Demonetization is the process of
stripping a currency unit of its status as legal tender. Present money is
pulled out of market / circulation and is replaced with a new currency.
Sometimes, a country completely replaces the old currency with new currency. It
occurs whenever there is a change of national currency. This process is called
The most common reasons for
To fight inflation
To combat corruption; especially to fight black
money and tax evasion
To facilitate trade and to make the economy to
promote digital payment
On the 8th of Nov 2016, the Govt of India
under the leadership of PM Narendra Damodar Das Modi announced that from
midnight 12 AM on words, RS 500 and RS 1000 notes which are currently in
circulation will be pulled out and will not be considered as legal tender
anymore. These RS 500 and RS 1000 noted accounted for 80% of the currency in
circulation. The citizens where then given time till end of 2016 to exchange
the notes with the newly issued RS 500 and RS 2000 notes.
This action taken by the Govt led to a huge chaos in
INDIA which is cash dependent and almost 78% of all Indian transactions are in
cash. There was huge chaos outside all BANKS and ATM’s to deposit and withdraw
new currency. The Govt also kept a withdrawal limit per day which led to
increase in shortage of change. The small business and daily wage workers where
most hit; many did not receiving wages on time. The Indian currency also fell
sharply against the US Dollar.
The Indian economy is fighting a long battle of
corruption, tax evasion, black money and digitization of cash transactions. As
per the report of, India stands at 96 in the list of most corrupted countries in the world. So
a smart and challenging move like demonetization was much required to fight the
battle. Also it was needed to revamp the economy. The citizens of India came
out in support of the move though they had to face hardships like standing in
long Q for hours and days to get their currency exchanged to the new one.
below are some the major reasons why INDIA went ahead with the process of
To combat the underground economy of India
To remove fake currencies
Fight against tax evaders as only 1% of India’s population
Fight against Money Laundering
To promote digital cash transactions and move to cashless
To track financial transactions
Eradicate terror activities and their funding
Cut down the system of bribing votes during elections
To reduce the lending rate by banks by increasing deposits
Further monetary accommodation
after Govt announcing the decision to Demonetize RS 500 and RS 1,000 notes, the
public rushed to buy gold and pay taxes using the old currency. The price of
the gold even shot up to 50% due to the high demand. Seeing this loophole, the
Govt decided that any purchase above RS 50,000 has to be linked with the PAN
Card. Many jewelers were flouting this norm and hence came under scanner of
action by the Govt pushed the Public and Traders to alternative payment systems
such as using POS Machines, PAYTM and Mobile Wallet etc. PAYTM saw a big
increase in their traffic and a 10 times jump in money added to their accounts
by users. The transactions increased to 5 million per day and APP downloads
went up by 300%. MobiKwik, another APP like PAYTM also experienced a 20 time
increase in the money added to their accounts.
other option which people used was Cash Cards like ItzCash. Other methods like mobile
payments systems linked to e-commerce businesses like Ola Money, FreeCharge,
Flipkart Wallet. Ola Money, the payment portal for popular transportation app
Ola Cabs, reported a 1500% jump in money added to the accounts in less than
citizens also started investing in BITCOIN. The company was adding 1000 of users
every month. There was an increased demand for BITCOIN as India has shortage of
supply, making the lack of liquidity in increase the prices of BITCOIN as
compared with the world market.
Mentioned below are the
positive effects of Demonetization on the Indian Market:
Corruption Free: The process of demonization
will reduce corruption in the country as the corrupt cannot keep the
unaccounted money at home and will have to be deposited in the bank. Any
deposit above INR 2,50,000 was under scanner of Law agencies and deposits above
INR 50,000 needed to be linked to PAN card. If unaccounted money was caught, a
penalty of 200% was imposed. This action by the Govt forced the corrupt to give
up unethical practices.
Digital Transactions: Nearly 85% of the transactions
in India are done in hard cash. The main aim of the Govt was to push the
country into an cashless economy which uses digital mode for payment. One of
the main benefits of this method is, all transactions are recorded and tax
evasion is not possible.
Reduce Money Laundering: The ban on high currency
denominations was a blow to people who indulge in money laundering. Now the
Income Tax authorities can easily catch those people who indulge in money
Black Money Reduction: People who held unaccounted
money with them had only 2 options. One is to deposit in the bank and other was
to destroy the money. If deposited in bank, there source of Income for
transactions above RS 2,50,000 was mandatory and if unable to prove source,
penalty and punishment followed.
