Demonitisation (Report)

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PANDIT SANT RAM GOVT.

COLLEGE

BAIJNATH

PROJECT REPORT

ON

“IMPACTS OF DEMONETISATION IN INDIA”


Submitted to Submitted by

Mrs Kamlesh Rana Priyanka, Indu,

Preeti, Avinash

& Vikrant

PREFACE
In today’s era of cut throat competition Bachelor of

Commerce (B.COM) is sure to have an edge over their

counterpart. B.COM education brings its students in

direct contact with the real corporate world through

industrial trainings & Project report. The B.COM

programmer provides its students of various

managerial activities conducted in various

department like production, marketing, finance, HR,

export-import, credit, dept etc. gives the student a

conceptual idea of what they are expected to manage,

how to manage & how to obtain the maximum output

in Impacts of Demonetisation in India (1946, 1978 &

2016).
WE WISH TO EXPRESS MY SINCERE GRATITUDE
TO MRS. KAMLESH RANA FOR PROVIDING US
AN OPPORTUNITY TO MAKE THIS PROJECT
REPORT ON “IMPACTS OF DEMONETISATION”.

AT LAST WE THANKFUL TO THE PRINCIPAL (MR.


SUNIL MEHTA) OF PSR COLLEGE BAIJNATH FOR
PROVIDING ME THE OPPORTUNITY TO EMBARK
ON THIS PROJECT REPORT.
TABLE OF CONTENTS
INTRODUCTION

HISTORY

IMPACTS OF DEMONETISATION IN 2016

IMPACTS OF DEMONETISATION IN 1978

IMPACTS OF DEMONETISATION IN 1946

ABSTRACT

SHORT TERM AND MEDIUM IMPACTS

TRANSITION ISSUES FOR BANKING SECTOR

MODE OF PAYMENT AND SPENDING BEHAVIOUR

IMPACT ON MACRO VARIABLES

COMPARISON

REVIEW OF LITERATURE

CONCLUSIONS

BIBLIOGRAPHY
INTRODUCTION
The government has implemented a major change in
the economic environment by demonetizing the
highvalue currency notes – of Rs 500 and Rs 1000
denomination. These ceased to be legal tender from
the midnight of 8th of November 2016. People have
been given upto December 30, 2016 to exchange the
notes held by them.1 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. 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”. 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. 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. The empirical extent of these
two components will be unravelled only over the next
six months. These two would have different effects on
the economy in the short term and in the medium
term, as will be explored below. 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
incoms 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. The uses that cash is
put to for these various segments of the economy can
be summarised in the form of Table 1. 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 snapshot.
HISTORY OF DEMONETISATION IN INDIA

The whole country was taken aback when Prime


Minister Narendra Modi on November 8 announced
that the currencies in the denominations of Rs 500
and Rs 1,000 will be invalid post midnight. However,
the lower denomination –Rs 10, Rs 20, Rs 50, Rs 100
and coins –will be valid. He further nounced that new
notes of Rs 500 and Rs 2,000 would introduce shortly.
Thus, giving millions of Indians a panic attack. But
what do you think was this the first time an Indian
currency was banned of a sudden?

Well, the answer is NO. A look into the past will make
you realise that India is no new to demonetisation.
Demonetisation has been implemented twice -1946
and 1978 – in the past.

Image Source

The first currency ban:

In 1946, the currency note of Rs 1,000 and Rs 10,000


were removed from circulation. The ban really did not
have much impact, as the currency of such higher
denomination was not accessible to the common
people. However, both the notes were reintroduced in
1954 with an additional introduction of Rs 5,000
currency.
Rs 500 and Rs 1000 notes were introduce in 1934 and
after four years in 1938, Rs 10,000 notes were
introduce.

Image Source

The second:

That came in 1978; the then Prime Minister of India


Morarji Desai announced the currency ban taking Rs
1000, Rs 5000 and Rs 10,000 out of circulation. The
sole aim of the ban was to curb black money
generation in the country.
Similarities in 1978 and 2016 ban:

 The note ban by Morarji Desai also aimed to drive


away black money out of circulation in the economy.
Hence, The High Denomination Bank Notes
(Demonestisation) Act was implemented.

