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Demonetization in India

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IMPACT AND IMPLICATION OF DEMONETISATION

this paper talks about the implication that demonitisation had in respect to Indian economy

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Withdrawing units of money from circulation is demonetisation; units of money are denied the status of legal tender. Demonetisation is defined as a process by which currency units will not remain legal tender. The currency notes will not be taken as valid currency. Demonetisation is a step taken by the government where currency units are ceased of its status as legal tender. Demonetisation is a basic condition to change national currency. In other words, demonetisation can be said a change of currency where new units of currency replace the old one. It may involve the introduction of new notes or coins of the same denomination or completely new denomination. The currency has been demonetised thrice in India. The first demonetisation was on 12th January 1946 (Saturday), second on 16th January 1978 (Monday) and the third was on 8th November 2016 (Tuesday). The study attempts to understand meaning and reasons of demonetisation, the sector-wise impact of demonetisation. This study also gives an insight into the positive and negative impact of demonetisation on Indian economy. This study is of descriptive nature so all the required and relevant data have been taken up from various journals, magazines for published papers and websites. Books have also been referred for theoretical information on the topic as required.

INROADS- An International Journal of Jaipur National University, 2017

Abstract The Indian government's stated objective behind the 2016 demonetization policy are as follows; first, to make India corruption free, second, to curb black money, third, to control inflation, fourth, to stop terror financing, fifth, to make the people pay income tax and finally, to make a cashless society and create Digital India. The demonetization policy is seen as a financial reform in the country but this decision is fraught with its own merits and demerits. This paper has made an attempt in analyzing the impact of demonetization on various sectors and the economy as a whole.

Objectives:To identify the possible impact of recent Demonetisation technique in India by reviewing the existing literature and examining the tax GDP ratio and GDP growth rate and sector wise growth rate before and after demonetisation. Methods: Since present study is basically a review of existing literature so it is fully based on secondary data. Secondary information is collected from various journals and economic survey of India various issue. Findings: By reviewing the earlier literature it is observed that from theoretical point of view Demonetisation is not encouraging. The study also found that though the tax GDP ratio has been increased after Demonetisation but GDP growth rate along with growth rate of different sector have fall immediately after Demonetisation. Future improvements: However due to lack of data, long run impact like impact on recovering black money has not estimated in the present study. So future study can be made in this regards.

This article studies the background and impact of the recent demonetization initiative taken by the Indian Government. Upon the advice of Reserve Bank of India (RBI), Government of India demonetized all old bank notes of ₹1000 and ₹500 denominations and replaced them with new bank notes of ₹2,000 and 500 denominations. As per various statements by the government as well as commercial sources, the key motives of this policy were to counter the shadow economy and eradicate use of illicit and counterfeit cash being used in facilitation of the terrorism and illegal activities. The sudden nature of the policy announcement gave rise to various drastic problems e.g. prolonged cash shortages and public unrest that had a significant effect on small businesses, agriculture, and transportation, threatening the economic output. Simultaneously, it attracted heavy criticism from the opposition parties, prominent economists and international media. The move was widely commended by several prominent factions of the banking industry as well as international pundits. The policy was heavily criticized due to its poor planning and timing thus triggering protests, litigation, and strikes. As far as the economic impact of the policy is concerned, following the announcement, the indices of NIFTY 50 stocks and BSE SENSEX dropped by almost 6% along with various other economic factors which have been discussed later in detail. The move also affected India?s GDP and industrial production. In this paper we will discuss the primary motives and benefits of this policy as well as its impact on the socio-economic scenario of India and her people along with recommendations for future.

Demonetization had been done with the positive approach to eradicate the black money from the economy but it does not go the way fully like it has been planned. Various steps need to be taken to eradicate stock of black money only one step is not enough for this purpose. But if we look on the other hand, demonetization is also the need of hour. Also there are also various steps regarding all these which government need to take in these regards. There are various effects of demonetization on Indian economy and its various sectors. There are many sectors whose trend went upward movement and there are various whose trend shows downward movement. Moreover these effects continue to go on in various directions with the time and the trend in economic activities.