Pay Taxes: Only 1% of India pays taxes
as India is an agriculture country and agriculture field is excluded from
taxes. Also people whose yearly income is 5 lakhs or less PA need not pay
taxes. This move forced all people to go and pay taxes with the old currency as
they cannot deposit in the bank or use it for any purpose.
Increase in JAN DHAN Accounts: This was a scheme of Govt to make people open
bank accounts in order to deposit all cash subsidies directly to the consumer
to reduce corruption and leakages. This move forces citizens to open bank
accounts and deposit all their cash.
Less lending rate: All banks received huge
deposits from the account holders due to demonetization. The banks had enough
cash with them which would force them to reduce rate of interest on loans.
India is one of those countries where ROI is very high on loans due to the
Fight Fake Currency: This move will stop the
circulation of fake currency. Most of the fake currency put in circulation is
of the high value notes and the banning of 500 and 1000 notes will eliminate
the circulation of fake currency. This move will thus block the funding to
terrorists and printing of fake Indian currency by Pakistan.
Easy Record of Transactions: Since people have opted to pay
by digital means, the sellers cannot fake their account book as all
transactions will be recorded and thus forcing seller to show exact sales and
thus pay taxes to Govt.
Reduce Parallel Economy: Global agencies say that
nearly 23% of the Indian economy is a parallel economy. Demonetization is a
move that will fight parallel economy.
Increase Govt Finances: With more and more people
coming forward to pay taxes, this will help increase the revenue of Govt. This
can help fight fiscal deficit target of the country. It will also help the
economy to move from Unorganized to Organized sector.
a single move, the Govt was able to tackle major issues that plague an economy;
which is parallel economy, fake notes in the market and terror activities. The
Indian Economy also got a new lease of life, along with huge positive
implications for liquidity, inflation, fiscal and external deficit in the short
term. Over the next two-three years, improvement in India’s position on
transparency and corruption in the global stage will further add to its
investor appeal. With GST on the anvil, India is now on the cusp of higher
growth in the medium term—to be steered by the organized sectors including
MSMEs and the revival of the private sector capex cycle.
Mentioned below are the negative
effects of Demonetization on the Indian Market:
demonetization was a brave and mart move by the Govt, it has some demerits too.
Most of the demerits which resulted from this action are short term and unavoidable.
However, there is no gain without some pain.
Inconvenience to Citizens: The decision to demonetize the
currency caused huge inconvenience to the citizens. Though Govt and Banks did
their best to make it convenient for people, there were huge challenges faced
by them. People had to come early in the morning and stand in huge Q to
exchange their money. There was a restriction on the amount that can be
exchanged per day and that can be withdrawn from the ATM. People also could not
buy anything due to shortage of currency and lower denominations. There was a
halt. But still, people hailed the decision and were ready to face the
inconvenience for betterment of the nation.
Denominations: Most banks and ATM’s
greeted customers with bigger denominations like RS 500 and RS 2000 thus making
it difficult for citizens to shop as the sellers did not have lower
denominations to return as change.
Less Spending: Shortage of cash forced the
construction and service industry to come to a halt. The builders did not have
enough cash to buy raw materials or pay workers. Most labors don’t have a bank
account and hence payments had to be made in cash only.
Fall in GDP: This was expected by the Govt.
There was a fall in GDP due to demonetization as it reduced spending by the
companies and investment as people were not having enough cash. The
manufacturing sector also came to a standstill.
Huge Expense: There is a huge expense in
printing new currency for distribution to people. Also the old currency notes which
are no longer a legal tender has to be destroyed.
No access to Banks: People who are mainly living
rural areas who does not have access to Banks or outside world were also hit.
Some of them were not even aware about the process of demonetization, especially
the senior citizens and people who are not educated and living in rural area.
Job Loss: Due to less spending and
investment by companies, many sectors faced less business and hence employees
were asked to leave or resign.
slowdown: The major industries like real estate, infra, gold etc have
been affected and sales would come down and that impacts the growth of the
economy. Many transactions halt, until the markets get back to normalcy.
Markets may see a temporary fall, and temporary recession. At least a year
would be the span to retain the normalcy. There could be a long-term gain.
It is too early conclude if the scheme of the Govt is a
failure or a huge success. The markets are currently picking up and Sensex has
risen to record heights. The banks have started to reduce lending rates and GDP
figures seem to be picking up slowly. Though all sectors have not completely
risen back to form; improvements are seen. The exports have increased and
imports have also come down.