IMPACTS OF DEMONETISATION IN INDIA 2016

1)Black Money

Black money stored in the form of Rs 500 and Rs 1000


notes will be taken out of our system. As predicted by
ICICI Securities Primary Dealership the government's
plan to scrap ₹500 and ₹1,000 notes will uncover up to
₹4.6 lakh crore in black money.
2) Terror funding

Fake Indian Currency Notes (FICN) network will be


dismantled by the demonetisation measures.Taking
out 500 and 1000 rupee notes out of circulation will
have a lasting impact on the syndicates producing
FICN's, thus affecting the funding of terror networks in
Jammu and Kashmir, North-eastern states and
Naxalite hit states.

3)Real estate may see significant course correction

The demonetization decision is expected to have far


reaching effects on real estate.Resale transactions in
the real estate sector often have a significant cash
component as it reduces incidence of capital gains
tax.Black money was responsible for sharp
appreciation of properties in metros; real estate
prices may now see a sharp drop.

4)Political parties in crisis ahead of polls

With nearly five state elections in 2017,


demonetization has stunned political
parties.Especially, in large states like Punjab and
Uttar Pradesh, cash donations are a huge part of
"election management".In one stroke, big parties will
find themselves hamstrung as cash hoards are often
undeclared money.Parties will have to completely
rejig campaign strategies in light of expected cash
crunch.

5)Moving towards digital payments

Demonetization will likely result in people adopting


virtual wallets such as Paytm, Ola Money etc.: This
behavioural change could be a game changer for
India.

6)Temporary chaos and confusion

Public will face minor problem for a few days owing to


the scarcity of lower denomination notes in the
system.
IMPACT OF DEMONETISATION IN 1978

1978 Demonetization
            It was the night of January 16, 1978 when then
Prime Minister Morarji Desai announced the
withdrawal of Rs. 1000, Rs. 5000, and Rs. 10,000
notes from circulation. This decision did have some
positive impacts on the economy at that time as far as
the issue of black money is concerned. However, it
wasn’t entirely successful. There have been
arguments and controversies that Mr. Desai’s decision
was meant to politically get back at Indira Gandhi, the
leader of the previous Government, who outplayed his
candidature as a Prime Minister twice, dismissed him
as the Finance Minister, and even put him in jail
during the time of Emergency.

We believe the biggest reason for the limited success


of the demonetization in 1978 was lack of a broad
vision and prerequisites and mainly, insufficient
groundwork.
The Government passed the High Denomination Bank
Notes (Demonetization) Act in 1978 with the
implementation of this scheme. This Act banned the
transfer and receipt of high denomination bank notes.
Any contravention, such as false declaration by
depositors, was made punishable and could send a
person to three years in jail. This somewhat explains
the policy that the Government chose to adopt at that
time, i.e banning the high denomination notes with the
assistance of a new law or act being passed.
No support from the RBI Governer in 1978

At that time, Desai did not have the support and


fortification of the then RBI Governor Indraprasad
Gordhanbhai Patel. However, the current RBI governor
Mr. Urijit Patel wholeheartedly supported this decision
with proper cash management at the mints and the
currency chests and also with its distribution.

Low quantum of higher denomination notes

The quantum of Rs. 1000, 5000 and 10,000 notes in


the total economy which was in circulation was only
10 % in 1978. But now the quantum of 1000 and 500
notes in circulation constitutes a whopping 87%.  The
1978 demonetization was not entirely successful also
because not many people had access to high
denomination notes. Apart from this, the purchasing
power of the money also matters. In the 70s, a 1000
rupee note had the capability of buying household
commodities and necessities for about two months on
an average, but a 1000 rupee note now lasts on an
average not more than a day.

