MINOR PROJECT REPORT

ON

IMPACT OF DEMONITISATION ON INDIAN ECONOMY

SUBMITTED TO

BHAI PARMANAND INSTITUTE OF BUSINESS STUDIES

(GOVERNMENT OF NCT OF DELHI)

(Affiliated To Guru Gobind Singh Indraprastha University, Delhi)

IN PARTIAL FULFILLMENT OF

BACHELOR OF BUSINESS ADMINISTRATION (BBA)

(THIRD SEMESTER, 2016- 2019)

UNDER THE SUPERIVISION OF- SUBMITTED BY-

Dr. S. MISHRA HIMANSHU GUPTA

Mr. RAHUL R. VERMA BBA (3rd SEMESTER)
ROLL NO- 00411401716

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 CERTIFICATE
This is to certify that the dissertation entitled “IMPACT OF DEMONETISATION ON INDIAN
ECONOMY” is a bona fide research work carried out by HIMANSHU GUPTA student of
BBA at BHAI PARMANAND INSTITUDE OF BUSINESS STUDIES, Department of Business
Administration during the year 2016-2019, in partial fulfillment of the requirement for the
award of degree of BBA and that the dissertation has not formed the basis for the award
previously of any degree or diploma to the best of knowledge and belief.

Dr. S. Mishra
Rahul R.Verma

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 DECLARATION
I hereby declare that the project entitled “IMPACT OF DEMONETISATION ON INDIAN
ECONOMY” submitted for the BBA degree at BHAI PARMANAD INSTITUTE OF BUSINESS
STUDIES is my original work which is done under the guidance of MR. RAHUL R. VERMA and S.
Mishra at BHAI PARMANAND INSTITUTE OF BUSINESS STUDIES.

Signature of student:

Himanshu Gupta
Roll no. 00411401716
BBA 3rd semester

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ACKNOWLEDGEMENT
In the first place, I thank BHAI PARMANAND INSTITUTE OF BUSINESS

STUDIES, Department of Business Administration for giving me an opportunity to work on

this project. I would also like to thank Dr S. Mishra and Rahul R.Verma, for extending me their
valuable guidance for the project. Without their help it would have been impossible for me to
complete this project.

I would be failing in my duty if do not acknowledge with a deep sense of gratitude and the
sacrifice made by my who have helped me in completing the project work successfully.

HIMANSHU GUPTA
00411401716
BBA 3rd semester

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EXECUTIVE SUMMERY
The purpose of this study is to know theobjectives of demonetisation on Indian
economy and what are its major impacts on both micro as well as macro level on the
Economy, Businesses and People.The immediate effect of demonetization of economy
would probably be short-lived. However, the long term effect will drive the Indian
economy to new areas of growth in the coming times with its impact not just only on
black money, terrorism and corruption but also in improving tax compliance, better
fiscal balance and lowering inflation. Though the contraction in GDP by 0.5% cannot be
ruled out due to fall in economic activity, growth in demand will start gaining
momentum once the economy moves out of the transition stage of demonetization to
Demonetisation. Demonetization drive has impacted the Indian businesses directly or
indirectly in terms of impact on demand but the impact of demonetization is majorly
seen on small businesses as these are highly driven by cash transactions. The labor-
intensive sectors mainly agriculture and construction sector have been impacted since a
major portion of transactions involve cash for the purchase of raw materials and
payment to daily wage laborers. These study reports analyze various aspects of the
demonetisation and the way forward. This study would help in understanding the cost
benefit analysis of demonetization in India. This would also help in finding out the
sectors that are affected due to demonetization and appropriate actions could be taken
by the government by modifying the policies accordingly.

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TABLE OF CONTENTS

S.NO. TOPIC PAGE NO.

1 2
CERTIFICATE
2 3
DECLARATION
3 4
AKNOWLEDGEMENT
4 5
EXECUTIVE SUMMARY
5 7 - 15
INTRODUCTION
6 16 - 17
LITERATURE REVIEW
7 18 - 19
RESEARCH METHODOLOGY

8 20 - 49
DATA ANALYSIS
9 50 - 60
FINDINGS & CONCLUSION
10 61 - 62
RECOMMENDATIONS
11 63
Bibliography

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 Chapter 1

INTRODUCTION

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INTRODUCTION
On the evening of 8th November 2016, Indian Prime Minister Mr. Narendra Modi
announced a sudden denomination of ₹500 and ₹1000 rupee notes. Instead of RBI
Governor Urjit Patel, surprisingly Prime Minister announced the news of demonetization
that these banknotes would not be legal tender after midnight of the 8th November. Means
the high value notes will not be legal for transaction. Although the old notes can be
exchanged till 31st December 2016. There were set an upper limit of cash withdrawals from
bank is ₹10,000 per day (up to ₹20,000 per week) per account and from ATM ₹2000 per day
per account from 10 to 13 November which is changed from 14 Nov. to ₹24,000 per week
from bank and ₹2,500 per day from ATM per account till 31st Dec., although a needy
person can withdraw with valid reason. The government claimed that the demonetisation
was an effort to stop counterfeiting of the current banknotes allegedly used for funding
terrorism, as well as a crackdown on black money in the country. The move was described
as an effort to reduce corruption, the use of drugs, and smuggling.
The term demonetisation has become much more than a household name since the old Rs
500 and Rs 1,000 notes were pulled out of circulation. While as per dictionary
demonetisation means "ending something (e.g. gold or silver) that is no longer the legal
tender of a country", one needs to understand that there is much more than the literal
meaning to the word. However, in the days following the demonetisation, banks and ATMs
across the country faced severe cash shortages. Also, following Modi's announcement, the
BSE SENSEX and NIFTY 50 stock indices crashed for the next two days.
The proposal by the government involves the elimination of these existing notes from
circulation and a gradual replacement with a new set of notes. In the short term, it is
intended that the cash in circulation would be substantially squeezed since there are limits
placed on the amount that individuals can withdraw. In the months to come, this squeeze
may be relaxed somewhat.

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The reasons offered for demonetisation are two-fold: one, to control counterfeit notes that
could be contributing to terrorism, in other words a national security concern and second,
to undermine or eliminate the “black economy”.

