SRI DHARMASTHALA MANJUNATHESHWARA COLLEGE,

(AUTONOMOUS) UJIRE- 574240

(Re-Accredited by NAAC at ‘A’ Grade with CGPA 3 .61 out of 4 by NAAC)

Paper presentation on Demonetisation: “A massive drive”

Organised by Department of commerce and management

Presented by: Ranjith 160654

Date: 16/1/2018

Place: Ujire

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 Demonetisation: “A massive drive”

The process of removing a currency from general usage circulation. Demonetisation is the act of
stripping a currency unit of its status as a legal tender. It is necessary whenever there is a change of
national currency. The old unit of currency must be retired and replaced with a new currency unit.

On 1.8 .2016 the prime minister Naredra Modi had demonited the currency of denomination 500
and 1000 Rs. This is currently on discussion but this is second demonetisation in the Indian history,
in 1978 Prime minister also demonetised currency notes of denomination of 10000 and 5000 Rs
notes

Definition of ‘Demonetisation’

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. It is current forms of money that is pulled from
circulation and it is often replaced with new notes or coins. Sometimes a country completely the
replaces the old currency with new one.

The dictionary meaning of demonetization is “to deprive (a metal) of its capacity as a monetary
standard” or to withdraw from use as currency”.

Finance minister ArunJaitely said that demonetization of Rs. 500 and Rs 1000 notes will expand
the size of economy, increase revenue base and make the system cleaner while preserving its
credibility.

The Indian government had demonetised bank notes on two prior occasions-once in 1946 and then
in 1978-and in both cases, the goal was to combat tax evasion by "black money" held outside the
formal economic system. In 1946, the pre-independence government hoped demonetisation would
penalise Indian businesses that were concealing the fortunes amassed supplying the Allies in World
War II. In 1978, the Janata Party coalition government demonetised banknotes of 1000, 5000 and
10,000 rupees, again in the hopes of curbing counterfeit money and black money. In 2012, the
Central Board of Direct Taxes had recommended against demonetisation, saying in a report that
"demonetisation may not be a solution for tackling black money or shadow economy, which is
largely held in the form of benami properties, bullion and jewellery."

The government has implemented a major change in the economic development by demonetizing
the high value currency notes of Rs.500 and 1000 denomination. These caused to be legal tender
from the midnight of 8 of November 2016. People have been given up to December 30 of 2016 to
exchange the notes held by.

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.

The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the
announcement. In the days following the demonetisation, the country faced severe cash shortages
with severe detrimental effects across the economy. People seeking to exchange their bank notes
had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

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Objectives:
1. Removing black money from currency.
2. Stopping terror funds.
3. Reducing fake notes.
4. Increase cashless transactions.
5. Encourage digitalisation

The reason offered for demonetisations are twofold:

One, to control counterfeit notes that would be contributing to terrorism, in the other words a
national security concern and second, to eliminate the “black money”

S Gurumurthy, well know political and economic analyst from Chennai, have been written about its
evils and suggestions to tackle the issue. He said this move was long overdue. The growth of cash
economy in proportion to the GDP was less than 10% until 2001, which is now 12% of GDP. He
said cash economy has moved deep into the Indian economy. As more than 50% of Indian
economy is in cash. Cash economy is not illegal. But it has destroyed the economy. He said only a
strong prime minister can take this decision, it also have some negative consequences. Out of total
circulation of currency about 16.6 lakhcrores, 87% is in Rs. 500 and 1000. On the other hand fake
currency in circulation is also high, and it affects the security of India. According to an estimate by
State Bank of India, out of 12 lakhscrores in the cash economy, 3 lkhcrore may never come back
into the system. And it will be monetary surplus to Reserve Bank of India.

Impact of demonetization in India Society:

There is a great impact of demonetization in the Indian society and economy. And most important
is that people will have lower expenditure power and they cannot purchase luxurious things.
Expenditure on marriage and other celebration decreases. Indian economy will see a big boom and
booming real assets sector shall fall on the fround. The things become cheaper and Indian currency
shall get respect in the international market. Innovative publication and corruption are down to a
considerable extent. Thus it will bridge a gap between haves and have notes.