International Journal of Research and Analytical Reviews, 2019

‘Demonetisation was a good idea but had bad results’- this was the reaction of the Indian public with regards to demonetisation that was implemented in India in November 2016. The NDA Government implemented demonetisation with the objective to attack the evils like black money, corruption and extremism. The public of India welcomed demonetisation with open hearts though many hardships fell on the citizens which made it difficult to even cope with the daily activities. The GDP of the Nation fell instantly affecting the economy as a whole. The cash intensive nature of the Indian economy was hit badly experiencing a forty five year high unemployment rate, bringing the nation to a stand-still. The position of black money was hit initially but the fake notes of the new 2000 rupee currency again brought back the situation to square one. The paper highlights the impact of demonetisation on the Indian economy along with the impact on black money and unemployment. The primary data was collected to better understand and know the real picture with regards to status of black money and unemployment. The analysis of the impact of demonetisation becomes clear as a time frame of year and a half have passed from the time of its implementation, to learn from the same and formulate more effective policies to solve the problem of black money, corruption and extremism for a long duration.

International Journal of Engineering and Management Research, 2020

Demonetisation is an act of cancelling the legal tender status of a currency unit. It is a process when the government pulled out a unit of currency from the total circulation of the economy. The concept of demonetisation is not new, at first French used demonetisation then after most of the countries has adopted demonetisation to clean up the economy from corruption and inflation. India has adopted demonetisation three times: At first in January 1946 when RBI demonetised Rs. 1000 and Rs. 10000 currency notes. and again in 1978 by Moraji Desai of Rs. 1000, 5000, 10000 banknotes were demonetised and both demonetisation were held to eradicate black money. But the term Demonetisation became familiar on 8 November 2016 when P.M. Mr Narendra Damodar Das Modi announced Rs.500 and Rs.1000 currency notes will be no longer as legal tender status from the past midnight to unearth the corruption, black money and terror funding. Therefore this research paper is an attempt to throw the light on...

"Demonetization-Necessity and it's Impact on Indian EconomyProf. Dr. Roshan S.PatelAssociate Professor,Department of Accountancy,Sheth C.D.Barfiwala College of Commerce, Surat. Email: [email protected] Mob. No. : 9426124543Abstract: The Government has implemented a major change in the economy environment by demonetizing the high value of currency notes - of Rs. 500 and Rs. 1000. India has carried out demonetization earlier two times, i.e. first was on 12th January 1946 ( Saturday ) and second one was on 16th January,1978 ( Monday ) under Morarji Desai Government. This is the third time demonetization happen in India i.e. on 8th November,2016 ( Tuesday ). So like this in India demonetization has occurred three times. On this ground government announced that INR 500 and INR 1000 notes will cease to be legal tender effective immediately. People have been given a time up to 30th December, 2016 to exchange the notes which are held by them. The purpose of this study is to compare and analyze the impact of demonetization and their significance in the economic development of India by comparing with other countries. The demonetization move has been taken in view to club black money, corruption and issues like circulation of fake currency and terror funding. Here I am going to discuss the reasons of it as well as its necessity to implement in India. I would also like to focus on how the tool of demonetization can be used to eradicate parallel economy. This is one of the biggest steps initiated by government in addressing the various issues like black money, circulation of fake currency, corruption, terrorism etc.Key Words: Demonetization, Indian Economy, Black money, corruption.********* Prof.Dr. Roshan S. Patel""Demonetization - Necessity and it's Impact on Indian Economy"" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-1 | Issue-5 , August 2017, URL: http://www.ijtsrd.com/papers/ijtsrd2403.pdf Article URL: http://www.ijtsrd.com/management/accounting-and-finance/2403/demonetization---necessity-and-it's-impact-on-indian-economy/profdr-roshan-s-patel"

innovative publication, 2017

The study about the concept of demonetization and its impact. After demonetization the economy had affected the different sectors mainly, retail, stock markets, E-commerce, financial inclusion, Gold market etc. Demonetization has the positive impact of the economy. To control the black money and inflation rate it came into effect. The paper describes that demonetization affect the current economy but in future it makes the Indian economy as a digital economy and people give more importance to buy and sell the product through online.

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What Is Demonetization?

Understanding demonetization.