According to RBI report on 31st march 2016, ₹500 and ₹1000 Banknotes consist around
86% of total cash circulation having value of ₹15.44 lakh crore. In this process 97% of old
notes around ₹14.97 lakh crore were deposited in bank before 31st December.

value of notes in circulation

14%
Higher Demonitisation Nates
others

86%

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 HISTORY OF
DEMONITISATION IN
INDIA AND THE WORLD
In India, there were many occasions when high denomination banknotes were
demonetized. RBI printed the highest denomination notes of ₹10,000 in 1938. After that
government demonetize ₹1,000 and higher denomination banknotes in 1946. Higher
denomination banknotes (₹1,000, ₹5,000, ₹10,000) reintroduced in 1954 and all of them
were demonetized in 1978 to curb unaccounted money. First time ₹500 banknotes were
introduced in 1987 in order to restrain over increasing banknotes, due to inflation and in
2000 again ₹1000 banknotes came back in circulation in order to contain the volume of
bank notes in circulation, due to inflation. There are potentially two ways in which the pre-
demonetisation money supply will stand altered in the new regime: one, there would be
agents in the economy who are holding cash which they cannot explain and hence they
cannot deposit in the banking system.
To understand the effects of these dimensions, it is important to first understand what is it
that cash does in the economy? There are broadly four kinds of transactions in the
economy: accounted transactions, unaccounted transactions, those that belong to the
informal sector and illegal transactions. The first two categories relate to whether
transactions and the corresponding incomes are reported for tax purposes or not. The third
category would consist largely of agents who earn incomes below the exemption threshold
and therefore do not have any tax liabilities. Finally, there would be demand for cash for
illegal purposes like bribes in elections, spending over sanctioned limits, dealings in crime
and corruption. If one takes a snapshot of the location of cash at any given point of time, it
is difficult to predict what the breakup of the cash according to these categories would be,
but it would be safe to say that each of these components would be represented in that

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snapshot. This part of the currency will be extinguished since it would not be replaced in
any manner. Second, the government might choose to replace only a part of the currency
which was in circulation as cash. In the other words, the rest would be available only as
electronic money. This could be a mechanism used to force a transition to cashless medium
of exchange.
However, ₹2,000 banknotes were first time introduced in Nov 2016. Along with India many
countries in the world had done demonetization in the history. Almost countries that had
done demonetization had some common objectives of demonetization which were to curb
corruption and black money and their government decided to demonetize their higher
denomination notes to rid of these problems. Here is the list of some countries that had
done demonetization:
List of countries in the world that had done Demonetization

Country Year Objective Results

Name

Nigeria 1984 To fix, debt Economy

burdened and collapsed
inflation-
ridden economy

Soviet Union 1991 Fight against The economic

unearned income, system of the
smuggling and USSR was
corruption essentially
crushed

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Ghana 1982 To control black People turned
money to foreign
currency

Myanmar 1987 To curb black led political

money dispute and
died
thousands of
people

North Korea 2010 To lower down Miserably

the market of Failed
black
money

Zimbabwe 2010 Sliding out from Failed

Hyperinflation

Australia To the curb black Success

1996 money crisis and
improve security
features on the
notes

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Britain 1971 To bring failed in other
uniformity in countries
currency except Britain

USA Due to black Success

1969 money

Pakistan 2015 To get rid from Messed Up

Black Money,
Counterfeit
Currency

Philippines 2016 To preserve the --

integrity of
currency

By investigating the table, we can observe that most of the countries that have failed
miserably. The main reasons behind the success could be the behavior of Indians to find a
way to show patriotism and the belief of Indian people in their strong gov.

Other than this observation, we can see in the table this table.

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By collecting the growth rates of the countries, which has done the demonetization most of
the countries lost a lot of growth due to that. Nigeria had a negative growth rate during
demonetization and before demonetization. Ghana, Soviet Union, Zaire,
Myanmar GDP growth Country & time periods Pre during Post 4 5/2/2017 economy
collapsed at that time but after the demonetization they grew at higher rate. Other than
this Australia was pretty stagnant in terms of growth rate in pre-and post-
demonetization period. United States and Britain felt a slowdown in the growth rate
during demonetization year but after they grew at higher rate. Many other countries also
done the demonetization when they had high negative growth rates in the following years,
so they couldn’t succeed and their economy collapsed. By this we can understand that it is
pretty hard to sustain the growth, and we should be aware and alert of that fact and should
take appropriate actions, otherwise the story would remain the same for us also.
The effect of demonetization on Money Market, Money Market-Supply Side
Demonetization reduce money supply in economy so M shift left, it’s implies that
consumers have less cash now so output’s demand go down due to fall in consumption (in
Goods Market) and graph of IS shift left and it results to a fall in real interest rate r, Now we
look at the labor Demand side- firm have less cash during demonetization so they reduce
their labor demand and its results to labor demand shift left and also output supply shift
left.

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 CHAPTER 2

LITERATURE REVIEW

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LITERATURE REVIEW
Arpit Guru and ShrutiKahanijow (2010) researcher analysed the black money income?
Need for amendment in DTAA &ITEA and analysed that black money is spread
everywhere in India up to a large extent which continuously stashed towards abroad in
a very large amount. The researcher also identified how black money had caused
menaces in our economy and in what ways it is used.

Sukanta Sarkar (2010) conducted a study on the parallel economy in India: Causes,
impacts & government initiatives in which the researcher focused on the existence of
causes and impacts of black money in India. According to the study, the main reason
behind the generation of black money is the Indian Political System i.e. Indian govt. just
focused on making committees rather than to implement it .The study concludes that
laws should be implemented properly to control black money in our economy.

Tax Research Team (2016) in their working paper stated in favour of demonetization Its
main objective is to analyze the impact of demonetization on Indian economy. This
paper shows the impact of such a move on the availability of credit, spending, level of
activity and government finances.

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 CHAPTER 3

RESEARCH
METHODOLOGY

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RESEARCH
METHODOLOGY
Research in common parlance refers to a search for knowledge. Once can also
define research as a scientific and systematic search for pertinent information on a
specific topic. In fact, research is an art of scientific investigation. The Advanced
Learner’s Dictionary of Current English lays down the meaning of research as “a
careful investigation or inquiry especially through search for new facts in any branch
of knowledge.

The purpose of research is to discover answers to questions through the application

of scientific procedures. The main aim of research is to find out the truth which is
hidden and which has not been discovered as yet.

The process used to collect information and data for the purpose of making business
decisions. The methodology may include publication research, interviews, surveys
and other research techniques, and could include both present and historical
information.

Data Collection
There are mainly two data collection techniques that can be use for any
type of research that are:

Primary Data
Primary data are information collected by a researcher specifically for a research
assignment. In other words, primary data are information that a company must gather
because no one has compiled and published the information in a forum accessible to the
public. Primary data are the data which the researcher collects through various methods
like interviews, surveys, questionnaires etc.

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Secondary Data
Secondary data are the data collected by a party not related to the research study but
collected these data for some other purpose and at different time in the past. If the
researcher uses these data then these become secondary data for the current users. These
may be available in written, typed or in electronic forms. External secondary data is
obtained from outside sources.

This research is solely base on secondary data collected from different sources like websites,
Newspaper, journals, magazines, E-books etc

OBJECTIVE
1. To study the major impacts of demonetisation on Indian Economy.

2. To study the various objectives of demonetisation.

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 CHAPTER 4

DATA ANALYSIS

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 Analysis of
Demonetization by
Sectoral Data Trends
Agricultural and Forestry Sector
Agricultural output is not seen immediately as crop
take time in growing. So, the data shown in the graph
actually representing the output of the previous
quarter. So, we would be able to see the effect of
demonetization on agriculture only after the results
are out for the next quarter. Sale, transport,
marketing and distribution of ready produce to
wholesale centres or mandis, is dominantly cash-
dependent. 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 and when credited into
bank accounts with limited access affect the sector.
The marginal farmers who sell their products on day
to day basis to the mandis and directly to the
consumers have been impacted.