IMPACT OF DEMONETISATION IN 1946

Historic Date: – 12th January 1946 announced by the


Reserve Bank of India
 The World War II just concluded. The allied powers
led by the United Kingdom won the war bearing huge
cash burnt. The situation in most of its colonial
countries wasn’t good as people didn’t have food to
eat. Honourable Prime Minister of United Kingdom
Winston Churchill has allowed the massacre of 3
million people in the man-made Bengal famine in 1943
to supply food to the soldiers in the war. He just hated
Indians. The rich Indians were on their toes to help
the colonial power to make more money. With the
introduction of Rs.10000 bill from the newly formed
Reserve Bank of India in 1938, the rich hoarded money
at the expense of the poor increasing inflation —-
Sorry….. Hyper-Inflation

 
In 1946 and 1978 the high denominations were
accessible to the rich only.
 

The government announced demonetization of


denominations above Rs.1000 with effect from
12th January 1946 and gave little time for exchange
too. As the notes were accounted only to 3% of the
India’s population, it didn’t affect normal life to an
extent. The crown princes were exempted from the
same and only 40% of today’s India-Pakistan-
Bangladesh was in effect, of the demonetization (by
area directly controlled by the British)
 

The government through this drive collected Rs.134


crore of the total Rs.143 crore available in the market
(according to RBI estimates), only Rs.9 crore was not
exchanged therefore demonetized.
 

It turned out to become more like a currency


conversion drive as the government couldn’t achieve
much of profit in the cash-strapped economy at that
time.

ABSTACT

Demonetization in 1946 and 1978: Stories from the


past
November 15, 2016, 2:49 PM IST Sanjiv
Shankaran in Cash Flow | Economy, India | TOI

Prior to last week’s announcement by Prime Minister


Narendra Modi that high denomination notes would
stop being legal tender from 9th November, there were
two similar instances in India.

The first instance was in 1946 and the second in 1978


when an ordinance was promulgated to phase out
notes with denomination of Rs 1,000, Rs 5,000 and Rs
10,000.
The media in terms of numbers was limited in 1946
and 1978 when compared to 2016. But given the
importance of the decisions, it did trigger coverage.

Newspaper and magazine archives of the 1946


decision do not seem to be available online.
Therefore, I relied on Reserve Bank of India
commissioned history of India’s central bank to get an
idea of how a stakeholder perceived the decision.

The following extract of RBI’s history volume is


sourced from “Mostly Economics,” a blog on economic
developments in India.

According to RBI’s relevant volume:


“Sir Chintaman Deshmukh (governor) felt that we may
not get even as much as Rs. 10 crores as additional
tax revenue from tax evasion and that the
contemplated measure, if designed to achieve such a
purpose, has no precedent or parallel anywhere. If
value is going to be paid
for value (no matter whether such value is in lower
denomination notes), it is not going to obliterate black
markets. His advice is that we should think very
seriously if for the object in view (as he deduces from
the declaration form) whether this is an opportune
time to proceed
with the scheme. Provided Government are satisfied
on the points of (i) sparing harassment to the
unoffending holders and (ii) a worthwhile minimum of
results in the shape of extra tax revenue, he does not
wish to object to the scheme as drafted, if
Government wish to proceed with it notwithstanding
the administrative difficulties involved.”

It was not the first time an RBI governor was


skeptical of government’s move to strip currency of
legal tender characteristic at short notice.

In 1978, when Janata government proclaimed an


ordinance, some of the media coverage of the
development was available online.

A Times of India report (sourced in-house) published


on 17th January 1978 said:
“A press note issued tonight said that the ordinance
had been promulgated because there was reason to
think that high-denomination notes were facilitating
the illegal transfer of money for financing transactions
which are harmful to the national economy or which
are for illegal purposes. There has been concern in
recent months over the behaviour of agricultural
prices particularly of edible oils. In spite of a bumper
harvest agricultural prices are ruling much higher than
after the poor harvest of 1976- 77. Massive imports of
edible oil have failed to bring down prices and the
mustard oil price control order has failed miserably to
give the consumer his requirements at the specified
rate. There has been a feeling that a considerable
amount of black money has gone to finance hoarding
and speculation. The demonetisation of high
denomination currency notes will hit black money
hard.”

