Table of contents
- Impact of Demonetization on Business
- Impact of Demonetization on the Governement
- Impact of Demonetization on the society
- Observation
Demonetization is a act of stripping a current currency unit of its legal status. Demonetization policy happens whenever a country changes their national currency. Sometimes a country completely replaces the old currency with the new currency.
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'Vision and Mission of The Demonetization'
Demonetization is undertaken by different countries at different time point for number of reasons:
- To fight against the economic inflation
- To fight the corruption within the country like tax evasions
- To fight against the black money circulating within the country
- To increase the cash liquidity within the country.
In the year 2016, November 7th Government of India adopted the Demonetization policy for the 3rd time in the country. Before 2016, Indian Government adopted the Demonetization policy in the year of 1946 and 1978.Adoption7th November, 2016 Prime minister of India Mr. Narendra Modi announced that form the very next day i.e. 8th November the legal tender status of ₹500, ₹1000 note is invalid. He also announced that new ₹500, ₹2000 currency note will be announced shortly. The Reserve Bank of India also notified that the invalid notes could be deposited in the banks till 30th December 2016. Citizens can exchange their notes in the banks but the exchange limit will was different time to time . Earlier it was ₹4000 per head then it was increased to ₹4500 but later on it was decreased to ₹2000 per head due to shortage of cash flow.
In this time Reserve Bank of India also gave the mandate limit on withdrawal from the personal bank accounts. Reserve Bank restricted the withdrawal limit to ₹10000 per day to ₹20000 per week. Later on this was increased to ₹24000. Central Bank also imposed the restriction in the withdrawal limit from the ATMs. It was limited within ₹2000 to ₹2500 in different places. Later on in January 2017 it was increased to ₹4500 and in mid-January it was increased to ₹10000. Objectives In a long speech Prime Minister Narendra Modi announced the demonetization of ₹500, ₹1000 currency note. Behind the demonetization of the old currency notes there was various reasons mentioned by the Prime Minister to discuss. Here we are mentioning some reasons which will be discussed later:
- Black Money : During the speech Narendra Modi mentioned the main reason of demonetizing the old currency notes was to get back the black money in India. Various studies showed the Black money is about 25% of the Indian GDP that is approximately 37 Lacs Crore and the Cash black Economy was about 10% of Black Economy that is approximately 3.79lacs Crore.
- To decrease the Cash transaction: One of the reasons mentioned by PM in his demonetization speech was to decrease the cash transaction within the country. Cash transactions eventually increases the corruptions in the system. Government’s aim was to break the corruptions within the government system.
- To eliminate the fake currency: Fake currency is one of the major problems in Indian economy. According to Former Finance minister P. Chidambaram, there is neither exact amounts nor estimation of the fake currency circulation in Indian economy. This fake currency was used by the terrorist and other anti-social groups to create nuisance within the country or terrorism in the country.
- To move from the high cash economy to digital cash economy: According to the present Finance Minister Mr. Arun Jaitley, another important object of demonetization was to move from the high liquid cash economy to digital space. The main reason of moving from this to that was because government can track every transaction which would be made by the digital wallet, net banking etc. so that there will be less error in the transaction.
- Converting the non-formal economy to formal economy: Other objective of demonetization was to convert the non-formal economy to a centralised formal economy where government can get the data of every person.
As the Government of India surprisingly announced the demonetization, it gave a huge shock to the citizens. The ₹500, ₹1000 currency notes were removed from the circulation as legal tender. Main mission of PM Narendra Modi was to:
- Eliminate the tax evasion.
- Explicit war against black money.
- Eliminate currency fraud and terror funding.
Main focus was of Prime Minister or Government of India on the black money agenda.
Impact of Demonetization on Business
Trades and Businesses are the backbone of the economy we have to find the impact of the demonetisation on the business firms and to assess the impact on various sectors. It has been observed that small firms are impacted majorly across all the sectors Industries as these are highly driven by cash transactions. we found that in the shorter period some cash driven factories are unable to fulfill their day to day requirements such as payment for daily wage workers and purchase of raw materials since they are unable to withdraw cash from the banks. As we have mentioned earlier there was a regulatory reasons to withdraw the money from the bank. As per the observations in the real life we saw the demonetisation includes retail sector followed by the agriculture real estate construction media and entertainment tourism and Labour intensive sectors affected majorly.