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Manufacturing Sector
Manufacturing sector histograms in the above set of graphs shows that manufacturing
sector has come down in the Q3. It is including the
formal sector only, that’s why it is only a small dump.
Otherwise, it could have been a large dump because
of a huge effect on the informal sector in
manufacturing industry. At the time of
demonetization, everyone was getting small amount
of cash that was only good to make the daily
expenses of a person and his /her family. Same was
the case with the people that were running many
manufacturing firms. As the survey showed only a
mild decline in manufacturing production in the last
month of the year, the average reading for the
October-December quarter remained in growth
terrain, thereby suggesting a positive contribution
from the sector to overall GDP. They didn’t have
enough cash to pay their employers on daily basis.
The supply of workers went down because they were
not getting new notes to buy something by doing the
work at firms. Some cases were seen those days of
the firm masters giving the employers the old notes
.That lack of the labor, lead to less production in manufacturing sector in Quarter 3.

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Real Estate
By the graphs, we can see that In Financial, Real Estate and Professional services, there
is a significant dump in the quarter 3. We can
understand this scenario by observing the basic
characteristics of these sectors. We know that in the
real estate sector, most of the transactions of even
very big deals are done through the cash. People don’t
prefer the online transactions in these cases due to
the fear of various duties and taxes on big transaction
to buy and sell properties. When the demonetization
was done, people had lesser currency with them than
that of normal days to do the transactions. A large
chunk of black money is invested in the real estate, so
real estate people had more currency than that of
according to their real income. The people who had
sold the property in recent time, had enough cash but
they could not tell the source of that. That large supply
of money was adjusted, large chunk of currency went
out of the market that is the essential lubricant to run
the real estate smoothly. In this way, the loss was
accounted due to very less activities. Real Estate is
most reactive sector towards economic policy changes like changing in Interest rate,
Demonetization, Tax Reforms, Shrinking Stock Markets etc. Therefore, we can see above
in the histogram that Real Estate market fell down in Q3 due to shorting of cash.

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Construction
Construction Trade, hotel, Transport Sector, Broadcasting Related services, Mining and
Quarrying sectors’ output not changed in
Quarter 3 because in these sectors a very few
transactions are made in cash.

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Public administration and
Defense
Public administration and defense is not affected
much by demonetisation.

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Electricity, gas and Water
supply
Electricity, gas, water and other essential things
does not changed during any month because they
are very essential for everybody.

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IMPACT OF
DEMONITISATION ON
GDP GROWTH
India’s GDP which grew at 7.6% in FY 2015-16 is likely to slow down by 0.5% to 1.5% as per
reports. This is due to less availability of cash in cash-
intensive sectors like manufacturing and real estate
Purchasing power of consumers has been negatively
affected due to cash not being readily available. It is indeed
difficult to predict the likely growth trajectory post
demonetisation. But assuming that the formal sectors
maintain the observed and the informal sectors have a flat
growth in the third quarter (Q3) of 2016-17 Q3 growth may decline to 4.1% in a best case
scenario. In case the contraction extends to industrial and professional services sector and is a
little sharper in construction and trade, Q3 growth may dip as low as 1.5%. Growth is expected
to recover gradually in the fourth quarter (Q4) of 2016-17 and in the first quarter (Q1) of 2017-
18 before returning to its normal trajectory thereafter. It is indeed true that increase in liquidity
in the formal banking sector will increase GDP growth originating in this sector, but with its
share of around 6% in GDP and with an increase in growth of 0.5 and 1.0 percentage points
factored in, this sector’s growth in Q3 and Q4, respectively, its overall impact on GDP growth
assessed may not be significant.
We need to remember that Indian economy is largely cash driven with more than 90%
transactions taking place in cash and digital transactions accounting for just the remaining 10
percent.

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Banks have also been focusing on the single task of deposit and withdrawals with the result that
their core function of issuing loans has been adversely affected. Also current account
customers, who are largely business owners, need large amounts of cash at short notice have
not been able to access cash and credit owing to restrictions on withdrawals and inability of
banks to focus on the task of issuing loans.

This has resulted in short-term disruptions in transactions in agriculture and related sectors,
small establishments, households and among professionals. Since injection of liquidity is slow,
incomes in both formal and informal sectors have been affected with the intensity of adverse
impact being greater for the informal sector. Since self-employed and casual workers dominate
in the overall economy, their incomes may suffer a setback. While some may view it as
deferring expenditure and income, a part of it may actually be revenue and income forgone
forever.

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Tax Compliance
A fee charged ("levied") by a government on a product, income, or activity. If tax is
levied directly on personal or corporate income, then it is a direct tax. If tax is levied on
the price of a good or service, then it is called an indirect tax. The purpose of taxation is
to finance government expenditure.
India’s tax-to-GDP ratio is quite low at 16.6% compared to other emerging economies. It
is estimated that since more money, including black money, gets accounted for this will
lead to better tax compliance owing to better targeting of income. This led to higher tax
collection as business men are depositing cash lying with them as current year income with
advance tax. Defaulters of bank, property tax, electricity bills and telecom bills are clearing
their long pending bills and thus utilizing their old currency notes. The positive impact could
be lower tax rates as the tax base widens and more people start paying taxes. The digital
push of the government will also result in higher indirect tax revenue for the govt. in the
form of service tax. Moreover businesses that under-reported their revenue earlier, will
have to make proper disclosure, especially, of revenue received through digital or
cashless means.

There are multiple channels through which taxes will be affected:

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
 At the point of transition to the new regime, people have attempted to
convert cash balances into commodities like gold or luxuries. On these
transactions the governments would have a spurt of taxes. This would
however not last beyond the transition phase.

 In the subsequent period, the impact on indirect taxes would be negative

because of the compression in demand.

 On property taxes, some local bodies have given people a window of

opportunity to pay old as well as current taxes in the scrapped notes. This
would result in an increase in revenue collections in property tax. 16

 On income tax there can be two potential effects: first, with compression in
the economy, there could be a reduction in the tax collection. In the
unlikely event of people choosing to deposit unaccounted balances in the
bank and pay taxes and penalty on the same, or if the tax department
through investigation, finds that some of the deposits are not explained
income tax collections would increase. For any individual depositing
balances above Rs 10 lakhs, the tax and penalty together would absorb
the over 90 per cent of the deposited amount. This would serve as a
disincentive for people with large balances to come and deposit the same
into accounts. In other words, the government cannot expect to get major
collections in terms of the tax and penalty on unaccounted incomes
revealed.

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On Small and Medium-
sized Enterprises (SMEs)
Small and midsize enterprises are businesses that maintain revenues, assets or a number of
employees below a certain threshold. Every country and economic organization has its own
definition of what is considered a small and medium-sized enterprise.

