Introduction

In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two
biggest denominations in its currency system; these notes accounted for 86% of the countrys
circulating cash. With little warning, India's Prime Minister Narendra Modi announced to the
citizenry on Nov. 8 that those notes were worthless, effective immediately and they had until
the end of the year to deposit or exchange them for newly introduced 2000 rupee and 500 rupee
bills.

Chaos ensued in the cash-dependent economy (some 78% of all Indian customer transactions are
in cash), as long, snaking lines formed outside ATMs and banks, which had to shut down for a
day. The new rupee notes have different specifications, including size and thickness, requiring
re-calibration of ATMs: only 60% of the countrys 200,000 ATMs were operational. Even those
dispensing bills of lower denominations faced shortages. The governments restriction on daily
withdrawal amounts added to the misery, though a waiver on transaction fees did help a bit.

Objective

The only means of exchange of old notes is through banks. That too there was a limit ranging
from Rs.2, 000/- Rs to Rs.4, 000/- per day depending on current liquidity situation. Any amount
higher needs to be deposited in the bank which can later be withdrawn from ATMs again with
the same limit. The main aim behind the limit was to make sure that black money holders would
not be able to exchange all the un- accounted money without paying necessary tax (under PM
Krishi Kalyan Yojana announced later). Even if we consider 30% of cash in circulation as black
money and even if half of it does not come back to banks, government expected to get a fiscal
push of approximately 2 lakh crores which can be used for various welfare projects over a period
of time.

Problems demonetization created are

1. The worst hit are those who are not on plastic money and have to take care of urgent
medical expenditure.
2. Traders, taxi operators and the tourism sector have been hit hard. Horticulturists from
Himachal were suffering as their produce was not been sold in fruit and vegetable
markets.Textile industry,
3. The people having marriages in their families have been allowed cash withdrawal of
Rs 2.5 lakh. Even for that amount a lot of riders have been added. Many are not getting
2.5 lakhs due to shortage of currency.
4. Pensioners are going through a harrowing time and long ques have taken many lives
already. Even senior citizens whose pension is directly linked to bank accounts are
facing hassles.
5. Private hospitals and chemists are not accepting old notes nor extending credit. The Rs
4,000 limit that has been imposed on withdrawals from banks mean it is a hand-to-
mouth existence for many who are already in trouble.
6. Manual laborers and daily wage workers are unemployed as their employer lacks
money to pay them in cash(online is not sufficiant).
7. Near panic in local markets. Number of transactions drop.
8. The people in rural areas and the farmers are also facing a great deal of hardship. Many
of them do not have bank accounts or own a debit/credit card. The concept of internet
banking is far removed for them. These people may be induced to rise in revolt.
Already the case of looting of a fair price shop by the public in Madhya Pradesh has
been reported.
9. Deep Deflation. The amount of money in circulation will drop dramatically while
supply of goods will remain stable - hence prices of goods will drop. Gold prices, stock
prices, commodity prices will drop.
10. The public is inconvenienced because they dont have the cash with which to buy daily
necessities.
11. Foreign tourists who have withdrawn money after landing in India are among the worst
hit. Instead of enjoying the sights and sounds of India, they are scampering around in
an alien land, trying to secure legal currency. Incredible India indeed. The negative
feedback to the tourist industry which will affect its reputation.
Conclusion

On November 8,Prime minister of India Narendra Modi took a historic decision by announcing

that the high-denomination notes (Rs 500 and Rs 1,000) then in circulation would cease to be
legal tender.

Before talking about the impact of demonetization whether its positive or negative lets talk about
objectives of demonetization

1. primary objective of demonetization is to curtail the shadow economy by counterfeiting

that is being used to fund illegal activity and terrorism.

2. And the second objective digitization of Indian economy

so the objective got achieved ?

As per the facts nearly 90% of the total cash in circulation has come back into the banking

system and hence, the stated purpose of the Demonetization exercise which was to extinguish
black money has accomplished,but that is just one side of it.

lets have a look on impacts of demonetization on Indian economy

Positives

A good part of black money is eliminated from the economy and this money can be used

for development of economy

With increased transparency, trust on Indian Economy is increased. Thereby foreign

investments poured in.

Demonetization move encouraged cashless transactions, which is a boost to Economy

Negative
 GDP growth was earlier estimated as 7.8%. Post-demonetization, estimates are lowered

to 7.1%.

Agriculture sector, small and medium scale businesses and informal sectors are the worst
hit by demonetization

Even though demonetization move created adverse short-term policy impact the real impact of

demonetization must be assessed in the medium/long term,at this point of juncture we cannot
precisely conclude whether demonetization is a failure or a success.

The Reserve Bank of India (RBI), after months of counting and accounting,
finally revealed on Wednesday the quantum of the withdrawn Rs 500 and Rs
1,000 currency notes that returned to the banking system post
demonetisation. "Subject to future corrections, based on the verification
process when completed, the estimated value of the SBNs (specified bank
notes) received as on June 30, 2017 is Rs 15.28 trillion," the central bank
revealed in its annual report. Considering that the value of the withdrawn
notes in circulation at the time of demonetisation was Rs 15.44 trillion, it
became clear that 98.96 percent of notes had found their way back into the
banking system. At least the initial expectation was that a 'few lakh crore of
notes' comprising the unaccounted money would stay out of the system which
would show the exercise of demonetisation as a success.

Those opposed to demonetisation have been attacking the government after

the data was published numbers and a few have even demanded an apology
from Prime Minister Narendra Modi for this 'anti-national act'. "Lives &
livelihoods were lost, the economy got a shock, workers lost their jobs. India
can never forgive Modi government for this anti-national act," CPI(M) General
Secretary Sitaram Yechury said.
RBI took some flak too. Former finance minister P Chidambaram questioned
whether demonetisation was a scheme designed to convert black money into
white. "99 percent notes legally exchanged! Was demonetisation a scheme
designed to convert black money into white? Rs 16,000 cr out of demonetised
notes of Rs 1544000 cr did not come back to RBI. That is 1 percent. Shame on
RBI which recommended demonetisation," Chidambaram tweeted.

Does the return of almost all the notes mean failure of demonetisation? It
appears so, if one goes by how government portrayed demonetisation initially.
It saw it as a fight against black money and there were indications that a lot of
the notes will not return as they are unaccounted cash and that would create a
windfall for the RBI and the government. Opposition is holding the
government to task on this argument.

What the government did not anticipate at that time was that those sitting on
unaccounted cash would find ingenious way to convert the cash or simply
deposit the money and pay the price. Or the government simply over-
estimated the extent black money held as cash in the system.

The government had subsequently articulated the benefits of demonetisation

to include fighting counterfeit currency, digitisation of the economy, widening
the tax base, formalisation of the cash economy and thereby leading to higher
tax revenues and possible lower tax rates.

Politics apart, it is still a bit too early to estimate the effect of demonetisation.
Tax base appears to be widening (we need more consistent data to prove it),
cash component in the economy has declined but is still high compared to
other similar sized economies and size of the formal economy will increase
now that GST has been introduced. Last word is not out yet on
demonetisation.