Advantages of Demonetizations of currency notes in India are as follows:

1. The biggest advantage is that it helps the government to track people who keep unaccounted
money in cash on which no income tax has been paid; they kept that money at their houses and in
some secret place. This money do not value after demonetization.

2. Illegal activities like terrorism funding, gambling these black money are used. So indirect war
against terrorism and other illegal activity. Reduction in illegal activity Banning high-value
currency will halt illegal activity as the cash provided for such activities has no value now. Black
money is usually used to fund the illegal activity, terrorism, and money laundering. Fake currency
circulation will come to a halt in a single shot. Corrupt officers, money launderers are under threat
as Income tax department is taking all the measures to track such people.

3. Black money inflating the price of major assets like real estate, gold etc. due to demonetization
demand of these assets decrease result into decreasing price. Black Money tracking This move will
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help the government to track unaccounted black money or cash on which income tax has not been
paid. Individuals who are sitting on a pile of cash usually do not deposit the amount in the bank or
invest anywhere as they would be required to show income or submit PAN for any valid financial
transactions. They would hide it somewhere and use it as and when necessary. Banning high-value
currency will impact people who will have no option, but, to declare income and pay tax on the
same or destroy the cash somehow. Now, it is not possible to hide the money as the notes have been
declared invalid.

4. Good amount of tax is received which can be used by the government towards betterment of
society Tax payment Most of the businessmen who have been hiding some income are ready to pay
advance tax as current year's income. Tax payers who have been hiding some income can come
forward to declare income and pay tax on the same. Individuals are required to submit PAN for any
deposit above Rs 50,000 in cash, which will help tax department to track individuals with high
denominations. Also, deposit up to Rs 2.5 lakh will not come under Income tax scrutiny.

5. The demonetisation was initially seen by some sources as a significant step towards making
India a cashless economy. Prime Minister Narendra Modi appealed to Indian population in his radio
address in Dec 2016 to go cashless with slogan - ‘Less-cash’ first, ‘cashless society’ next. More
people began using cards and e-wallets, and the demand for point of sales (POS) or card swipe
machines increased. This led to the acceleration of installation of POS machines According to data
of Pine Labs, the demand for its POS machines doubled after the decision. The company stated
that the debit card transactions rose by 108% and credit card transactions by 60% on 9 November
2016.However concerns were raised regarding the lack security of mobile apps used for digital
transactions. Several e-commerce companies hailed the demonetisation decision as an impetus to
an increase in digital payments, hoping that it would lead to a decline in COD returns which could
cut down their costs. In December 2016, the government launched an app called BHIM (Bharat
Interface for Money) based on the Unified Payment Interface.

The above discussed are advantages of Demonetisation which will boosts our economy to grow.

As demonetisation held in India, most of common man suffered, also Indian economy become
imbalanced the main disadvantages of demonetisation are as follows

Prominent economic analyst Vivek Kaul, said in a BBC article that "demonetisation had been a
failure of epic proportions." It was highlighted that there were meagre or no gains as against ill
effects such as the cost of printing new notes, loss of livelihoods and deaths.

1. The scarcity of cash due to demonetisation, and most people holding old banknotes faced
difficulties in exchanging them due to endless queues outside banks and ATMs across India,
which became a daily routine for millions of people waiting to deposit or exchange the ₹500
and ₹1000 banknotes 9 November 2016. ATMs were running out of cash after a few hours of
being functional, and around half the ATMs in the country were non-functional. The cash
shortage was still ongoing in the month of April 2017, five months after the demonetisation.

According to a survey, the situation was as bad as 83% of people being unable to withdraw
money in Hyderabad, while in Pune, the figure was 69%.

2. As effect of demonetisation, the stock market indices dropped to an around six-month low in
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the week following the announcement. The day after the demonetisation announcement, BSE
SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the
intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points
and the NIFTY 50 index was below 8100 intraday.

3. After the demonetisation was announced, about 800,000 truck drivers were affected with
scarcity of cash, with around 400,000 trucks stranded at major highways across India were
reported. While major highway toll junctions on the Gujarat and Delhi-Mumbai highways also saw
long queues as toll plaza operators refused the old banknotes.