The small and medium-sized enterprise (SME) sector,

as we understand, is a big chunk of the economy,
contributing to eight percent of the GDP whilst
employing more than 80 million people year on year.

The labor wages in this sector are largely paid in cash

and wages have been adversely affected by the
demonetisation move. Unemployment has also been
reported owing to decline in demand of SME goods as the purchasing power of the
consumers has contracted in the short term. Other sectors within the SME space
like restaurants and transport operators have also been negatively impacted since
economic activity has declined and also due to the fact that there is high tendency in this
segment to accept payments through cash only.
Wholesale vegetable markets have been witnessing declining demand and prices of
tomatoes and other food items have fallen drastically making it economically unviable for
the farmers to produce these crops.

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On Agriculture
Agriculture and allied sectors like forestry and fisheries accounted for 13.7% of the GDP
(gross domestic product) in 2013, about 50% of the workforce. The economic contribution
of agriculture to India's GDP is steadily declining with the country's broad-based economic
growth. The reason that we have permanent civilizations, is because of agriculture.
With the development of agriculture, communities did not have to follow the herds
in order to have food to eat. ... To produce the mass amounts of food, the farmers
needed extra help, which led them to domesticate animals. This is one sector where all
transactions are in cash and, given the values involved, involve the higher denomination
notes. The withdrawal of the old currency notes has put pressure on the mandis; farmers
are having problems in selling their produce as both the parties have to agree on the mode
of payment. Also since there is acute shortage of Rs 500 denomination notes
presently, change for the high denomination Rs 2000 notes is not readily available with the
vegetable and fruit vendors. This is also taking the buyers away from these vendors to big
retail markets thus impacting the livelihood of the unorganized sector. Agricultural output is
not seen immediately as crop take time in growing. So, the data shown in the graph actually
representing the output of the previous quarter. So, we would be able to see the effect of
demonetization on agriculture only after the results are out for the next quarter.

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On Employment
Generation
Since consumer demand has slowed and consequently industrial production has
declined, employment generation has been adversely impacted by the currency
demonetisation drive. Since the manufacturing sector which accounts for the highest
employment of skilled and semi-skilled laborers, is witnessing slowdown in production; not only
less jobs are being created but lay-offs are also taking place at a higher rate.
Informal employment, which constitute as high as 95 percent of all employment is backed with
no social security such as health, education or provident fund benefits. Workers are subject to
be fired at any point of time during the production process. Since majority of wage payment is
made in cash form; they are thus the ones to face misery caused by the recent announcement
of ‘demonetization’. According to Financial Express (Nov, 24, 2016), an estimated 4 lakh
workers, largely belonging to this segment will be affected by the decision. It is further found
that labor intensive units such as food and beverage, tobacco, textile, leather, wood and
jewelry employ nearly half of the total workers in the organized manufacturing sector of the
economy (ASI, 2013-14). Given that nearly 84 percent of total factories have employment in the
range of 0 to 99 are thus prone to be affected by the recent move of the government.
Newspaper, electronic media or social media are flooded with the news on ‘reverse migration’,
i.e. lakhs of people are forced to flee the industrialized state such as Punjab, Haryana,
Maharashtra, Gujarat etc., to their place of origin.
Industry is staring at temporary job losses due to demonetisation, as production gets hit,
especially in labor-intensive sectors like textiles, garments, leather and jewelry. As many as 4
lakh people, mostly daily wagers, may have either lost their jobs or shunned work temporarily
due to the lack of payment so far, and the number is only going to grow if the cash crunch
persists.
From the above analysis, it can be easily concluded that employment scenario in the country is
not conducive enough to face any challenge such as the ‘demonetization’ of currency. In a
country, when 79 percent of non-agricultural wage workers have no written contract and only
one fourth are eligible for any social security, the decision is certainly a cause of concern. India
has the world largest youth population, so for any developing country like India, it is the time to
harness the population dividend by providing them gainful employment.

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Automobiles
“There will be a temporary disruption in the auto industry in the near term due to the
ban on currency notes. But a larger impact will be in the rural markets as the number of
cash transactions is high. It is, however, too soon to comment and more clarity will
emerge in a few days,” Sugato Sen, deputy director general, Society of Indian
Automobile Manufactures, told Autocar India. Motorcycle sales in the rural areas could
also slow down since a majority of two-wheelers here are bought with cash. Besides,
two-wheelers are exempt from disclosure of Permanent Account Number which is
mandatory for larger vehicles. While passenger vehicle (PV) sales won’t be impacted
much, two-wheelers (2W), commercial vehicles (CV) and tractor sales will take a
significant hit over the next few months. Two-wheelers, commercial vehicles, and
tractor sales declined after demonetization, while passenger vehicle and private car
sales were flat as compared to the months preceding November. Although there are
signs that the initial negative impact on sentiment and sales is now abating, it’ll
probably be several months before growth in India’s automotive market overcomes its
current slump.

PROS CONS
Passenger Vehicles: Short term impact Two Wheelers: High impact on 2 wheeler
due to purchase deferment; demand will sales as large % of rural 2W transactions
revive in medium term. are in cash, % transactions backed by
loans is lower

Tractors: Demand to be materially Luxury cars & SUV: Sales will see
impacted; plus questionable trade significant impact due to wealth
practices like over-invoicing to moderate deterioration and decline in rural
transactions (cash based)

Due to decrease in bank lending rates, Commercial Vehicles: Negatively impacted.

the sales might be boosted as the Bike 2nd hand truck sales, which had higher % of
and Car EMIs become much more cash transactions, will decline sharply (both
affordable. number of transactions and pricing)

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Impact of
Demonetisation on
Black Money
Fighting black money rampant in the economy was one of the foremost objectives of
this entire exercise.

Cash component forms just 6% of the black money in the Indian economy and currency
demonetization will target just this 6% black income. If various reports are anything to
go by, most of this black income has been converted into white by depositing it in Jan
Dhan accounts, depositing in individuals own accounts by breaking into smaller chunks,
by exchanging for new currency notes through hawala dealers, by buying last-minute
luxury items like jewelry and high priced mobiles, by paying advance wages to
employees etc.

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This is supported by the fact that almost the entire amount of
Rs 14.18 lac crores in Rs 500 and Rs 1000 currency
denominations lying with the public has returned to the
banks at the time of writing this post. This implies that the
dividend which the govt. has been hoping for by way of 2-3
lac crores not returning to the banking system (since it is
black money and/or counterfeit currency) has turned out to
be a mirage.

Also as per various announcements by the govt. from time to time that deposits by
housewives and those exempt from tax will not be scrutinized has provided a way out
for black money hoarders to convert their money into white.

However there have also been some positive impacts like one time removal of
counterfeit or fake currency from the economic system. Some people argue that since
black money has reduced, prices of black money intensive sectors like real estate and
gold jewellery will go down. This remains to be seen.

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But demonetisation cannot and will not prevent future generation of black money since
black money problem is more of a cultural mindset in India than a legal problem.

It will also be easier for the corrupt and black money hoarders to deal in Rs 2000
currency notes as compared to Rs 500 and Rs 1000 notes since higher currency value
can now be carried with greater ease.