An analysis of the move was written by Jay Dubashi in


one of India Today’s February editions. Dubashi
reported that the ordinance had a ripple effect on
other markets such as gold and diamond where prices
slumped by 5 to 10% within a week. In addition, the
old notes were going at 70% discount in Bombay’s
Zaveri Bazar.

In his report, Dubashi wrote:


“Politics apart, the demonetization is unlikely to curb
black money in circulation, for the simple reason that
no one really knows how much black money there is
in circulation and, even more important, whether
black money can really be defined in precise terms in
all its shades.”
I.G Patel was governor of RBI when the ordinance was
promulgated in 1978. He was not happy about the
government move.

“Mostly Economics” quotes the relevant part from


Patel’s memoirs which are as follows.

“such an exercise seldom produces striking results.


Most people
who accept illegal gratification or are otherwise the
recipients
of black money do not keep their ill-gotten earnings in
the form
of currency for long. The idea that black money or
wealth is
held in the form of notes tucked away in suit cases or
pillow
cases is naïve. And in any case, even those who are
caught napping—
or waiting—will have the chance to convert the notes
through paid agents as some provision has to be made
to convert
at par notes tendered in small amounts for which
explanations
cannot be reasonably sought. But the gesture had to
be
made, and produced much work and little gain.”
It is early days and the context of 2016 is different,
but history does not give us reason to be optimistic.
.

SHORT TERM AND MEDIUM IMPACTS

Very short-term impact The demonetisation, 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.
Alternatively, to keep the flows going, people might
take recourse to credit - both the retailers and other
agents in the economy might make supplies on credit
in the hope that when the liquidity status is
corrected, the payments can be realised. In these
cases, the price of commodities might rise instead of
falling. In other words, the impact of an incremental
reduction in money supply where the demand and
the supply chain remain unaffected would be different
from a case where there is a drastic reduction in
money supply and outputs might adjust rather than
the adjustment being in prices. In other words, the
expectation that inflation would decline might be
belied. 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.
TRANSITION ISSUES FOR BANKING
SECTOR

There are multiple issues here. a. The banks too


might have a transition issue to deal with. Banks
would have a model of the fraction of deposits that
they can safely lend without an excessive risk of
withdrawal of the amount. This is important since,
while banks can borrow money from the call money
market, the costs of such borrowings can be large.
These models, however, might need to be altered in
the new regime since the character of the new
deposits that come into the bank would be different
from the pre-existing deposits. In the latter, while a
fraction of the deposits would be for transactional
purposes – e.g. salary earners – another fraction would
be depositing only savings into the account. By
eliminating high value currency notes, these agents
who were operating through cash, would now have to
move to non-cash instruments and hence, the
balances in their accounts would not be savings but
transaction values which will be retained in the
account for shorter durations of time. The banks
therefore would need to re-model their decisions on
how much of the deposits can be lent out and for what
duration. It is, for instance possible, that a larger
proportion of the deposits would be retained for short-
term lending and can even be dedicated to the call
money market. b. Second, while 1/reserve ratio
defines the potential maximum amount of credit that
can be generated in the economy, the actual credit
generation would be defined both by the demand for
credit and the extent to which cash intervenes in the
functioning of the economy. For instance, if people
who receive credit from the bank make payments
through cheques alone and they in turn make
payments through cheques, then the potential credit
creation can be realised. However, if on receipt of
payment, the agent withdraws the money to cash and
makes payments, only a fraction of the credit/deposit
will return to the banking system. Thus, larger is the
extent to which cash is used as a means of
transacting, smaller is the total credit that can be
generated. With a withdrawal of cash from circulation,
the deposits will continue to remain in the bank, it
would merely shift from account to account or from
bank to bank. Thus, even on the earlier deposits,
the amount of credit that can be generated would be
larger. This is another reason why
the banks would need to remodel their investment
decisions corresponding to a given level of deposits

