payment is restored as legal tender.
Declaration of 86 percent of currency notes as illegal tender in just a blink of time on eve of
8thNovember 2016 mandated the creation of immediate interruption in daily lives. This movement
rendered everyone surprised as this was momentous decision and unexpected one which was declared
without any prior information in the evening at 8:15 p.m. addressed by our honorable Prime Minister
Shri Narendra Modi. This concept of demonetization is not new. This move is targeted for flushing the
stocks of “black money” out of our economy and getting them legitimate, banked and taxable so that it
becomes a part of our economy. On reviewing the microeconomic effects it somewhat proved to be
beneficial: first, the uncollected revenue at various Nagar Nigams increased and second it was also a
political move as it was a surgical strike on terror financing, forged notes circulation can also be
restrained. However on macroeconomic level large number of population is considering this move as
unfair due to the problems faced by them.
Though fast forwarding to 1923, Dr B R Ambedkar, through his book ‘Problems of Indian
Rupee’, recommended changing currency every 10 years to curb inflation and black money.
Following the suit, India’s first demonetization move in 1946 met with a little success with only 6.3%
of high value currency notes being exchanged.
Most recently, Zimbabwe demonetized its currency as economy collapsed & inflation reached
unprecedented heights in 2015, and June 2016 saw Saudi Arabia banning options and derivatives on
riyal’s USD peg.
Just a fortnight back, Venezuela banned 100 Bolivar and the country went in total chaos and
looting. Further, Euro Zone would stop issuing the 500 Euro note post 2018 and will bring 100, 200
Euro banknotes. Australia has proposed to ban AUD 100 to fight black money.
TABLE NO: 1: NAME OF COUNTRIES WHICH IMPLEMENTEDDEMONETIZATION
SR.
NAME OF EFFECT ON
NO YEAR RESULT IMAGE OF CURRENCY
COUNTRY ECONOMY
.
People
support
for black
Made market
1 Ghana 1982
economy weak and
unsuccessful investmen
t in
physical
assets.
Debt-
ridden and
Economy inflation
2 1984
Nigeria collapsed did not
Unsuccessful take
change
well.
Led to
mass
protest
3 Myanma 1987
Unsuccessful resulting
r
in killing
of many
people.
People did
not take
change
4 Soviet 1991 Unsuccessful
positively
Union
due to
poor
harvest.
As the
purpose
5 1996 No side was only
Australia
effects to replace
paper with
plastic.
People
left with
6 North 2010
no food
Korea Weak
and
Unsuccessful
shelter
Face
value one
hundred
Weak
7 2015 trillion
Zimbabwe Unsuccessful
dollars
dropped
to $0.5
dollar.
As the
people have
Dec ample time
Cannot be
8 Pakistan 201 to get their
predicted
6 note
exchanged.
The Indian rupee (INR) is the official currency of the Republic of India. The rupee is subdivided
into 100 paisa (singular paisa), though as of 2011 only 50 paisa coins are tender. The issuance of the
currency is controlled by the India. The Reserve Bank manages currency in India and derives its role in
currency management on the basis of the Reserve Bank of India Act, 1934. The rupee is named after
the silver coin, rupiya, first issued by Sultan Sher Shah Suri in the 16th century and later continued by
the Mughal Empire.
In 2010, a new symbol ‘, was officially adopted. It was derived from the combination of the
Devanagari consonant “र” (ra) and the Latin capital letter “R” without its vertical bar (similar to the R
rotunda). The parallel lines at the top (with white space between them) are said to make an allusion to
the tricolour Indian flag,[6] and also depict an equality sign that symbolizes the nation’s desire to
reduce economic disparity. The first series of coins with the new rupee symbol started in circulation on
8 July 2011.
In a major step to check undeclared black money, the Government of India on the 8 November
2016 announced demonetization of Rs 500 and Rs1000 banknotes with effect from the same day’s
midnight, making these notes invalid. Apart from combating black money, the stated purpose is also to
check fake currency (used to finance terrorism) and corruption. A new redesigned series of Rs500
banknote, in addition to a new denomination of Rs 2000 banknote is in circulation since 10 November
2016.The new redesigned series is also expected to be introduced to the banknote denominations of
Rs1000, Rs100 and Rs50 in the coming months.