A total of Rs 3185 crores in black money of which Rs 86 crores in new notes has been
seized by the Income Tax authorities since the launch of the demonetisation drive on
8th November. This implies that on the one hand black money is getting unearthed and
on the other leakage of new currency notes is taking place; most probably through the
banking system itself.

On15th November 2016 Attorney-General Mukul Rohatgi submitted in the Supreme

Court that, 3.25 Million Trillions in Rs. 500 & 1000 notes was deposited out of 15 or 16
Million Trillions in circulation. At least, Rs. 10 to 11 Million Trillions is expected to come
in. It is clear from the Attorney General statement that, At the time the decision to

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demonetization was announced, the view within the government was that, roughly Rs 5
Million Trillions of the scrapped currency would not come back into the system. There
was also a view within a section of the government that this money, once legally
extinguished, would constitute windfall gain for the RBI and could be transferred to the
Centre as special dividend. According to Bloomberg news services Nearly 97 per cent of
the demonetized Rs. 500 & 1,000 notes has been deposited with banks as on December
30, , the process is not over yet. The window for majority public to deposit their old Rs
500 and Rs 1,000 notes got over by the 31 December but those Indians who were
abroad during 9 November to 30 December have been given a three-month period till
31 March to deposit the banned notes, while for non-resident Indians (NRIs), the
window is actually open for the six months until 30 June. it is quite clear from that
expectations of the Government and the reality is different. There are two possibilities.
One, there was very little or no black money in cash in the system and most of it is
already converted into assets such as real estate, gold or overseas financial investments.
The second, tax cheats have found a way to infuse nearly all the black money in cash to
bank accounts through several own accounts or through Anonymous (benami) channels
including those Jan Dhan accounts owned by the vulnerable low-income people. The
public has validated all that was invalidated by PM Modi on the evening of 8 November.

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CORRUPTION IN INDIA The

most common word 'Corruption' we find in India. Everyone talks about it, hates it, wants to
eliminate from system. According to Transparency International Corruption defined as “the
abuse of entrusted power for private gain” In India it has even crossed the alarming stage.
From the officials of the highest rank to a peon, everyone is involved in corruption. Many
big problems such as unemployment, poverty, illiteracy, pollution, underdevelopment,
external threats etc. are posed in front of the Indian government. Having a glimpse at all
these problems faced by India, one might notice that corruption plays an important role in
making these problems even bigger. India is still facing poverty due to corruption. Most of
the governments and its employees are corrupt so the schemes initiated by the government
for the betterment of poor are not properly implemented and just because corruption
comes into play the grant advanced to the poor does not reach them and they remain the
same and so does the problem of poverty.

Causes of Corruption
Once we understand what is corruption and its evils, it is important to understand the
Causes for corruption. some of them are Low pay scale in public sectors, the tax collection
system, less job opportunities in the country, lack of accountability in public sectors, lack of
enough powers to the judiciary system, lack of transparency in public sector, unhealthy
competition in business organizations.

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Classification of Corruption
Corruption can be classified in to four types:

(i) Petty corruption: Government or public servants abuse their power

by accepting benefits for regular approvals and transactions. The victim
of this type of corruption is only an individual.
(ii) Grand Corruption: when the public officers in high positions (Political,
administrative and financial) abuses the power while making the policy
and its implementation. This is a most dangerous type of corruption as
entire nation will become the victim of these corruptive and
compromised decision made at such a higher levels.
(iii) Business Corruption: Often the big corporate houses engaged in
corruption mainly tax evasion, money laundering, accounting and
financial irregularities and insider trading.
(iv) Political Corruption: It refers to greed of power makes the political
parties to indulge corruptive practices such as purchasing voter (cash,
alcohol and gifts), favoring relative and friends by providing jobs,
dividing the people in the name religion, cast and creed and payment
of journalist for favorable coverage.

After analyzing the causes and classification of corruption, it is highly difficult to

understand how Demonetization will influence or stop corruption whereas we can say that
non availability of cash (new currency) will reduce corruption for a short period at petty
levels, once the currency remonetized business as usual. Whereas the demonetization gave
chance to the some crook bank employees to get involved in corruption for converting
demonetized currency with new currency. What about the most dangerous types of
corruptions at Grand, business and political levels, dose this require cash availability to
operate.

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Terror Funding and Fake
Currency
This was another stated objective of the currency demonetization drive of the
government. While initial reports suggest that terror related activities in J&K witnessed
a noticeable halt in the days following the demonetisation drive, including, stone
pelting by misguided youths; the recent Nagrota attack shows that terrorism is
continuing in the valley.

Although the availability of cash has surely declined among the terror groups presently.
The govt. also claimed that the new currency notes contain very high security features
and are almost impossible to replicate. But this claim does not seem to be true since
many stories of

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Counterfeit currency has come to light since the note ban was announced on November
8th. However in the short term, circulation of fake currency has definitely slowed
down considerably since the infrastructure set up to print fake currency notes in
neighboring countries like Pakistan has been rendered useless by the demonetisation
drive.

Bureau submitted a report to Lok Sabha on fake currency notes seized by police and
other enforcement agencies for the year 2013 to 2016 (up to 30th September) f 278
million is seized. According to "Estimation of the quantum of FICN in circulation", the
joint study by the Indian Statistical Institute and National Investigation Agency
conducted in the year 2015, to analyze fake-currency trends, especially those originating

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across India‟s borders it is clear that out of every 1 million note in circulation in India
250 notes are fake i.e. 0.00025 per cent. At any given point out of 16.41 lakh corores in
circulation only 4 billion are fake notes i.e. 0.00025 per cent. This study even reveals
that Rs. 0.7 billion fake currency infused every year in the Indian market and the
agencies only being able to intercept one third of them. The study said that "the
detection of FICN is carried out primarily by commercial banks. However, their reporting
is irregular too and only three banks - Axis, HDFC and ICICI report about 80 per cent of
the detection". The report concluded that "the existing systems of seizure and detection
are enough to flush out the quantum of FICN being infused". The institute says that if
detection can be improved, the value of FICN in circulation can be reduced by at least 20
per cent annually.

Cashless Transactions
Cashless transactions account for only 10% of all transactions on daily basis. The
government in order to divert some of the blame for the poor implementation of this
demonetization exercise announced mid-way that making India a cashless or less cash
economy was one of the important objectives of this demonetization drive. Towards

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 this end, the Finance ministry, RBI and NITI Aayog announced a host of incentives to
boost cashless transactions. This was also done to ease some of the problems that have
resulted due to acute shortage of cash in the economy.

Some of these incentives include:

 No Service Tax on cashless transactions below Rs 2000

 Providing cash backs ranging from 0.25-0.75 percent on various transactions like paying

for fuel, govt utility bills, stamp papers, property registrations etc.