- Retail- The impact of demonetisation is majorly seen in the retail sector because this sector generates a lot of cash transaction in daily life the impact is comparatively higher on the small traders and unorganised retailing segment.
- Agriculture- Agriculture was impacted majorly because sales transport distribution of Reddy produce to wholesale centres is dominantly cash dependent. But due to the regulatory the cash transactions were limited, the marginal farmers who sell their products on daily basis to the mandi's or Vegetable wholesale markets and directly to the consumers have been impacted more.
- Real estate- One of the other sector which was impacted for the demonetisation was the real estate segment. Because the real estate businesses are mainly cash dependent. Like The Other small traders the small real estate developers are severely impact because of very I high involvement of cash transactions as a component of payment in real estate deals payment of daily wage workers and raw materials.
- Construction- Construction sector has a severely impacted because to the lower collections in the form of customer advances in a project in the early stages of construction because these are mostly dependent on the advances of construction progress and the deep servicing demonetization policy drive has measured infected the fate of the unskilled work force which was a daily which paid labourers and absorbs maximum unskilled work force after the agricultural Sector 20 workers are working majorly on the basis of daily wages in the construction activities in the country. Due to the restriction on the withdrawal order deposit of the cash they were unable to pay the workers and the left the job.
- Tourism and Hospitality-One of the major sector which was affected due to the demonetisation was tourism and hospitality sector. Because the people are unable to spend for the tourism due to the lack availability of the currency The Tourist Industries offered in that time and the unorganised Inventory of the hotels is mostly impacted. For that the restaurant businesses were were facing slow down in the businesses and the growth on account for the lack of the availability of cash because the restaurants are generally high usage of cash spending dependent.
- Labour intensive sectors- Labour intensive sectors like leather mining and textile industries requires huge amount of money to be paid in the cash to the daily wage labourers but due to the demonetisation policy and the restriction on the cash transactions the impact on the labour intensive sectors where very high. due to the restriction of the daily or weekly transactions limit the impact on the weekly payment of the contractual workers are the labourers in the textile or Mining industry impacted a most. Due to availability of the cash negatively influenced the procurement and the production in the mining of textile industries which affected in directly to the economic growth of the country for a certain time.
- Automobile- Automobile industry was another major sector which was impacted due to the demonetisation of the Government of India because there was a major decline observed in the demand of the two wheelers than the other four wheeler all luxury cars because the two wheelers are less costly then the other four wheeler or luxury cars. it has been observed that different Card dealers has reported there are certain decrease in the sales. And the repairing industry which was attached or related to the automobile industry was affected due to the unavailability of the cash because mainly the repayment of automobiles are dependent on the cash transactions rather than in a digital or credit transactions.
Impact of Demonetization on the Governement
Government is another wing where we observed the impact of the demonetisation adopted by the Government of the India in 2016 November 7th. In June 2016 Government of India adopted and new income declaration scheme which was last date till 30th September of 2016 which was a precursor of a demonetisation. The Government of India give a fair chance to the citizens of the India to provide the information of their black money and undeclared assets to avoid the litigation and to show the clear images by declaring their undeclared income on registered properties and assets through paying the tax and penalty of the tax evasion. Announcement of demonetisation started a new era in the government or in the whole of the Indian economy which was of valiant effort to get itself free from the black money fake currency and corruption within the country and the government system. We will discuss some of the points which we observed that has late impact within the government and the system.
- Black money and the corruption- After announcing of the demonetisation we can see the immediate effect of the black money and the Amount deposited in the form of the cancelled legal tender of rupees 500 rupees 1000 notes. According to the various reports around 12 lakh crore rupees is deposited in different commercial banks but it was estimated lakh crore will be deposited in the bank so seeing the data it is believed approximately 1. 5 to 2 lakh crore maybe of black income.
- Elections- We also saw that that demonetisation had been given a shock to the political parties at the time of the election of Uttar Pradesh and Punjab. Political parties were helpless due to the low availability of the cash and cash out of the UN declared money that were used to attract the voters. Due to this situation the result of the upcoming elections expected to be a transparent at some extent.