c. A third issue that might arise as a transition issue is


because of the mismatch between people’s
preferences for cash and the availability of cash. In
the interim, until people adjust to the use of non-cash
instruments, there would be an increased demand for
the cash that is available and that might generate a
situation where the agents have to pay a premium to
access legal tender. In periods of scarcity of coins for
instance, it is commonly known that people pay a
premium to get the change. While this can be
considered a transition issue, there are two different
implications of such a development: i. If the premium
on cash is high, it would encourage both the shift to
non-cash instruments on one hand, and to informal
substitutes of cash on the other. ii. This might
undermine the confidence that people have in the
currency and hence, encourage move to other
currencies.
MODE OF PAYMENT AND SPENDING
BEHAVIOUR
There is growing literature that points out to the
possibility of changes in spending behaviour as a
result of moving to instruments other than cash. There
are many substitutes for cash in the modern
economy ranging from cheques, debit cards, pre-paid
cards, credit cards and mobile wallets. When
compared to cash, these instruments differ in a
number of key characteristics. Temporal separation or
degree of coupling is the extent to which a purchase
and the payment for the transaction from resources
are separated in time. If the two are de-coupled,
people may not perceive a sense of separation from
money at the time of incurring the expenditure and
hence may overspend.8 The second characteristic is
related to the pain of payment flowing from salience.
It is argued that people perceive the pain of payment
depending on the tangibility or salience of the outflow.
9 A third feature is
the stringency of budget constraint – while cash limits
one’s ability to spend to the amount of cash in hand, a
debit card expands it to the balances available in the
account and a credit card further relaxes it to include
future earnings as well.
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 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.
COMPARISON

A different perspective

(We believe in laymen-economics)

The largest note ever printed by the Reserve Bank of


India was Rs.10000 which was introduced in 1938 by
the British India government and subsequently again
by Independent India in 1954. The notes introduced
were Rs.500, Rs.1000, Rs.5000 and Rs.10000.

These notes were withdrawn in 1946 by the RBI under


the British Indian Government to curb the black
money menace in India. These notes were exchanged
for Rs.100 or lower denomination.

Date: 12th January, 1946 probably declared in the


morning working hours

Motivation: Steps taken by the Government of France,


Belgium and United Kingdom.

Announced By: – RBI headquarters, Mint Road,


Mumbai, India

Result: – The exchange of Rs.143 crore was replaced


by new notes of lower denomination of Rs.135 crore,
making only 9 crore rupees demonetized, partially
successful because it mostly became a conversion
scheme rather a demonetization scheme.

The notes were re-introduced in 1954 by the RBI,


which was subsequently demonetized in 1978 by the
Morarji Desai-led Janta Parivar government, just after
the downfall of the Indira Gandhi government in 1977
due to Emergency crisis the country faced.

Date: – 16th January, 1978 at 9AM on the All India


Radio

Motivation: – To curb the black money menace and


make a comeback from the Emergency period
problems by starting afresh for the betterment of the
Indian economy.

Announced By: – R Janaki Raman, a senior official


from chief accountant’s office at RBI Headquarters in
Mumbai.

Result: – It was also more like a culmination process


rather a conversion process in 1946. This was
because there were rumours about the
demonetization before it was announced in 1978,
making the black money hoarders alert to store
money in lower denominations. It was a failure in
terms raked in 1946.
We learn from our mistakes: The demonetization of
2016.

As stated earlier the reasons for demonetization, the


government seems to have come prepared for the
same.

In 2014, Prime Minister Narendra Modi announced


zero-balance account for all the citizens of India under
the Pradhan Mantri Jan Dhan Yojana along with RuPay
Debit Cards, OD facility, etc…. This was done to bring
about financial inclusion in the country.

The government also announced Insurance schemes


and Pension schemes from these accounts for its
lifetime.

Large number of citizens stood in queues to open new


bank accounts with a record of 18 lakh accounts in
the first week of the launch of the scheme. Rs.50
Billion was received as deposits from these accounts,
an added benefit to the government exchequer.

The government introduced Income Declaration


Scheme in 2016 in which the black money could be
made white by paying 45% tax on the total amount.
The government had kept the deadline of September
30, 2016 and promised to keep the data confidential.
The scheme attracted $10 Billion swelling the tax
coffers by Rs.30000 crore.