 Encouraging use of Point-of-Sale (PoS) machines and mobile wallets like PayTM by

businesses and individuals

 Reducing self-assessment tax from 8% to 6% on businesses with annual turnover of less

than Rs 2 crores

 Announcing monthly jackpots for people using cashless transactions in govt services

 And other incentives

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As a result, use of mobile wallets and cashless transactions, as a whole, has increased by
about 300% since the launch of demonetisation exercise. However we need to
remember that this 300% increase is against a very low base of digital transactionsand
most of this increase has been noticed in the urban areas where people have ready
access to PoS machines, internet banking, and mobile wallets.
Cashless transactions are still rarely used in rural areas and in the informal sector like
road side vendors, small shops, buying seeds, wage payments etc.

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Advantages of Digital transactions
1) Reduction in cash operations cost: Cash operations costs to the RBI and other
commercial banks can be limited to a greater extent with the cashless economy which is
possible through digital transactions. The increased use of credit/debit cards will reduce
the amount
of cash that people will carry and as a consequence, reduce the risk and the cost
associated with that.
2) Universal availability of banking services online: Digital transactions will
provide universal availability of banking services to all across the nation as there would
not be any physical infrastructure needed other than digital portals of the respective
financial institutions.
3) Convenient and user friendly services: Digital transactions can be performed
at any time across world through internet with no delays and queues. Also, speed and
satisfaction ofoperations for customers, make it an efficient way of making payments.
4) Transparency in businesses: An increased use of credit cards instead of cash
would primarily enable a more detailed record of all the transactions which take place in
the society, allowing more transparency in business operations and money transfers.
Thus, improvement in credit access and financial inclusion will benefit the growth of
SMEs in the medium/long run.
5) Efficiency in welfare programmers: There will be greater efficiency in welfare
programmersas money is wired directly into the accounts of recipients. Thus once
money is transferred directly into a beneficiary’s bank account, the entire process
becomes transparent. Payments can be easily traced and collected and corruption will
automatically drop.
6) Reduced instances of tax avoidances and curb black money generation:
Since digital transactions are based on financial institutions, it lowers the instances of
tax avoidance and money launderings due to the higher traceability of all transactions.

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At the same time, curbs generation of black money and problem of counterfeit
currency.

Disadvantages of Digital transactions

1) The necessity of Internet: Since, internet is a prerequisite for digital
transactions,inaccessibility of internet services at emergency situations can limit the use
of digitalplatforms for transactions.
2) Higher risk of getting hacked: The biggest fear is the risk of identity theft. With
the rising incidence of online fraud, the risk of hacking will grow as more people use
digital platforms for transactions in the long run. The worse situation is when the system
of processing company has been broken, because it leads to the leak of personal data on
cards and its owners. Even if the electronic payment system does not launch plastic
cards, it can be involved in scandals related to the Identity theft.
3) High restrictions: Each payment system has its limits regarding the maximum
amount in the account, the number of transactions per day and the amount of output
which limits its use.
4) The lack of anonymity. The information about all the transactions, including the
amount, time and recipient are stored in the database of the payment system which
implies that the intelligence agency has an access to this information.
5) Difficult for tech-savvy: Besides the practical difficulty of going digital, a bigger
block is the psychological shift. The digital medium may prove a challenge for the tech-
unfriendly people, who will need more time to adapt or the availability of other options
to conduct transactions. It’s a problem for the older people and those lacking digital
literacy, who may suddenly find themselves locked out of their accounts if they can’t
download an app or don’t have cash.

Survey on impact of demonetization on Economy

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According to RBI, banks have received almost Rs. 13 lakh crores in old 500 and 1,000-
rupee notes uptil December 10, 2016. Meanwhile, the banks have issued new currency
notes valued at Rs. 5, 92,613 crore to the public over their counters and through their
ATMs( between 10thNovember – 19th December 2016. In this period, the RBI has issued
to the public through the banks and their branches a total of 22.6 billion pieces of notes
of various denominations of which 20.1 billion pieces belonged to small denominations
of Rs. 10, 20, 50 and 100s and 1.7 billion belonged to higher denominations of Rs. 2000
and Rs. 500.

It has been observed that money deposited and money withdrawn has a deficit of Rs.
7,07,387 crore in the system which in the present situation is causing immense cash
crunch in the economy ultimately affecting the day to day requirements of people and
businesses across the country.

Summary of Withdrawal and Deposit Balance sheet in the wake of demonetization

Total deposits (1) Rs.13,00,000 Crore

Remonetized money (2) Rs. 5,92,613 Crore

Deficit (2-1) (-)Rs.7,07,387 crore

Source: PHD Research Bureau, compiled from RBI

Production process not only in the informal sector but also in the formal sector has been
impacted directly or indirectly. Cash driven segments such as fruits and vegetable
markets, horticulture and floriculture, agricultural and food processing, construction
activities, among others have been impacted. Nonpayment of wages to the workers of
cash driven sectors has adversely impacted the employment situation in the informal
sector. Also, the formal sector is impacted as demand in the economy has been
decelerated significantly.

Majority of the economists (81%) said that there will be short-term pain for India's
economicgrowth. But, the benefits of demonetization will go a long way with its impact
not just only on black money, terrorism and corruption but also in improving tax
compliance, better fiscal balance and lowering inflation which will help in sustaining
economic growth in the longer term.

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There will be an increase in savings and term deposits in the short run as a large part of
the informal and cash-based economy will shift to the banking system for savings and
investments. However, in the long run demonetization may impact savings in bank
deposits as excess funds in the banks could force them to lower the interest they pay on
deposits which would reduce the return of depositors. Further, it is expected that there
could be a shift in other financial assets from bank deposits to stock, mutual funds,
insurance and pension products if the return on small savings is higher than bank
deposits.

It is expected that removal of black money from the system would create a good scope
for reduction in interest rates via-a-vis lower inflationary expectations and reduce the
incidence of direct taxation. People are expecting that the forthcoming budget will be
unconventional and our Hon’ble Finance Minister is going to provide out of box benefits
such as increase in the direct tax slabs and enhanced disposable incomes.

MARKET SIZE
A market is a medium that allows buyers and sellers of a specific good or service to interact
in order to facilitate an exchange. This type of market may either be a physical marketplace
where people come together to exchange goods and services in person, as in a bazaar or
shopping center, or a virtual market wherein buyers and sellers do not interact, as in
an online market.
Market size is a measurement of the total volume of a given market. For now, think of
market size in terms of a pie chart (think of a circle). The entirety of the circle represents
the market size.

Demonetisation reduces the cash flow in the economy which directly affects the need,
willingness and ability to pay of the customer. Because of lack of cash in hand, customers
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are not willing to buy any commodity or product. So there is decrease in the sale of the
goods and services. If we consider the online marketplaces, most of the cash on delivery
orders are cancelled by the customer because of lack of cash resources. It causes heft loss
to all the online market places. The Indian consumer sector has grown at an annual rate of
5.7 per cent between FY 2005 to FY 2015. Annual growth in the Indian consumption market
is estimated to be 6.7 per cent during FY 2015-20 and 7.1 per cent during FY 2021-25.
The FMCG sector has grown at an annual average of about 11 per cent over the last decade.
The overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$
110.4 billion during 2012-2020, with the rural FMCG market anticipated to increase at a
CAGR of 17.7 per cent to reach US$ 100 billion during 2012- 2025. Food products are the
leading segment, accounting for 43 per cent of the overall market. Personal care (22 per
cent) and fabric care (12 per cent) come next in terms of market share.