A look into the past will make you realize that India is no new to demonetization. Demonetization has
been implemented twice -1946 and 1978 – in the past.
source of image:https://www.ncaacademy.com/know-all-about-history-of-indian-currency-
demonetisation/#prettyPhoto,http://northbridgetimes.com/wp-content/uploads/2016/11/new-500-
1000_3073457f.jpg
HISTORICAL BACKGROUNDS OF DEMONETIZATION IN INDIA:
The sudden move to demonetize Rs 500 and Rs 1,000 currency notes is not new. Rs 1,000 and
higher denomination notes were first demonetized in January 1946 and again in 1978.
The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000
note in 1938 and again in 1954. But these notes were demonetized in January 1946 and again in
January 1978, according to RBI data. Rs 1,000 and Rs 10,000 bank notes were in circulation
prior to January 1946.
Higher denomination banknotes of Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954
and all of them were demonetized in January 1978. The Rs 1,000 note made a comeback in
November 2000. Rs 500 note came into circulation in October 1987.
The move was then justified as attempt to contain the volume of banknotes in circulation due to
inflation .However, this is the first time that Rs 2,000 currency note is being introduced.
While announcing currently circulated Rs 500 and Rs 1,000 notes as invalid from midnight 8
Nov, Prime Minister NarendraModi said new Rs 500 note and a Rs. 2,000 denomination
banknote will be introduced from November 10.
Bank notes in Ashoka Pillar watermark series in Rs 10 denomination were issued between 1967
and 1992, Rs 20 in 1972 and 1975, Rs 50 in 1975 and 1981 and Rs 100 between 1967-1979.
The banknotes issued during this period contained the symbols representing science and
technology, progress and orientation to Indian art forms.
In the year 1980, the legend Satyameva Jayate — ‘truth alone shall prevail’ — was incorporated
under the national emblem for the first time.
In October 1987, Rs 500 banknote was introduced with the portrait of Mahatma Gandhi and
Ashoka Pillar watermark. Mahatma Gandhi (MG) series banknotes – 1996 were issued in the
denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (August
2001), Rs 50 (March 1997), Rs 100 (June 1996), Rs 500 (October 1997) and Rs 1,000
(November 2000).
The Mahatma Gandhi Series – 2005 bank notes were issued in the denomination of Rs 10, Rs
20, Rs 50, Rs 100, Rs 500 and Rs 1,000 and contained some additional/new security features as
compared to the 1996 MG series.
The Rs 50 and Rs 100 banknotes were issued in August 2005, followed by Rs 500 and Rs 1,000
denominations in October 2005 and Rs 10 and Rs 20 in April 2006 and August 2006,
respectively
LITERATURE REVIEW:
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. 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.
The current financial crisis is a great opportunity to teach peace. Wars may be about land, or energy,
or power, but they require vast expenditures of money. Americans are beginning to see the Teach Peace
bailout grand theft warning is accurate. A JP Morgan Chase executive has confirmed the bailout funds
are not to help homeowners but to consolidate power in anticipation of what could become a
depression. The banks listed below are using taxpayer funds to buy smaller banks. People are
increasingly waking up to see what the Federal Reserve is and who it really serves. The opportunity we
now have is one that can unite all Americans and benefit everyone who cares about our country.
Financial Crisis, Demonetization, European Monetary UnionDemonetization is the act of stripping a
currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of
national currency. The old unit of currency must be retired and replaced with a new currency unit. This
article has five parts. The first part includes definitions needed to understand the financial crisis. Next
are specific warnings that summarize key themes in the article. The third part explains why we are on
the path to devaluation and demonetization. The fourth is an explanation of the Federal Reserve. The
fifth identifies specific actions to solve current problems and prevent even bigger ones. Recent example
of demonetization occurred when the nations of the European Monetary Union adopted the euro. In
order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into
euros. When the euro was introduced, the old national currencies were demonetized. However, the old
currencies.
