INDEX

SR NO TITLE PAGE NO
1 Meaning 1
2 Places where demonetisation took place 1
3 Demonetisation in India 2
4 Background of demonetisation 2
5 Demonetisation process 3
 DEMONETISATION
MEANING:
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.

PLACES WHERE DEMONETISATION WORKED:

Australia – 1996

United Kingdom – 1971

European Union – 2002

Zimbabwe – 2015

Pakistan – 2016

PLACES WHERE DEMONETISATION FAILED:

Ghana – 1982

Nigeria – 1984

Myanmar – 1987

Soviet Union – 1991

North Korea – 2010

DEMONETISATION IN INDIA:

INTRODUCTION:
In November 2016, the Government of India announced the demonetization of all
₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the
issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised
banknotes. The Prime minister of India Narendra Modi claimed that the action
would curtail the shadow economy and reduce the use of illicit and counterfeit cash
to fund illegal activity and terrorism.

The announcement of demonetisation was followed by prolonged cash shortages in

the weeks that followed, which created significant disruption throughout the
economy. People seeking to exchange their banknotes had to stand in lengthy
queues, and several deaths were linked to the rush to exchange cash.

BACKGROUND OF DEMONETISATION:
The Indian government had demonetised banknotes on two prior occasions—once
in 1946 and once in 1978—and in both cases, the goal was to combat tax evasion
via "black money" held outside the formal economic system. In 1978, the Janata
Party coalition government demonetised banknotes of ₹1,000, ₹5,000 and ₹10,000,
again in the hopes of curbing counterfeit money and black money.

In 2012, the Central Board of Direct Taxes recommended against demonetisation,

saying in a report that "demonetisation may not be a solution for tackling black
money or shadow economy, which is largely held in the form of benami properties
bullion and jewelry.” According to data from income tax probes, black money
holders kept only 6% or less of their wealth as cash, suggesting that targeting this
cash would not be a successful strategy.

DEMONETISATION PROCESS:
 PREPARATION AND ANNOUNCEMENT: The plan to demonetise the
₹500 and ₹1,000 banknotes was initiated between six and ten months before
it was announced, and was kept confidential. In April 2016, a report by the
State Bank of India analysed possible strategies and effects of
demonetisation. In May 2016, the Reserve Bank of India had started
preparing for new banknotes and confirmed the design of ₹2,000 banknotes
in August 2016. The Union cabinet was informed about the plan on 8
November 2016 in a meeting in the evening called by the Indian Prime
Minister Narendra Modi. Soon after the meeting, Modi announced the
demonetisation in an unscheduled live national televised address at 20:15
IST. He declared circulation of all ₹500 and ₹1,000 banknotes of the
Mahatma Gandhi Series as invalid effective from the midnight of the same
day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the
Mahatma Gandhi New Series in exchange for the demonetised banknotes.

 INFORMATION LEAKS: Prominent businessmen stated after the

announcement of demonetisation that they had received prior warning of the
move, allowing them to convert their money into smaller denominations.[37]
A BJP MLA from Rajasthan, Bhawani Singh Rajawat, claimed in a video
that wealthy businessmen were informed about the demonetisation before it
occurred. He later denied making the comments.
 CASH EXCHANGE AND WITHDRAWAL: The Reserve Bank of India
stipulated that the demonetised banknotes could be deposited with banks
over a period of fifty days until 30 December 2016. The banknotes could
also be exchanged for legal tender over the counter at all banks. The limit for
such exchange was ₹4,000 per person from 8 to 13 November, was
increased to ₹4,500 from 14 to 17 November, and reduced to ₹2,000 from 18
to 25 November.

Cash withdrawals from bank accounts were restricted to ₹10,000 per day
and ₹20,000 per week per account from 10 to 13 November. This limit was
increased to ₹24,000 per week from 14 November 2016. RBI increased the
withdrawal limit from Savings Bank account to ₹50,000 from the earlier
₹24,000 on 20 February 2017 and then on 13 March 2017, it removed all
withdrawal limits from savings bank accounts.