- Digital payments- Due to the move of the demonetisation by the government and the low availability of the cash it leads to use of the digital payments. at that time. We show different E wallet services like Paytm Mobikwik, oxygen wallet and other digital wallet services got hit in that time of the demonetisation. due to this digital transactions the money will come to a centralised system which will be accountable, generic tax and will help for the development of countries economy.
- Fake currency- Prime Minister Narendra Modi mentioned repeatedly that the objective of the demonetisation is to fight against the fake currency this type of fake currency was used in different anti-social nuisance and terrorism activities within the country. It was a good move to defeat the fake currency Syndicate but why were we observed after that new 200 rupees note where officially released for circulation in the economic system there were several cases has been reported in the news or print media about the fake currency print.
- GDP- With the support of the available data from the central statistics office of government of India the economy of the India was expected to grow at the rate of 7. 1 % in the financial year factoring the impact of demonetisation but in reality it didn't hurt the growth of the financial year during that time it was observed that GDP was in between of 6. 9 and 7 % this data give the central government to defend the decision of the scrap of old 500 and 1000 rupee note.
- Low inflation- As you observed the black money drained out from the system the money supply was shrink to add some extent and the purchasing power of peoples decline within the country with this situation the inflation rate was reduced.
Impact of Demonetization on the society
The information on demonetisation was released suddenly and the common man was most affected. Show the effect on the marriage ceremony which was scheduled at that time the families faced issue with the cash transactions in the marriages at that time. To get the liquid cash the family where marriage is happening have to show the invitation card to withdraw 250000 and above for the expenses of the marriage this cost creates problems within the families and hassles. We saw the minimal impact on the education sector as they had been directed to enable the online transactions in their website for the fees and other online payments for the convenience of the students and the parents but a lot of black money was recovered through the different educational institutions when the Income Tax Department raid which was received as a donations from the students. Common people like salaried persons faced a huge problems and hassles at that time of the demonetisations because on the opening day of the month the salary is better credited in the bank but they were unable to withdraw more than 2500 rupees from the ATM machines. it has been observed in various parts of the country that lots of salaried people went to the bank branch and withdraw the entire money with minimum deduction or loss of pay. The demonetisation policy adopted by the Government of India created a social problem in the form of protests Bandh, Road blockages and debates and quarrels among the people with different views and ideologies.
Observation
In the year 2018 July-August, Reserve bank of India released a report on the Demonetization policy. They have mentioned some information related to the Demonetization policy adopted by the Government of India. We observed:
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- Government’s estimation was to eliminate 15.41 Lacs crore rupee from the circulation. According to the report 15.31lacs crore have been returned to the RBI. This means approximately 10Lacs rupees haven’t returned to the Central Bank which is definitely not the amount of black money. First failure of the demonetisation system was unable to track the black money in Indian economy.
- According to the opposition party Congress party spoke person “Mr. Prime Minister promised to citizens that approximately 3 lacs Crore unaccounted ‘Black Money’ will return to the economy system, but as per the report nearly 99% of the total estimation is returned back”. What actually opposition party meant that government made false commitment and failed to meet that.
- In addition government spent extra 8000 Crore rupee to print new currencies and for the entire process of demonetization.
- SMEs face huge liquid cash problem at that time. Normally SME’s labor workforce are depended on liquid cash transaction and daily cash paid labourers.
- Households faced problems in their day to day life needs. Daily withdrawal limit was restricted.
- Demonetization created chaos in the society, everyday huge line in front of the banks had been observed to exchange the old notes in to new notes.
Demonetization policy had been adopted in India twice before 2016. The aim to demonetize the currency to eliminate fake note, to recover the black money and to cut down the corruption. It is very debatable to conclude whether government has been achieved the aim of demonetization or not, there will be two option from two side of the political parties. Ruling party will indicate the positive side of the policy but at same point opposition parties will point out the disadvantages of the policy. We observed that there is positives of negatives of the policy but we can say that though there was certain negatives, there is some positives also which will help the economy in the long term. It created a chaos in the society due to some under preparedness to fight this situation and the restriction limit was too low for the urban households. It has been observed that there is lower trend of fake currency printing in the economy and lower rate corruption. This will help the Indian economy in the future time.