4. Transactions in the Indian agriculture sector are heavily dependent on cash and were adversely
affected by the demonetisation of ₹500 and ₹1,000 banknotes. Due to scarcity of the new
banknotes, many farmers have insufficient cash to purchase seeds, fertilisers and pesticides needed
for the plantation of rabi crops usually sown around mid-November. Farmers and their unions
conducted protest rallies in Gujarat, Amritsar and Muzaffarnagar against the demonetisation as well
as against restrictions imposed by the Reserve Bank of India on district cooperative central banks
which were ordered not to accept or exchange the demonetised banknotes.

5. By the second week after demonetisation of ₹500 and ₹1,000 banknotes, cigarette sales across
India witnessed a fall of 30–40%, while E-commerce companies saw up to a 30% decline in cash
on delivery (COD) orders.

6. India's GDP growth for the quarter Jan-Mar '17 was 6.1% as against a forecast of 7.1% by
economists. The GDP growth for the entire fiscal year was 7.1%, a reduction from the 8% of the
previous year. This drop in GDP was attributed to demonetisation by economists. The GDP growth
rate for the quarter April - June 2017 dropped to 5.7%, in comparison to 7.9% for the same quarter
in the previous year. This drop in GDP growth was attributed to demonetisation. This was the
lowest growth in GDP since 2014.The drop in GDP growth was exactly as predicted by Manmohan
Singh in November 2016.

7. There was a reduction in industrial output as industries were hit by the cash crisis. The
Purchasing Managers' Index (PMI) fell to 46.7 in November from 54.5 in October, recording its
sharpest reduction in three years. A reading above 50 indicates growth and a reading below shows
contraction. This indicates a slowdown in both, manufacturing and services industries.

8. There was a loss of jobs due to demonetisation, particularly in the unorganised and informal
sector and in small enterprises. Labour union jobs were crashed

9. In India, the cash deposited into hundis, or cash collection boxes in temples and gurudwaras are
exempted from inquiry by the tax department. This exemption is sometimes misused to launder
money. After the note ban, there was a spike in donations in the form of the demonetised notes in
temples. Authorities of Sri Jalakanteswarar temple at Vellore discovered cash worth ₹4.4 million
from the temple hundi in the form of defunct notes.

Criticism:

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  The Indian Supreme Court while hearing one among a slew of cases filed against the sudden
demonetisation decision in various courts, observed that it "appears to be carpet bombing
and not surgical strike" which government repeatedly claims it to be.
 Nobel laureate Indian economist Amartya Sen, severely criticised the demonetisation move
calling it a "despotic action" among other things
 Former Senior Vice-President and Chief Economist of the World Bank, Kaushik Basu, called
it a 'major mistake' and said that the 'damage' is likely to be much greater than any possible
benefits.
 Pronab Sen, former Chief Statistician and Planning Commission of India member, called it a
"hollow move" since it did not really address any of the purported goals of tackling black
money or fake currency.
 Prabhat Patnaik, a former professor of economics at the Jawaharlal Nehru University, Delhi
called the move 'witless' and 'anti-people'. He criticised the simple way in which black
money was assumed as "a hoard of cash", saying that it would have little effect in
eliminating "black activities" while "causing much hardship to common people."

Conclusion:

The above decision in on the recent decision on demonetization of Rs. 500/- and Rs. 1000/- notes.
This decision is not new it has done before in 1946 and 1978. Other countries like Europe,
Germany, France and Italy demonetize their currency in the past. Various definitions have declared
that demonetization is just to eradicate black money from the economy. This also reduces terror
funds and fake notes. More Indian transactions are done in cash, although cash transactions are not
bad but it destroys economy. This decision also helps to encourage projects like digital India or
case less India. It is also found that although many inconveniences people do not criticized
government decision. This affects adversely to the daily wages worker and small business. But all
most people stand by the government decision. It is also found that people who own black money
find various methods to convert this money into white. And at last but not least as “every coin has
two sides” this decision also does have their own positive and negative impact. So the paper
concluded by identifying various pros and corns of demonetization.

Reference:

https://www.goodreturns.in/classroom/2016/11/indian-currency-demonetization-advantages-
disadvantages/articlecontent-pf8421-517945.html

https://www.studydhaba.com/demonetization-pdf/

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