A daily limit on withdrawals from ATMs was also imposed varying from
₹2,000 per day until 14 November and ₹2,500 per day until 31 December.
This limit was increased to ₹4,500 per day from 1 January and again to
₹10,000 from 16 January 2017. From 17 November, families were allowed
to withdraw ₹250,000 for wedding expenses. Farmers were permitted to
withdraw ₹25,000 per week against crop loans.

 ORDINANCE AND ACT: The Specified Bank Notes (Cessation of

Liabilities) Ordinance, 2016 was issued on 28 December 2016, ending the
liability of the government for the demonetised banknotes. The ordinance
also imposed fines on people found carrying out transactions with them after
8 November 2016, or holding more than ten of them after 30 December
2016. It provided for the exchange of the banknotes after 30 December for
people who had been outside India between 9 November and 30 December.
The Specified Bank Notes (Cessation of Liabilities) Act, 2017 was notified
on 1 March 2017, replacing the ordinance.
OBJECTIVES:
 Removing Black Money from Country: Modiji has done a really good
work, as people who are having Black Money will now be left with nothing
particularly. All the cash which resides below the pillow, will now be
Useless (Although Small Amount of Black Money can be converted into
white, but amount in Hundreds of Crore of Rupees is almost next to
impossible to make it white)

 Stopping of Corruption: By removing the currency notes from Circulation,

It will have a direct impact on corruption. People who have this notes will
now be left with nothing.

 Stopping Terror Funds: Because of Demonetisation, the people or

organisations who used to fund terror groups will be now sitting without any
works, they will naturally die and that too with starvation.

 Curbing Fake Notes: Demonetisation will also stop the Circulation of Fake
Notes in the Economy (Although the amount of fake notes revolving in the
Economy was around 400 Crores).

 Stopping Illegal Dabba Trading: Due to Demonetisation, the Illegal share

trading and Dabba Trading will cease to exist. This will ensure stability in
share markets, especially at these 'Times f Turbulence'.

 The Uttar-Pradesh Elections: It is generally seen that, there is ample

liquidity in the States, where elections are to happen, this thing is considered
as Vote Bank and Politicians buy Votes of People by Offering them money,
if they vote for them. Now because of Demonetisation, Vote Bank System
will not be in existence (The proof here is currency notes, which were found
from River Ganga). As an ultimate result, we would see transparent
elections.
  The Betting on U.S. Presidential Election Results: It seems that Modiji is
well aware of the fact that Indians are a master in betting at anything like
Pro! Because of his address to nation at 8:00 PM, there will be no betting
done on The US Presidential Election Results, or atleast it’s Quantum would
be less than, what it should be have earlier.

 To Send A Clear Message That This Government Is Well Inclined

Towards Working For The Development Of Nation: Because of his bold
step, it will send a clear message that this Government is well inclined
towards Development of Nation. It will also send a message to the
International Community, that the Government is doing constant efforts to
Make India a better place to invest and a better place to do business.

MERITS:
 The menace of black money can be controlled to some extent.
 Terror financing, using black money for illegal activities etc will all take a
hit.
 The counterfeit currencies which have an impact on the real economy, will
be rooted out.
 The mobilization of
deposits in the banks
will increase, which
may lead to increased
credit flow and lowering
of lending rates.
 The black money adds
to the inconspicuous
demand and hence the
inflation to some extent
will be under control.
 The government is also aiming to raise its revenue collection (eg- by taxing
exorbitant IT rates over certain deposits, the tax collection in other forms
will also increase etc).
  The real estate is one of the major sources of black money generation. With
this move it is expected that the property market rates may bottom out or
moderate.
 It’s a major step by the government towards forming a cashless economy.
 The honest workers will be rewarded under such scenario.
 The elections are usually associated with black money generation and
circulation, with this scheme the funding of elections through nefarious ways
will be hit.
 It is expected that with this move the Fiscal Deficit of the government may
come down.