3. SandeepKaur“DEMONETIZATION AND ITS IMPACTS IN INDIA” International
Journal Of Research,ISSN online 2348-6848:
Declaration of 86 percent of currency notes as illegal tender in just a blink of time on eve of 8th
November 2016 mandated the creation of immediate interruption in daily lives. The chaos was created
in every strata of the society whether upper, middle or lower. Where some welcomed the move as it
was seen for curbing black money, many are suffering by this movement. But the supreme sufferers of
this move were the informal sector of Indian economy, where cashless transactions are minimal.
Informal sectors of Indian Economy includes 106 activities like agriculture, workers in construction,
local transport, community services and small workshops like shoe makes and garment
makers(International Conference of Labour Statistics (2003), rural populations and the urban poor and
middle class. This paper aimed at reviewing the general implications of demonetization on rural people.
Without adequate and proper planning; the demonetization-driven cash crunch has rendered Indian
economy paralyzed for short duration as the informal sector which comprises of 40 percent share in
GDP has become unviable
Demonetization is an economic term which is used to mean the 'scrapping' of old currency notes and
stripping them off their status of legal tender, usually when a new currency note or currency is being
introduced in the economy of the country. This is a standard practice followed by all major economies
of the world for different reasons. For instance, when the 'Euro' was introduced as the common
currency of the European Union, the participating countries had effectively followed a 'demonetization'
drive of their respective currencies by fixing exchange rates for the old currency to the newly
introduced Euro. Indian Rupee has been demonetized various times as well. The Rs. 10,000 notes were
demonetized once in January 1946 and then again in January 1978. Recently, the Rs. 500 and Rs. 1000
notes were demonetized in a surprise move on November 8, 2016. The recent scrapping of Indian 500
and 1000 rupee currency notes has sent the entire country in a whirlpool of confusion. The country may
be happy about the initiative or upset with the move, but the word 'demonetization' has recently become
the trend. We bring to you the basic understanding of what the word means, when and how the
demonetization of Indian Currency was brought into effect and why it is good or bad,
RESEARCH METHODOLOGY:
1. Objective of study:
2. Research design:
There are three type of research design: exploratory research design, descriptive research design
and causal research design. In this study, I have used exploratory research design to know the
effect of demonetization on Indian economy.
ANALYSIS
After demonetization of Indian currency on 08 NOV 2016, rupee has become weaker than currency
of 96 countries or economies. Out of 161 countries’ currency, rupee has become stronger than 60
currencies and is at same exchange rate with 5 currencies.
If we take data for past 6 months before demonetization from 08 may 2016 to 08 nov 2016, rupee has
became stronger than 125 currencies. But after 26 days of ban on Rs 500 and Rs 1000 notes, rupee has
became stronger than only 47 currencies.
Rupee has become weaker by 2.66% against US Dollar ($) from 66.40 to 68.17 INR per unit US Dollar.
Rupee has become weaker against some popular currencies like British Pound, Canadian Dollar and
Hong Kong Dollar too. But also became stronger than Euro, Australian Dollar, Swiss Franc, Singapore
Dollar and Japanese Yen.Indian rupee (INR) became weaker than currencies of other south asian
nations Pakistani Rupee, Sri Lankan Rupee, Bangladeshi Taka and Nepalese Rupee.
Source:http://statisticstimes.com/economy/indian-rupee-after-demonetization.php
Source:http://statisticstimes.com/economy/indian-rupee-after-demonetization.php
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 small-sized 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.
Source:http://www.livemint.com/Money/WZMX0fj5YQKOU4l6P0J44I/Demonetization-of-rupee-has-
hit-the-Indian-markets.html
IMPACT OF DEMONETIZATION ON INDIAN ECONOMY:
3) Effect on Demand
The overall demand is expected to be affected to an extent. The demand in following areas is to be
impacted particularly:
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.
4) Effect on Prices
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).
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
CARE rating report “Economic consequences of demonetization of 500 and 1000 Rupee Notes”
November 9 , 2016.
Roughly 1.2 crore more Indians started using digital wallets in a single week. The reach of mobile
payments increased by 6% in the week of the announcement as compared to the previous week, to peak
at the highest ever reach of 70%. Usage frequency also surged by 15%.