• Pros and Cons
• Example in India

Other Uses of Demonetization

• Demonetization FAQs
• Monetary Policy

Demonetization: Meaning, Example, and How It Works

Investopedia contributors come from a range of backgrounds, and over 25 years there have been thousands of expert writers and editors who have contributed.

Investopedia / Yurle Villegas

Demonetization is the act of stripping a currency unit of its status as legal tender . It occurs whenever there is a change in 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 a new currency.

Key Takeaways

• Demonetization is a drastic intervention into the economy that involves removing the legal tender status of a currency.
• Demonetization can cause chaos or a serious downturn in an economy if it goes wrong.
• Demonetization has been used as a tool to stabilize the currency and fight inflation, facilitate trade and access to markets, and push informal economic activity into more transparency and away from black and gray markets.
• A famous example of demonetization occurred in 2016 when India demonetized 86% of its nation's currency.
• Demonetized may also refer to social media or digital content that formerly qualified for revenue distribution but has since been denied income proceeds.

Removing the legal tender status of a unit of currency is a drastic intervention into an economy because it directly affects the medium of exchange used in all economic transactions. It can help stabilize existing problems, or it can cause chaos in an economy, especially if undertaken suddenly or without warning. That said, demonetization is undertaken by nations for a number of reasons.

Demonetization has been used to stabilize the value of a currency or combat inflation . The Coinage Act of 1873 demonetized silver as the legal tender of the United States, in favor of fully adopting the gold standard , in order to stave off disruptive inflation as large new silver deposits were discovered in the American West. Several coins, including a two-cent piece, three-cent piece, and half-dime were discontinued.

The withdrawal of silver from the economy resulted in a contraction of the money supply , which contributed to a recession throughout the country. In response to the recession and political pressure from farmers and from silver miners and refiners, the Bland-Allison Act remonetized silver as legal tender in 1878.

In a more modern example, the Zimbabwean government demonetized its dollar in 2015 as a way to combat the country’s hyperinflation. At its peak, Zimbabwe's hyperinflation reached month-over-month growth of 79.6 million percent growth and year-over-year growth of 89.7 sextillion percent. The three-month process involved expunging the Zimbabwean dollar from the country’s financial system and solidifying the U.S. dollar, the Botswana pula , and the South African rand as the country’s legal tender in a bid to stabilize the economy.

Some countries have demonetized currencies in order to facilitate trade or form currency unions. An example of demonetization for trade purposes occurred when the nations of the European Union officially began to use the euro as their everyday currencies in 2002. When the physical euro bills and coins were introduced, the old national currencies, such as the German mark , the French franc , and the Italian lira were demonetized. However, these varied currencies remained convertible into Euros at fixed exchange rates for a while to assure a smooth transition.

The opposite of demonetization is remonetization, in which a form of payment is restored as legal tender.

Pros and Cons of Demonetization

There are several advantages when a nation demonetizes its currency. Fraudulent financial practices may be minimized as individuals will be unable to exchange illegal tender with banks. This also includes the potential reduction in tax evasion, pumping additional revenue into a nation's economy.

Demonetizing physical paper tender also demonstrates an advancing banking system, as digital currency can be more accessible, safer to store, and easier to transfer ownership. Organized industries and companies often benefit the greatest due to an easier transition.

Demonetization isn't without its faults. It's inconvenient for the nation's citizens and may be confusing when only select denominations are phased out over time. As a result of the disturbance, a nation's economy may temporarily experience a period of stalled growth in the short-term as the demonetization process occurs.

There are costly logistical measures to be taken as well. ATMs and other means of disbursing cash must be modified and recoded. Consumer prices must be reframed to ensure proper change can be given if needed. Daily wage earners—often among the poorest with no to minimal savings —may continue to be paid in defunct tender and must miss work to exchange their earnings with a bank.

Demonetization

Often results in decreased tax evasion and increased tax revenue

Ofte nresults in higher long-term GDP due to higher tax revenue being reinvested in the nation

Fosters innovation by converting currency to digital currency and promoting digital transactions

Reduces overall crime by enhancing transparency and discouraging the circulation of black money.

Imposes a burden on citizens, especially those who must convert one currency to another

Likely stalls a nation's GDP during the conversion process

Incurs expensive administrative costs including printing, adjusting ATMs, and marketing the changes.