Some months back, the government had made it


mandatory for all gold buyers worth above Rs.2 lakh to
furnish PAN account details. Gold market went on a
strike for the same, but the government didn’t bulge
from its stand.

In the meanwhile, GST Bill being passed by the Upper


House with a 100% majority proved to be a bright spot
on this drive. With GST rates decided 5% to 28% in
four slabs, foreign investors have got a good reason to
invest in India, which has a good tax structure and
less black money.

Come November 8, 2016, PM Narendra


Modi announced the demonetization of India’s two
largest denominations (Rs.500 and Rs.1000) with
effect from midnight.

Salient features of the activity

 Except for Fin Min and top officials of the RBI, no


one had the news about the activity which was
on cards since 6 months.
 The Cabinet was briefed early on Tuesday and
were not allowed to move out of the premises till
the PM finishes his address.
 It came as a shocker, but the government
seemed well prepared to handle the situation. Mr.
PM has left no stone unturned for any hue and cry
among the public (let alone the politicians). Mr.
PM had got most of the unbanked sector into the
banking ecosystem by the Jan Dhan Yojana with
Rupay Cards. He then gave an opportunity
without extension (through the Income
Declaration Scheme) to declare the black money
and strictly warned of action to be taken by the
government against hoarders.
 The Indian Media is the freest media in the world.
Media starts protesting for even a small issue.
NDTV India received a ban for 24-hours of the
Pathankot Attack coverage (later upheld by the
MIB till December 5, 2016) on 9th November
2016. All newspapers, journals, TV reporters
spoke about this issue as a serious matter
diverting the attention of the media from the
demonetization. (P.S. Rumours had made the
1978 demonetization drive a culmination)
 The government announced the decision after
Diwali, making fewer problems for the general
public.
 The Best part: – The announcement was done by
Mr. PM at 8 pm IST (ish…) rather by the RBI in the
morning. Most of the businesses were shut for
the day and people were wrapping up from their
day’s work. Banks remained closed for the next
day paralysing the country. Black money
hoarders couldn’t find a way out to funnel the
black money, making it a fool proof plan to nab
all the hoarders under the tax radar.
REVIEW OF LITERATURE

The Objective of this course to pay attention to the


most important dimension of Research i.e. Research
Methodology. It will enable the Researchers to
develop the most appropriate methodology for their
Research Studies. The mission of the course is to
impart research skills to the beginners and help
improve the quality of Research by the existing
researchers. The Course Structure is designed in a
way that the learning of Research Methodology can
move from Mugging up syndrome to fun-practical
method; from a teaching process to an experimental
process, from memorizing to brainstorming,
from clearing the examination to feedback learning,
from knowledge transfer to knowledge creation, from
competitive learning to collaborative learning. 
The Participants of the Course will start the course by
reading the provided literature at the end of the
course they will find themselves equipped enough to
author a book or two themselves.
This course is now available in all the major
languages. Study Material can also be provided in your
language.You can request for the same by sending us
an email.

CONCLUSIONS

The demonetisation undertaken by the government is


a large shock to the economy. The impact of the
shock in the medium term is a function of how much
of the currency will be replaced at the end of the
replacement process and the extent to which
currency in circulation is extinguished. While it has
been argued that the cash that would be extinguished
would be “black money” and hence, should be
rightfully extinguished to set right the perverse
incentive structure in the economy, this argument is
based on impressions rather than on facts. While the
facts are not available to anybody, it would be
foolhardy to argue that this is the only possibility. As
argued above, it is possible that these cash balances
were used as a medium of exchange. In other words,
while the cash was mediating in legitimate economic
activity, if this currency is extinguished there would
be a contraction of economic activity in the economy
and that is a cost that needs to be factored in while
assessing the impact of the
demonetisation on the economy and its agents.
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 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.
BIBLIOGRAPHY

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Demonetisation-Madurai-Corporation-makes-
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PTI. (2016, Nov. 9). Demonetisation will benefit
economy in long run: Jaitley. The Hindu Business Line.
Retrieved from
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