There are some 20 to 30 mobile payment / e-wallet companies in India the enrollment to them has
leapfrogged post demonetization. The following are some of the numbers
(7)Effect on farmers:
The demonetization has been introduced during the Rabi sowing season, which would severely impede
the farmers ability to buy seeds and plant hence would affect the food production. The appended table
presents the data on Rabi sowing season which indicates the area has actually increased by about 9% in
this season.Sowing season could not have registered any increase had there been any strain in the
commercial transactions at rural levels
(8)Effect on food sector:
Foods witnessed the highest increase in growth during the demonetization week at 19% vs. year-ago.
Within the food basket, packaged grocery and cooking medium saw a big upswing. Tea, packaged Atta
and rice, baby food, milk food and non-refined oil also contributed to the growth.
Impulse categories (biscuits, chocolates, salty snacks and confectionery) also grew, but at a
much slower pace. Soft drinks’ slowed down significantly; however, the onset of winter could also be
contributing to this slowdown.
Volume growth patterns in foods indicated a shift to bulk packs. Much of this could be driven
by retailer private labels or the ongoing offers in the demonetization week.
Non-food sales grew as well, driven by personal care (17% in demonetization week vs. a 4.8%
growth year-till-date before demonetization). All non-food categories including essentials like detergent
powders and cakes, toothpaste, shampoo etc., saw a healthy double-digit growth (despite
demonetization falling right after the monthly shopping period).
Food categories received a mixed response with certain categories having witnessed
positive tailwinds while other categories saw a dip in demand from retailers. Impulse food witnessed
the steepest decline in demand, while cooking oil and packaged grocery saw an exorbitant demand from
retailers on the back of the belief that consumers would prefer to stock up on essentials in wake of the
cash crunch.
Source: Reserve
Bank of India;
The above table represents the fake currency detected and reported in the system during the last
financial year, a point to be noted is that just three banks Axis, ICICI and HDFC reported 80% of such
counterfeit notes, which implies that such notes are not detected fully in other banks. A data from
Indiaspend reports that the only 6 out of every 250 fake currency is reported. Going by that percentage
the estimated fake currency that would have been eliminated would be Rs 1.2 trillion.
Adding it up with anticipated 3.6 trillion black money, the total counterfeit and black money that would
have been eliminated would be Rs 4.7 trillion.
(10) Effect on Gross Domestic Product:
Demonetization will have a "very significant adverse effect" on the country's GDP . it has been highly
critical of demonetization decision and has predicted a 2% drop in the country's GDP due to it. Finance
minister Arun Jaitley, responding to a question at a press conference on Wednesday, ruled out any
short-term impact of demonetization on growth, holding that it will rather benefit growth in the long run
because “all this will impact the size of the GDP itself because more transaction that were happening
outside the (formal) economy will get into the economy itself”.
CONCLUSION
RBI has and might have adequately replaced up to 75% of demonetized value with the new 500
and 1000 notes within the two months it might have had. People of India are very much adaptive and is
evident from the massive support for the move and quick change to e-wallets Even in the first week of
demonetization some sectors of the economy have shown growth while some other sectors such as
impulsive purchase sector (biscuits, soft drink etc.,) have shown decline. Farmers and Rabi sowing do
not seem to have been affected, reflected by the increase in sowing area. Currently Indian economy is
taking ‘V’ shape after the effect of demonetization. After demonetization, digital payment is increasing
one. All peoples are trying to adopt digital payment. Black money has reduced in Indian economy.
Corruption has reduced in India. Deposit in the bank, short term may rise, but in the long term, its effect
will come down. Due to demonetization , gross domestic product of India will be decline.
BIBLIOGRAPHY
http://www.careratings.com/upload/NewsFiles/SplAnalysis/Effects%20of
%20Demonetization%20of%20500%20and%201000%20notes.pdf
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http://www.livemint.com/Money/WZMX0fj5YQKOU4l6P0J44I/Demonetization-of-rupee-
has-hit-the-Indian-markets.html
http://www.investopedia.com/terms/d/demonetization.asp#ixzz4XUuBxoQJ
http://www.dnaindia.com/money/report-demonetization-from-history-to-geography-2285269
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