Negatively impacts and even stops cash-driven sectors

Introduces new types of currency risk such as cybercrime

Demonetization Example in India

Lastly, demonetization has been tried as a tool to modernize a cash-dependent developing economy and to combat corruption and crime (counterfeiting, tax evasion ). 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 country’s circulating cash.

With little warning, India's Prime Minister Narendra Modi announced to the citizenry on Nov. 8, 2016, 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 country’s 200,000 ATMs were operational. Even those dispensing bills of lower denominations faced shortages. The government’s restriction on daily withdrawal amounts added to the misery, though a waiver on transaction fees did help a bit. Severe cash shortages were recurring even through 2018.

Small businesses and households struggled to find cash and reports of daily wage workers not receiving their dues surfaced. The rupee fell sharply against the dollar. 

The government’s goal (and rationale for the abrupt announcement) was to combat India's thriving underground economy on several fronts: eradicate counterfeit currency, fight tax evasion (only 1% of the population pays taxes), eliminate black money gained from money laundering , and terrorist financing activities, and to promote a cashless economy.

Individuals and entities with huge sums of black money gotten from parallel cash systems were forced to take their large-denomination notes to a bank, which was by law required to acquire tax information on them. If the owner could not provide proof of making any tax payments on the cash, a penalty of 200% of the owed amount was imposed.

Demonetization can also refer to the business practice of denying payment and is often experienced related to social media. Demonetization happens when a platform's content creator used to receive payment but due to underlying changes in the platform are no longer eligible. This may occur due to a terms and conditions violation or due to changes in the platform's algorithms that determine which creators are eligible to earn revenue.

Although used in an entirely different context, this form of demonetization is similar to the form of discontinuing legal tender. For both, an asset once held value but due to underlying changes in the nature of the asset, it no longer holds any monetary value.

Why Would a Country Demonetize?

Demonetization has been used to stabilize the value of a currency or combat inflation. Some countries have demonetized currencies in order to facilitate trade or form currency unions. Lastly, demonetization has been tried as a tool to modernize a cash-dependent developing economy and to combat corruption and crime (counterfeiting, tax evasion). 

What Are the Advantages of Demonetization?

The main benefit of demonetization is to curtail criminal activity as their supply of money is no longer legal tender. This affects counterfeiters as well as they cannot exchange their "merchandise" for fear of discovery. It can prevent tax evasion as those who were evading taxes must come forward to exchange their existing currency at which time the authorities can retroactively tax them. Finally, it can usher in the digital currency age by slowing down the circulation of physical currency.

What Are the Disadvantages of Demonetization?

The chief disadvantage is the costs involved in printing and minting the new currency. Also, demonetization may not have the intended effect of reducing criminal activity as these entities might be savvy enough to hold assets in other forms other than physical currency. Finally, this process is risky as it can plunge the nation into utter chaos if not handled with the utmost of competence.

How Does Demonetization Impact GDP?

In the short-term, demonetization usually stunts economic growth and causes GDP to decline. During the conversion process, many industries and sectors may temporarily come to a halt. Some industries may not be able to pay laborers as the demonetization process occurs.

Once demonetization is finished, it often creates long-term economic benefits that increase GDP in the long run. Demonetization attempts to fight financial crime; by making transactions more transparent or discouraging the trade of illegal bills, a government is usually able to collect more tax revenue and invest heavier into their country.

American Economic Association. " The Great Indian Demonetization ."

United States Mint. " The 'Crime of 1873' ."

United States Mint. " 100 Years of Silver Dollar Coinage (1878 - 1978) ."

Cato Journal. " On the Measurement of Zimbabwe's Hyperinflation ."

Reserve Bank of Zimbabwe. " January 2016 - Monetary Policy Statement ," Page 71.

European Central Bank. " The Euro ."

Reserve Bank of India. " Bank Notes ."

The Hindu. " Demonetisation of Rs. 500 and Rs. 1000 Notes ."

Mint. " Govt. Allays Cash Crunch Fears as ATMs Run Dry ."

British Broadcast Channel. " Why India Wiped Out 86% of its Cash Overnight ."

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Demonetization

An economic process in which a country’s currency unit is no longer legal tender

What is Demonetization?