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 CHAPTER 5

FINDINGS &
CONCLUSION

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 Short-term and
medium-term
impacts
Very short-term impact
By removing 86 per cent of the currency in circulation, has resulted in a very severe
contraction in money supply in the economy. This contraction, by wiping out cash balances
in the economy, will eliminate a number of transactions for a while, since there is no or not
enough of a medium of exchange available. Since income and consumption are intrinsically
related to transactions in the economy, the above would mean a severe contraction in income
and consumption in the economy. This effect would be more severe on individuals who earn
incomes in cash and spend it in cash. To a lesser extent it would also affect individuals who
earn incomes in non-cash forms but need to withdraw in cash for consumption purposes,
since a number of sectors in the economy still work predominantly with cash.
In terms of the sectors in the economy, the sectors to be adversely affected are all those
sectors where demand is usually backed by cash, especially those not within the organised
retailing. For instance, transport services, kirana, fruits and vegetables and all other
perishables, would face compression in demand which is backed by purchasing power. This
in turn can have two effects: while it is expected that supply exceeds demand, there would be
a fall in prices, however, if supply too gets curtailed for want of a medium of exchange,
prices might, in fact, rise. Thus, while generally people seem to expect prices to fall, it is
quite possible that prices would instead rise.

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A further impact would be a compression of the demand for non-essentials by all the agents
in the economy in the face of uncertainty in the availability of cash. The demand from
segments which have access to digital medium of exchange would remain unaffected, but
that from the rest of the economy would get compressed. This would transmit the effect to
the rest of the sectors in the economy as well.

There are likely to be two spin-offs from this change – one, there would be some increase in
tax collections in the short term, and second; various IOUs could emerge as currency
substitutes. To the extent people attempt to get rid of unaccounted cash balances through
purchase of goods and services and/or payment of property taxes, one should witness a spurt
in tax collections in indirect taxes as well as property tax in the month after demonetisation
which would disappear thereafter. There is evidence already that property tax collections in
some cities are higher than last year. Similarly, in the case of currency substitutes, at MCD
tax collection centres at the border, people are being given IOUs in lieu of the balance they
were entitled to, which would be valid for six months.

Short-term effect with complete

replacement:
The short-term effect on the economy would depend on the speed with which and
the extent to which the cash is replaced by the authorities. If the entire cash is
replaced within a short duration of time, the effects beyond the very short term of 1-2
months might be little. But a few sectors are likely to be seriously affected. To give
an example from two sectors which are supposed to have large employment effect
on the economy, we can talk about agriculture, automobiles and construction.

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The second sector which could be adversely affected would be the construction sector. The
sector, it is often argued, works with a significant amount of cash. Payments to workers as
well as a variety of purchases might be carried out in cash. So, on the supply side, this sector
can be adversely affected. On the other hand, on the demand side, the demand for houses and
buildings would appear as a demand for non-essentials and might be pushed on to the back
burner until the economic situation normalizes. Thus, to the extent there are agents in the
economy whose demand was backed by savings from unaccounted incomes held in the form
of cash which got extinguished on demonetisation, there would be a compression of demand.

Short-term effect with incomplete

replacement:
If, on the other hand, the authorities choose to replace only a fraction of the total
cash that was surrendered by the people to the banking sector, then one would
witness some other changes/effects in the economy. For transactions to be restored
to the pre-change level, a number of agents who are using cash as a medium of
exchange have to move to using digital versions of money as the medium of
exchange. While this change is gradually happening in the economy, if it is forced by
making cash inaccessible, the compression in demand as well as in income
generation in the economy would continue for a longer period until people get
familiar with the functioning and use of these media.

Medium-term effects:
In the medium term, the effects would be related to the extent to which the
currency is not replaced within the economy. If the entire currency is replaced, there
would not be any major effects on the economy. However, it is to be expected that
the entire currency would not be replaced – to the extent currency is extinguished

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and to the extent some of the currency remains as bank deposits, there would be
some impact on the economy. The first effect would be a compression of the
economy to the extent the extinguished currency was working as a medium of
exchange. The currency that is placed in the banks but not withdrawn, it is argued,
would generate an expansion in deposits in the economy. In the discussions on
demonetisation, there is a consistent reference to the resultant increase in credit creation in
the economy. Like Finance Minister ArunJaitley says, “Bank deposits will increase and they
will have more capacity to support the economy.

Alternatives to currency: would they evolve in

the face of demonetisation?
A number of agents in the economy would be required to move from the informal
sector to the formal sector. For these agents as well as for agents who have been
operating through the medium of cash and find the transition difficult, certain
informal cash substitutes might emerge. For instance, even at present, there are
coupons like the SODEXO coupons which are used for paying for certain purchases.
These are accepted by a range of establishments in place of formal currency. It is,
therefore, possible to see an expanded use of these coupons. The change might
induce the generation of other tokens as substitutes for money as well - the agency
collecting MCD’s green tax has started issuing tokens in place of change. Similarly,
for high value transactions one can think of bitcoins and other such crypto
currencies on one side and foreign exchange on the other as a mechanism for
settling transactions. Perhaps these would not take on a dimension large enough to
challenge the official currency, but it can disturb the expectation that the
unaccounted economy would be brought into the formal sector since there might
exist alternatives to the formal currency. Here it is important to explore the possibility
and acceptability of peer to peer payment instruments – a category which has been
evolving in recent times.

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Impact on Macro Variables
Apart from the transition issues faced by banks, in judging the impact on the economy,
it is important to differentiate between the two changes that the demonetisation can
bring about in money supply. The first change, i.e., cash being extinguished, to the
extent it was being used as medium of exchange, would result in a compression in
incomes, employment and consumption in the economy. On the other hand, the effect
of the second change, i.e., cash being only partially replaced in the system would have
the opposite effects of expansion in potential credit creation. The potential credit
creation would translate into actual credit creation provided there is sufficient demand
for credit. If the demand for credit in the economy is large enough, the potential credit
can be realised. Of the credit created, other things remaining the same, it can be
expected that at least a part of the credit, will be for productive purposes. This would
mean expansion in investment in the economy and subsequently an increase in GDP and
employment.
If there is increase in investment in the economy, the demand for capital goods rises. If
output can expand in this sector, there would be an expansion in the income generation
and in demand for goods and services. Sectors that are not operating with excess
capacity cannot meet the expanded demand with increased output, leading to increase
in prices. This would hold for agriculture as well as any industry with long gestation lags
to investment. In other words, in the short run there is a possibility of increase in
inflation.
With increase in GDP, since imports are supposed to be related to the size of the
economy, it is expected that imports will rise, but the same cannot be said about
exports. In other words, the balance of trade could worsen. This could result in
pressures on the rupee towards depreciation. Any increase in inflationary pressures too
could augment these pressures.
MSME is one segment of the economy which is credit constrained15. Expansion in the
potential credit in the economy could expand the credit available to this segment of the
economy which is more employment intensive than the organised manufacturing. In
other words, if the access to credit for this segment can be improved, it can generate
many positive spin-offs. One reason why this segment might get better access to formal
sector credit would be if all their transactions move to the digital format, thereby
making available to the lending institutions evidence of credit worthiness. However, for
this the transactions need to move digital before they can get access to credit. In other

