Demonetisation on Indian economy. its positive and negative impact on the economy.

1. DEMONITISATION AND ITS
EFFECT ON INDIAN ECONOMY

2. Presented by-
Arijeet Dutta
MBACORE015032

3. What is Demonetization
• Demonetization is the act of stripping a currency unit of its status as legal
tender
• The opposite of demonetization is remonetization where a form of payment is
restored as legal tender.
• Demonetization for us means that Reserve Bank of India has withdrawn the
old Rs 500 and Rs 1000 notes as a official mode of payment

4. Introduction
• The Indian government launce a surgical attack on November 8, 2016 against
black money in the economy.
• Prime Minister of India Mr. Narendra Modi, in an unscheduled live televised
address to the nation on November 8, 2016 declared circulation of all INR 500
and INR 1000 bank notes are void with immediate effect.
• Issuance of new currencies of value INR 500 and INR 2000 in exchange of old
void currencies.

5. History of Demonetisation in Indian
economy
It is not the first time that the government launched demonetisation,
Historically previous Indian governments had demonetized bank notes. In
January 1946, Banknotes of 1,000 and 10,000 rupees were withdrawn and
new notes of 1,000, 5,000 and 10,000 rupees were introduced in 1954. The
Janata Party coalition government had again demonetized banknotes of 1,000,
5,000 and 10,000 rupees on 16 January 1978 as a means of curbing black
money.

6. • Demonetization has been embraced in the past by several other countries. They
include:
• Some of the countries have met the purposes and whereas have failed
Country Year Currency value
Nigeria 1984 100 Niaira
Ghana 1982 50 cedis
Zimbabwe 2010 $100 000 000 000 000
Soviet Union 1991 50 and 100 ruble
Australia 1996 Full series of polymer
bank notes
• In 1996, Australia became the first country to have a full series of
circulating polymer bank notes after replacing all paper-based notes

7. Current Situation
We can’t compare with the previous demonization with current one.
Latest round of demonetization, the common public and bankers are undoubtedly
facing hardship since more than 85 percent of currency in circulation has been
rendered illegal in one single stroke. Demonetization is surely hampering the
current economy and will continue to do so in the near term and will also impact
India’s growth but will have positive long lasting effects.

8. Need for demonetization
• High denomination notes are known to facilitate generation/ circulation of
black money
• Total number of bank notes in circulation rose by 40 percent between 2011
and 2016
• Increase in number of notes of INR 500 denomination was 76 percent and for
INR 1,000 denomination was 109 percent during this period
• Infusion of new series bank notes will be monitored and regulated by RBI
• The World Bank in July, 2010 estimated the size of the shadow economy for
India at 20.7 percent of the GDP in 1999 and rising to 23.2 percent in 2007
• A parallel shadow economy corrodes and eats into the vitals of the country's
economy resulting in:
–Inflation adversely affects the poor and the middle classes
–Depriving the Government of its legitimate revenues
–Forged cash used to fund terrorist activities against India

9. Phases of Demonetisation
Demonetization
Income Declaration Scheme
(Rs.65,250cr disclosed)
Pradhan Mantri Jan Dhan Yojana
(25.98cr Bank accounts)

10. Exchange of Currency
• The Reserve Bank of India laid down a detailed procedure for the exchange of
the demonetized banknotes with new 500 and2,000 banknotes
• Citizens will have until 30 December 2016 to tender their old banknotes at any
office of the RBI or any bank branch and credit the value into their respective
bank accounts.
• Cash withdrawals from bank accounts were restricted to 10,000 per day and
20,000 per week per account from 10 to 13 November 2016. This limit was
increased to 24,000 per week from 14 November
• For immediate cash needs, the old banknotes could be exchanged for the new
500 and 2,000 banknotes as well as 100 banknotes over the counter of bank
branches by filling up a requisition form along with a valid ID proof. It was
announced that this facility would be available until 30 December 2016.

11. -Initially, the limit was fixed at 4,000 per person from 8 to 13 November 2016.
-This limit was increased to 4,500 per person from 14 to 17 November 2016.
-The limit was reduced to 2,000 per person from 18 November 2016
• All exchange of banknotes was abruptly stopped from 25 November 2016
• withdrawals from ATMs were restricted to 2000 per day. From 14 November onwards,
ATMs recalibrated to dispense new 500 and 2000 notes will allow a maximum
withdrawal of 2,500 per day.
• However, exceptions were given to petrol, CNG and gas stations, government hospitals,
railway and airline booking counters, state-government recognized dairies and ration
stores, and crematoriums to accept the old 500 and 1,000 banknotes until 11
November 2016, which was later extended to 14 November 2016 and once again to 15
December 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.
• Under the revised guidelines issued on 17 November 2016, families were allowed to
withdraw 250,000 for wedding expenses from one account provided it was KYC
compliant. The rules were also changed for farmers who are permitted to withdraw
25,000 per week from their accounts against crop loan.