Demonetization is an economic process in which a country’s currency unit is no longer legal tender. A currency unit is what we would commonly refer to as physical money, such as banknotes and coins. When demonetization occurs, the country’s currency unit is essentially worthless, as it can no longer be used to purchase goods and services .

Demonetization can occur for several reasons, from a change in national currency to the retirement of older forms of money. Over time, several countries have implemented currency demonetization measures, albeit with varying degrees of success.

• Demonetization is an economic process in which a country’s currency unit is no longer legal tender.
• After a currency has been discontinued, it is no longer legal tender and contains no monetary value.
• At times, countries may also decide to reinstate discontinued currency as legal tender through a process known as remonetization.

The Demonetization Process

Demonetization is a form of economic intervention, where a country moves to replace one form of currency with another. At the beginning of the demonetization process, the old currency is discontinued and pulled from circulation to be replaced with new forms of money.

During the process, people are given time to exchange their existing banknotes and coins for the new currency before it is officially discontinued. After a currency has been discontinued, it is no longer legal tender and contains no monetary value.

The demonetization process can occur in many different forms – a country can introduce new banknotes or coins or implement a completely new form of currency altogether. However, demonetization is a drastic measure that occurs rarely and can disrupt society if implemented improperly. At times, countries may also decide to reinstate discontinued currency as legal tender through a process known as remonetization.

Reasons for Demonetization

Although demonetization is rare, countries around the world have conducted demonetization measures for various reasons.

• Governments may choose to undergo demonetization if the currency gets out of control, due to problems like hyperinflation .
• Demonetization can also be used to prevent criminal actions, such as counterfeiting, terrorism, or tax evasion.
• In other cases, demonetization occurs to implement a new currency standard. For example, in 2002, the European Union introduced the euro, a central currency that would replace the existing currencies of several nations. In adopting the common currency, countries across Europe discontinued their currencies and introduced the euro as the standard across the European Union .

Advantages of Demonetization

Through the demonetization of currency, a country can receive benefits ranging from crime prevention to greater currency standardization.

1. Reduces various criminal activities

One of the benefits of demonetization is the reduction of various forms of criminal activity. Through the demonetization process, old banknotes and coins are discontinued and taken out of circulation, and effectively become worthless. For groups conducting criminal activities, such as terrorism, their supply of money effectively becomes worthless, as the currency is no longer legal tender.

For those engaged in counterfeiting, the banks will evaluate whether old banknotes are counterfeit before exchanging them, therefore allowing the government to remove counterfeit currency from the system.

2. Prevents tax evasion

Demonetization of currency can also prevent tax evasion, as those that are evading taxes must exchange their existing currency or risk their money becoming worthless. In the currency exchange process, the government can catch those who have evaded taxes and retroactive tax their unreported earnings.

3. Promotes a cashless economy

Demonetization can also further the push towards a cashless economy, as the government can slow the circulation of physical currency and move towards more digital options.

Disadvantages of Demonetization

On the other hand, some disadvantages can arise from the demonetization process, including:

1. Incurs costs from printing new banknotes and minting of coins

One of the initial drawbacks is the costs involved with the printing of new banknotes and the minting of coins, as well as the discontinuation of existing currency.

2. May not entirely reduce criminal activity

In addition, demonetization may not reduce criminal activity, as criminals may keep their assets in other forms, such as gold or real estate.

3. Can trigger chaos among citizens

Finally, if the demonetization process isn’t implemented successfully, it can result in chaos among the population, as people scramble to exchange their currency before discontinuation.

Real-World Examples

1. india (2016).

A recent example of demonetization was India in 2016 when the government announced the discontinuation of all ₹500 and ₹1,000 banknotes. It was done to reduce the presence of counterfeit cash to fund criminal activity.

When the demonetization was announced, there were shortages of cash across the country, as people scrambled to exchange their existing banknotes. It led to disruptions to the economy, reducing India’s industrial production and hindering its GDP growth rate .

2. Eurozone (2002)

Another example of demonetization was the European transition to the euro in 2002. To facilitate the process, the European Central Bank needed to ensure that there was enough currency to be circulated and began printing banknotes and minting coins as early as 1998.

When the euro was introduced, the central bank ensured that all citizens were able to access to the new currency and began providing banks with the new banknotes and coins several months in advance.

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