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words, unless the banking sector is exploring more risky asset categories, they would
not be the beneficiaries of the expansion in potential credit.
It should be kept in mind that credit is not the only constraint faced by the MSMEs.
There is a cost of compliance with regulation in the formal sector both of tax legislation
and other legislation which would increase the cost of operation. In the absence of
economies of scale, after incurring all these costs, some of the MSMEs might not be
viable in the new environment. In other words, the decision to move from the informal
sector to formal sector is a non-trivial decision for the units and merely changing
the access to credit might not be adequate to alter the status quo. Under those
circumstances, they might explore the use of alternative currencies as a means
for survival.
It is, however, not correct to assume that expansion in credit will definitely
materialise. In the last two years, the demand for credit in the economy has been
sluggish at best. In comparison to a credit deposit ratio of 1.53 in 2011-12, the
figures for 2014-15 were as low as 0.54. While there might be many factors that
contributed to this outcome, what is of consequence is that the demonetisation
has been introduced in this environment where demand for credit is rather low. A
compression in demand in the economy would further depress the sentiment
driving investments. In other words, demand for credit would continue to be low
and the potential credit will not be realised immediately.
bring in sufficient demand and banks would need to explore alternative ways of
placing the additional deposits available with them. This could mean that banks
take in more risky assets potentially opening up the economy to more volatility
and risks. This could include real estate, consumer credit and consumer credit
cards. The housing loan bubble of the US economy might be one such example
of lending to more risky projects, thereby bringing in more volatility into the
system.
Two more extreme possibilities that might follow are: a loss in the confidence of
the people in the official currency leading to bank run kind of situations if the
current description of waiting for long hours for withdrawing money persists and
the caps on withdrawal are not relaxed. Alternatively, they could shift to
alternatives to currency. Second, there could be social unrest if the compression
in incomes and consumption are severe and persistent.

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Cost of Demonetization
17,000 crore on printing and distributing + 6,000 crore as the interest cost of
managing the excess liquidity with banks + 45,900 crores due to economic
contraction = 68,900 crore.

Now we can estimate total profit for the government = 88,430 crores- 68,900 =
19,530 crore.

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CONCLUSION
Initially Govt’s Objective was to curb black money but if we look at the figure, 97% of
₹500 and ₹1000 rupees’ banknotes were deposited in banks and only 3% (.43 trillion
rupees) black money scraped as undeclared income hence we can say a less part of
Black Money is in cash so this action isn’t effective to curb black money. However, Tax
GDP ratio will increase in future. Due to demonetization counterfeiting currency market
offhand shut down for a while but they have capability to create new notes’ duplicate so
we can say in short run their activity will be slowdown but in long run they can rebuilt
their market and also it is easy to handle 2000 rupees notes instead of 1000 rupees
notes in briefcase to giving bribe. In this study, we have found some important points
about the short-term effects of demonetization as well as about the long-term effects
by observing the previous cases of demonetization in other countries. We have to be
alert and thoughtful to sustain our growth because many countries which have done
demonetizations could not sustain the same. In short run, almost all the sector in the
Indian economy have been affected negatively due to shorting of cash. However, in
long-run Informal Economy would be formalize. So, government have to focus on
informal economy and need to make appropriate policies for them. Other than this, we
have got the point by using the Baumol’s model in this case that the transactions were
more difficult to make than it could be simply estimated by the ratio of money supply in
demonetization period to the normal period’s money supply.
It is likely that there would be a spurt in the banking deposits. While interpreting the
phenomenon, however, one has to keep in mind that a large part of their deposits were
earlier used for transactional purposes. For example, if a small trader deposits 2 lakh
Rupees in the Jan Dhan account since the currency in which he held these balances in

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for transactional purposes has been scrapped, it would be incorrect to interpret this as
success of the programme in bringing in people who were hiding black money. Nor can
they be interpreted as additional balances that the banking sector can lend out on the
same basis as earlier deposits, since the deposits now would remain in accounts for
much shorter periods that deposits based on savings would be.

Money supply reduction results to fall in interest rate and accessibility of loan will be
easier as interest rate decrease. It will be helpful to new entrepreneur for their startup.

After demonetization, Indian economy got the momentum towards Case less economy.
Long-term effect of demonetization couldn’t identify yet due to less availability of
information set.

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 CHAPTER 6

RECOMMENDATIONS

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RECOMMENDATIONS
1. There is a need of setting up of digital literacy booths outside
banks majorly in ruralregions for spreading digital literacy across all
sections of the nation.
2. Government should print more and smaller denominations such as
Rs. 50, 100 and Rs. 500notes so that there should be sufficient
circulation of money in the market.
3. Government needs to ensure that the sufficient quantity of money
is being transported tothe banks and ATMs in both rural and urban
areas on time.
4. Facility of mobile ATMs in the Government, public sector and private
corporate sectoroffices having more than 25 employees in their
establishments.
5. Cash driven sectors such as constriction sector and Small and Micro
Units (SMEs) should befacilitated by expanded cash limits for the
payment of salaries of their daily wage andcontractual workers.
6. Cash driven sectors such as constriction sector and Small and
Micro Units (SMEs) shouldbe facilitated by expanded cash limits to
withdraw from the banking sector for the paymentof salaries of their daily
wage and contractual workers.
7. Incentivize RTGS (Real Time Gross Settlement) and NEFT (National
Electronic Funds Transfer) under the ambit of digital transfers so that
more and more people adopt the available facility and are less dependent
on cash transactions.
8. Enhance in the limits of Removal of service tax charged while
making payments throughcredit card, debit card, charge card or any other
payment card up to Rs. 2,000 in a singletransaction is a good start for the
transformation from cash transactions to the digitaltransfers, however, the
limit needs to be revised to Rs. 10,000.
9. Increase in daily cash withdrawal limits from ATMS: Daily cash
withdrawal limit from ATMsshould also be increased to Rs. 10,000 so that
people are not coming in queue again andagain.

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Bibliography

 (2017, February 9). Retrieved September 2017,

from bankbazaar.com:
https://www.bankbazaar.com/savings-
account/demonetisation.html
 (2017). Retrieved september 2017, from
investopidia.com:
http://www.investopedia.com/terms/d/demonetizatio
n.asp
 (2017, september 16). Retrieved september 2017,
from wikipedia.org:
https://en.wikipedia.org/wiki/2016_Indian_banknote
_demonetisation

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