2. WHAT IS DEMONETIZATION?
Demonetization is the act of stripping a currency unit of its status as legal tender.
Demonetization 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.
In India, it was announced by PM Modi on the evening of 8th November,2016 that
500 and 1000 Rupee notes would no longer be legal tender.
To be precise, He said,
"Brothers and sisters,
To break the grip of corruption and black money, we have decided that the
500 rupee and 1,000 rupee currency notes presently in use will no longer be legal
tender from midnight tonight, that is 8th November 2016. This means that these
notes will not be acceptable for transactions from midnight onwards. The 500
and 1,000 rupee notes hoarded by anti-national and anti-social elements will
become just worthless pieces of paper. The rights and the interests of honest,
hard-working people will be fully protected. Let me assure you that notes of 100,
50, 20, 10, five, two and one rupee and all coins will remain legal tender and will
not be affected."
3. WHY DEMONETIZATION?
The reasons given by PM Modi were:
Demonetisation would tackle the black money.
It would lower the cash circulation in the country "which is directly realted to
corruption in our country".
To eliminate fake and dodgy funds which have been used by terror groups to
fund terrorism in India.
4. DEMONETIZATION-PROS AND
CONS
PROs
Massive decline in
black money
Almost End of Fake
currency racket
intially
Obstacle for
terrorism
Reduce in
corruption for few
months
Fair Election
CONs
Inconvenience to
people
Loss to comman
People
Initial rise in
corruption
Loss of Tax Payers
Money
Powerfull Poltician
are converting
black into white
easily
Issuing the new Rs.
2000 notes &
bringing Rs 1000
back
6. DEMONETIZATION, ECONOM
Y AND GDP
The demonetization of the 500 rupee note and the 1,000 rupee note—the two highest
currency denominations available in India—will likely hit the economy hard in the short
term. The surprise move is expected to grind the consumption activity in the Indian
economy to a virtual halt. The service sector, which dominates economic activity and
involves a sizable chunk of cash transactions, will likely be hit the hardest.
India’s economic growth
Growth in the Indian economy remained solid in the quarter from April to June 2016 (the
latest available). In India, a financial year begins in April and ends in March of the following
year. The previously mentioned quarter is the first quarter of fiscal 2016–2017. During that
period, the GDP (gross domestic product) rose 7.1%, while the GVA (gross value added)
rose 7.3%. The relationship between the GDP and GVA is:
GDP = GVA + taxes on products – subsidies on products
The base year for calculating the GVA is 2011–2012.
The fall in economic activity due to demonetization could last from two to three quarters.
As a result, GDP and GVA growth in the quarters from September to December 2016 and
January to March 2017 could be significantly lower than previous years. Some bounce back
should be seen in the first quarter of fiscal 2017–2018. In the medium term, the Indian
economy can grow considerably after curbing the debilitation caused by counterfeit money
and an increase in economic activity.
7. DEMONETIZATION AND BLACK
MONEY
In India all sections of the society are accustomed to use cash transactions, and this habit is
unscrupulously misused by some bad elements of the society. Such habit resulted in even people
with accounted money are started using cash transaction for high value transactions.
It is resulted into parallel economy with unaccounted money, even much stronger than regular
economy. The parallel economy black money, corruption, counterfeit currency and terror financing.
These issues hampered growth and development of the economy.
In this background demonetarisation of Rs 500 and Rs 1,000 currency notes as a master stroke,
as the move will address issues like black money and corruption and also help the economy
become more digital.
The move will either unearth the black money slashed in the form of cash or forces to destroy
those unaccounted currencies. Demonetisation will curb the menace of black money and will help
check stashing of funds to a large extent.
Similarly it has major impact on corruption that exists in India and also on financing of terror
activities in India. Hence it was considered as courageous step in the fight against unaccounted
money.
- See more at: http://www.drishtiias.com/editorial-analysis-demonetisation-and-black-
money#sthash.34hfHkHt.dpuf
8. WHO WILL PAY THE PRICE? -
THE REALITY
The ‘demon’ in demonetization is in the beginning. On November 8, Indian
Prime Minister Narendra Modi announced in a broadcast to the nation that
Rs500 ($7.40) and Rs1,000 currency notes would no longer be recognized
legally as currency. “Great,” said Corporate India, economic commentators,
foreign investors, international think tanks and global rating agencies.
“Masterstroke,” echoed the Confederation of Indian Industry (CII).
The aim behind the government’s action was to combat tax cheating,
counterfeiting and corruption. Eliminating large denominations makes it
harder to hide large amounts of cash. Modi noted that the move
complements the country’s swachh bharat abhiyan (Clean India campaign).
“For years, this country has felt that corruption, black money and terrorism
are festering sores, holding us back in the race towards development,” he
said. “To break the grip of corruption and black money, we have decided that
the currency notes presently in use will no longer be legal tender from
midnight tonight.” Added Finance Minister Arun Jaitley: “The goal of this is to
clean transactions, [to] clean money.”
9. Click to “This announcement appears to be the most significant change made by the Modi
government to date,” says Girish Vanvari, partner and head (tax), KPMG in India. “Its impact
could be even bigger than GST (the Goods and Services Tax which is still running the gauntlet
of politicians).” Adds a report by Crisil, a global S&P company: “Tuesday’s move could change
the face of the Indian economy, improve the government’s fiscal position and tax compliance.
The size of the cash economy will shrink, as will black money generation avenues, because of
the better cash-flow trail.”
That was Tuesday. By Wednesday, the picture on the streets had begun changing somewhat:
The demon started surfacing. India is a cash economy; almost everyone keeps a few Rs500
notes as a nest egg. Lines began forming in front of ATMs and banks which could exchange
old notes for new. A mere exchange — a new Rs500 for an old Rs500 — was not enough;
there was also a limit imposed on how much one could exchange or withdraw from their
accounts. In some cases, there were altercations as people waited for hours. Gas pumps and
hospitals (which were allowed to accept old notes) saw a boom in business. People also
wanted smaller currency notes to serve their daily needs. A loaf of bread costs Rs25. No
shopkeeper would give change for Rs500.
10. IS DEMONETIZATION WORTH
IT?
The biggest beneficiaries of this move are going to be Indian Banks. The
increased liquidity will lead to increased credit lending and most of this wont
necessarily go to to the common man but to Big Corporates who are starved
for cash.
In short-term expect inflation as the increase in money circulation will make
credit easily available. If this is not matched with rise in Income, the general
public (Aam Admi) eventually will either have to substantially dial down their
life-style or fund it with credit. If they choose to do the latter, expect rise in
defaults, and once again in the near future the banks will be left hanging on
to mountain of NPA’s. Now all depends on how the Banks split the liquidity
between Consumer and Institutional lending will have to be seen. Either ways
if the due-diligence is lax as it has been up until now, expect the economy
to where it was a year ago, STATIC.
Amongst other things, to preempt any such arbitrary move by the Indian
Government again in the future, the Black Money hoarders from hereon will
start converting their Indian Currency into USD’s and Euro’s (via Hawala)
thereby, adversely causing fiscal implications as no direct or in-direct tax
will be levied on this transaction.
11. CONCLUSION
Demonetization has its own benefits but it also has its own
disadvantages.
It has lead to many deaths as shown by many news channels and
it has also made a big impact on the GDP and our economy. This
decision was very bold but it lacked preparation, the idea had already
leaked as shown in the video by Dhruv Rathee and the schemes and
laws were introduced a little bit too late.
People are saying that it has many long term benefits but I think that
it is just a waste of time and money and lives.
THANK YOU