DEMERITS:
 For one all the black money is not stored in the form of cash only and
secondly the measure takes care of result but not the cause-black money is
generated mainly because of corruption and tax evasion. This measure
controls the usage of black money but cannot control the causes.
 Sudden and huge demand for the new currencies.
 Panic amongst the common man (already we have seen the case wherein
people have looted fair price shop in MP, Cash Carrying companies seeking
higher insurance etc).
already the panic has led to
people hoarding currencies
which has further reduced
the liquidity in the market.
 The small
trade/shopkeepers are facing
difficulties.
 Black marketing of the new
notes/currencies is on the
rise.
 The establishments such as banks, hospitals etc are under lot of stress.
 Another area which is a cause of worry is the likely drop in the rural demand
as the cash usage will become restricted. Apart from this the experts are also
 expecting an impact on SME sector, agricultural production (the economy
was expected to perform well as there was an expectation of a good rabi
crop after two bad monsoons but a prominent economist, Pronab Sen has
said that demonetization is akin to third bad monsoon year as it will have an
impact on agricultural production, but the more dangerous situation is this
having a spillover effect on to fertilizer, tractor sectors).

CHALLENGES:
 The coverage of the banking sector-
 Only 27% of the villages have a bank within 5 Kms (as per
Economic Survey 2015-16)
 In spite of recording breaking implementation of JDY, the
banking penetration is low-on an average 46% in all the states (as
per Economic Survey 2015-16).
 Another challenge in implementing and eradicating black money would
be presence of informal economy. It accounts for 45% of GDP and 80%
of employment hence this move may have a greater impact on informal
economy.
 Logistics and cost challenges of replacing all the Rs 500 and Rs 1000
notes – as per the RBI documents this measure would cost at least Rs
12000 crore as it has to replace over 2300 crore pieces of these
currencies.
 The decision to issue Rs 2000 denomination currency and withdrawal of
Rs 500 and Rs 1000 currency will lead to huge challenge as most of the
day to day transactions in India are centered around Rs 500 note (more
than 47% of the value of notes in circulation is in Rs 500 note form).
 The availability of Rs 500 and Rs 1000 notes will be the biggest
challenge as both of them covered over 85% in terms of value of total
currencies issued.
 The process has led to huge rush and long queues of the people in front
of ATMs and as per the statement of finance minister the ATM
recalibration would take around 2 to 3 weeks.
 As per data furnished by the Finance Ministry, Rs 17,50,000 crore worth
of currency notes were in circulation in October-end, out of which over
 85% per cent or Rs 14,50,000 crore is in the now defunct Rs 500 and Rs
1,000 notes. So far for the first four days the government has been able to
pump in Rs 50000 cr (on an average 12500 Cr). Going by these numbers
it would take around 4 months to replace these notes as against the 50
days promised by the PM.

EVASIONS:
After demonetisation, these evasion attempts people tried to 'fix' their black
money:

 Gold purchases: From

9th November onwards,
in Gujarat, Delhi and
many other major cities,
sale of gold increased
with a hiked, reportedly,
20 to 30% premium,
surging the price as
much as Rs 45,000 from
the ruling price of Rs 31,900 per 10 grams.

 Multiple bank transactions: As per some reports, people

circumvented the restrictions imposed on exchange transactions, they
attempted to convert black money into white by making multiple
transactions at different bank branches. Reportedly, people were also
getting rid of large amounts of banned currency by sending people in
groups to exchange their money at different banks. The government,
in response, announced that it would start marking customers with
indelible ink. On 17 November, the Government of India reduced the
exchange amount to Rs 2,000 to discourage attempts to convert black
money into white.

 Donations: At Vellore, authorities of Sri Jalakanteswarar temple

discovered cash worth Rs 4.4 million from the temple Hundi.
 Railway bookings: As soon as the notes ban was announced on 8th
November, it was noticed by the Indian Railways that a large number
of people started booking tickets particularly in classes 1A and 2A for
the longest possible distance, to get rid of unaccounted cash.
Reportedly, on November 9, 27,237 passengers had booked tickets in
1A and 69,950 in 2A. On November 13, in a sharp dip, their number
were only 1,209 in 1A and 16,999 for 2A. Responding swiftly, the
Railways Ministry and the Railway Board decided that cancellation
and refund of tickets of value ₹10,000 and above will not be allowed
by any means involving cash.

 Municipal and local tax payments: As the use of the demonetised

notes had been allowed by the central government for the payment of
municipal and local body taxes, it led to people using the demonetised
Rs 500 and Rs 1,000 notes to pay large amounts of outstanding and
advance taxes. Revenue collections, as a result, of the local civic
bodies jumped. Within 4 days, the Greater Hyderabad Municipal
Corporation reported collecting about Rs 1.6 billion in cash payments
of outstanding and advance taxes.