12. Positive side of demonetisation
• One of the biggest benefits of this move is that it is going to drastically affect the
corrupt practices.
• People who are holding black money in cash will not be able to exchange much as
they would be in a fear of getting penalized and prosecuted by the authorities
• Enemies of the country which are involved in counterfeit currency and terrorism
will not be able to continue it further for quite some time at least.
• The smuggling of arms and dealing with the terrorist will not sustain further as all
of the money will be on record now.
• Real estate prices dip to be seen in the long run .
• Reduction in inflation

13. • Reduction in Fiscal Deficit
• Reduction in lending rates
• Increase in GDP
• Secondly, the banking system will improve as it will slowly head towards a
cashless society.
• Cashless society will increase credit access and financial inclusion. The
existing white money of people will be known to the government and it
will remain with banks so that it can be put on loan, and interest can be
generated from it (though interest rates would fall) with a corresponding
fall in Inflation. Further Banking System will get a boost, as more than Rs
7-8 lakh crore base money (new legal money) will enter the system.

14. Indirect impact
• Kashmir moved to normalcy - Blow of
insurgency, no more schools being burnt
and no stone patters found
• Use of Apps and cards - Initial step
towards digitization in India with the
involvement of small vendors leading to
transparency in the system
• Gold Stock - Declaration in the stock
maintained by the jewellers on a day-to-
day basis, which if continued would have
control over generation of wealth from
black money
• Increase in revenue collection by the
Government authorities
• Simplification in tax policies and
reduction in tax rates in the upcoming
years

15. Negative side of Demonetisation
• The liquidity squeeze caused by demonetization
will be negative across sectors with high level of
cash transactions. Real estate, jewellery, retailing,
restaurants, logistics, consumer durables and
luxury brands, cement and some segments in
retail/SME lending space will be facing short term
instability. Those companies with high level of
debt will face more pressure and can face loan
defaults.
• Secondly, there will be an added replacement
costs of currency. We cannot ignore the increased
cost of operating ATMs need to be refilled more
often and also it will be a huge burden on banks.
Initially, it is very difficult to create a cashless
society as more than 50 percent of Indian
population is not well versed with card
transactions.

16. Banking
About 3 trillion rupees in the form of old INR 500 and INR 1000 banknotes
deposited in the banking system .
500 billion rupees dispensed via withdrawals from bank accounts, ATMs as well as
exchanges over the bank counters .
Spike in the usage of debit card and credit card post demonetization was also
reported Business
E-commerce
E-commerce companies saw up to a 30 percent decline in cash on delivery (COD)
orders.
E-payment options like PayTM and BHIM saw a rise
Real Estate
Primary transactions may not be impacted, secondary sales may to some extent.

17. Municipal and local taxes
Allow ability of use of INR 500 and INR 1000 notes to pay municipal/ local taxes
resulted in increase in revenue collections.
Agriculture
Adverse impact on Input-output channels in agricultural sector.
Sale, transport, marketing and distribution of ready produce to wholesale centres
or mandis, adversely impacted.
Disruptions, breaks in the supply chains feedback to farmers as sales fall.
Increased wastage of perishables.
Lower revenues that show up as trade dues instead of cash in hand.

19. Statistics - Approximately
• Demonetized Bank Notes – Rs.14.5 laks crs
• Printing of Rs.2,000/- cost involved is Rs.3.94 and for Rs.500/- is Rs.3.04.
• Total Black Money -
• Black Money on Account –Rs.3800 plus crs
• Cash & Jewelry on Raid - Rs.440 crs
• New 2000/- Notes – 80 crs (Raid)
• Income tax raid on 650 plus places [Inclusive of Tamilnadu Chief Secretary Rao]
• Issued notice from Income Tax Depart for 3100 persons for declaration on source
of deposit.
• Only 4 % to 7 % of black money is in form of cash
• Others form of black money in terms of real estate, gold, politician money, deposit
in foreign bank are still not been evaluated

20. Economist’s View
In spite of the initial hiccups and disruptions in the system, eventually this
change will be well assimilated and will prove positive for the economy in the
long run.
Black money hoarders will definitely lose out, eventually boosting the formal
economy in the long run.
Short term fall in real estate prices might benefit middle class citizens.
This move by the Government along with the implementation of the GST will
eventually make the system more accountable and efficient.

21. Conclusion
The government is taking steps to improve liquidity into the system and reduce
inconvenience as much as possible.
The decision of this surgical strike on black money was not taken in a day or two.
Rome was not built in a day and similarly, this plan is the result of Prime Minister's
meticulous planning and never ending fight against corruption.
As a result, he has successfully made the right stroke at the right time. Further, the
penal provisions are hefty enough to ensure that corrupt practices will find it hard
to take roots again. Despite certain short term troubles, demonetization is
certainly going to give a boost to the Indian economy in the long run. As of now, all
of us should stand and support this bold move of our Prime Minister and help
those needy, around us.