 Backdated accounting: The Enforcement Directorate (ED) raided

several forex establishments making backdated entries. Money
laundering using backdated accounting was carried out by not only
co-operative banks, but jewellers, sellers of iPhones, and several other
businesses.
IMPACT OF DEMONETISATION ON INDIAN
ECONOMY:
 On Gross Domestic
Product (GDP): The Indian
economy is a cash-driven
economy and
demonetisation has largely
affected its growth. The
GDP growth rate of 8.01%
in 2015-2016 fell to 7.11%
in 2016-2017 after
demonetisation. This was largely due to less availability of cash in
cash-intensive industries like manufacturing and construction. It has
also adversely impacted the primary function of banks to issue loans
and has put pressure on them as current account holders demand0
large sums of cash.

 On Daily Wage Workers: A major portion of the Indian workforce is

a part of the informal economy. They use cash to meet all their
expenses and demonetisation has resulted in a lot of them losing their
jobs due to unavailability of cash. According to CMIE’s Consumer
Pyramids Household Surveys (CPHS), approximately 1.5 million jobs
were lost during the final quarter of the financial year 2016-17. The
estimated employment during this period was 405 million as
compared to 406.5 million during the previous four months.

 On Small Scale Industries: Businesses like the textile industry,

salons, restaurants, and seasonal businesses are low capital enterprises
and work on the basis of liquidity preference. Demonetisation gravely
impacted their revenue collection and threatened their existence to an
extent.
 On Black Money: Though only a small portion of black money is
stored in the form of cash and majority is in the form of physical
assets like gold, land, and building, demonetisation of the rupee 500
and 1000 notes might take out a lot of black money from the
economy.

 On the General Economic Situation: Till months after

demonetisation the general economic situation was disturbed. The
public had to queue up outside banks to exchange their old currency
for new ones. Households lacked liquidity and could not do
transactions for daily items. Small shopkeepers who only accepted
cash went into losses and some even shut down.

 On Inflation: The Reserve Bank of India (RBI) considers the

Wholesale price index (WPI) and the Consumer Price Index (CPI) to
measure inflation. Demonetisation is expected to reduce inflation as
consumers have cut down on spending and aggregate demand has
considerably fallen. According to government press releases, the
official WPI for ‘All Commodities’ (Base: 2004-05=100) for the
month of December, 2016 declined by 0.2 percent to 182.8
(provisional) from 183.1 (provisional) for the previous month. The
index started rising during the month of January and rose by 1.0
percent to 184.6 (provisional) from 182.8 (provisional) for the
previous month. This may be correlated with the availability of cash
with people which led to increased spending.

 On Terror Funding: Demonetisation was aimed as a clean-up of the

economy where Fake Indian Currency Notes (FICN) would be
checked. It is aimed at rendering all fake notes of rupees 500 and 1000
useless and thus drastically affecting illegal funding of terror groups
in Jammu and Kashmir, states in the North-East, and Naxalism-
influenced states.
  On Political Parties: Many Political Parties use large amounts of
undeclared cash to campaign for elections and meet other
requirements. Due to Demonetisation such acts might get restricted to
an extent and parties will have to formulate new strategies.

 Towards a Digital Economy: Absence of liquid cash has led to

people making transactions using cheques or account transfers. They
have also switched to virtual wallets like Paytm which allows
electronic transfer of money. All this might result in a digital economy
where transactions are being recorded and the economy has more
white money. This might increase the government’s tax revenue.

CONCLUSION:
Demonetisation has been praised as well as criticised on various grounds. There
has been a lot of opposition regarding the implementation of this policy. In the
short run, there have been problems related to liquidity crunch, unemployment,
loss of growth momentum, and a temporary halt to major economic activities. All
this is evident from the data provided by the RBI.

The long term effects of Demonetisation are yet to be ascertained. It is expected

that it can improve the Indian economy in the long run by increasing tax
compliance, financial inclusion, consequently improving the state of the economy.
It can boost the GDP by increasing the availability of funds for lending and also by
reducing transaction costs if the economy moves to digital modes of payments.