On 8 November 2016, the Government of India announced the demonetisation of all ₹500 (US$7.40) and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series.[2] The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism

1. DEMONETISATION IN
INDIA AND ITS IMPACT
SREEKESH VP
KN.RAJ CENTRE

2.  What is Demonetisation of currency
Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs
1000 notes as a official mode of payment. According to Investopedia, demonetization is the
act of stripping a currency unit of its status as legal tender.
(ECONOMICTIMES.COM Nov 09, 2016 )
In a 40 minute long speech Indian Prime Minister Narendra Modi announced
the demonetization of existing notes of Rs 500 and Rs 1000 during a televised
address on November 8 Tuesday evening. The move by the government to
demonetize Rs.500 and Rs.1000 notes by replacing them with new Rs.500 and
Rs.2000 notes has taken the country with surprise
Modi announced that the notes of Rs 500 and Rs 1000 "will not be legal tender
from midnight tonight" and these will be "just worthless pieces of paper. PM also
urged people to ‘join this mahayajna against the ills of corruption

3.  REASON FOR DEMONETISATION

4. General View points
 The sudden nature of the announcement—and the prolonged cash shortages in the weeks
that followed—created significant disruption throughout the economy, threatening
economic output
 Many Economists like Amartya Sen,, Kaushik Basu(Former Senior Vice-President and Chief
Economist of the World Bank), Pronab Sen ( Chief Statistician and Planning Commission of
India member), Prabhat Patnaik(a former professor of economics at the Jawaharlal Nehru
University, Delhi)
 The move was heavily criticized as poorly planned and unfair, and was met with protests,
litigation, and strikes
 The Reserve Bank of India stipulated a window of fifty days until 30 December 2016 to
deposit the demonetised banknotes as credit in bank accounts.
 The banknotes could also be exchanged over the counter of bank branches up to a limit that
varied over the days:
• Initially, the limit was fixed at ₹4,000 per person from 8 to 13 November.
• This limit was increased to ₹4,500 per person from 14 to 17 November
• The limit was reduced to ₹2,000 per person from 18 November

5. • The total value of old Rs.500 and Rs.1000 notes in the circulation is to the tune of Rs.14.2
trillion, which is about 85% of the total value of currency in circulation. This means that the
total cash has to now pass though the formal banking channels to get legitimacy.
• Now, post the announcement of demonetization by the government this money would have
to either accounted for by paying the relevant tax and penalties or would get extinguished.
There are higher chances of larger proportion of this unaccounted currency getting
extinguished as the tax rate and subsequent legal issues could be prohibitively high for such
money

6. Source: http://www.hindustantimes.com/india-
news/demonetisation-100-days-pm-modi-s-note-ban-an-economic-
disaster-or-a-political-masterstroke/story-
GDRqF6gkH0Nky5GCxvmYeO.html

7.  Cash is the preferred mode of transaction in India and only less than half the population uses
banking system for monetary transactions. An immediate public anger appeared against the
mismanaged and unprepared banking system.
 The banks didn’t have enough of the newly designed banknotes (Rs 500 and Rs 2000) to
distribute in exchange for the canceled notes.
 The move has also led to a shortage of lower denomination notes such as Rs 100 and Rs 50
that are still legal tender, as people have taken to conserving whatever cash they have in
hand.
 The demonization initiative has caused a sudden breakdown in India’s commerce and the
unbanked and informal economy is hard hit.
 Trade across all aspects of the economy has interrupted, and sectors like agriculture, fishing,
and the huge informal market were almost shut down during the initial days of
announcement.
 The informal sector in India employs more than a majority of the workers and most
transactions are in cash.
NEGATIVE IMPACTS

8.  Central government argued that cooperative banks as financial institutions supporting black
money.
 also created a crisis of confidence of the stakeholders in this important financial segment of
the Indian economy. States like Kerala have been hard hit by this measure
 As an outcome of Demonetisation, the external value of the Indian rupee is showing a
declining trend. On November 8, the exchange rate between American dollar and Indian
rupee was 66.70. But on December 30 it has become 68.12.
 Real estate and allied sectors may see near term to medium term negative impact
 Disruption to this system could endanger the employment and livelihood of weaker sections
of society.
 The change disturbed the lives of ordinary people, led to widespread need and major job
losses for the poor.
 A.T.M.s and tellers soon ran dry

9. India’s demonetization move was apparently mismanaged in the beginning, the effects at
micro level look advantageous
 The cash-centric black market for the most part ceased to function with the nullification of
the bulk of its currency.
 It is also thought that the drive will wipe out a measure of corruption and tax evasion in
India’s real estate market
 The real-estate market is likely to come to a standstill with property prices likely to fall and
the possible tax inquiries following demonetization will affect both consumption and
investment in the formal and informal sectors
 The move is also likely to have a habit changing impact in the Indian populous and there
could be increased belief of keeping cash in the banks rather than stashed at home and use
formal banking channels for their spending needs.
POSSITIVE CHANGES

10.  Many people forced to open accounts to save their money. It is estimated that banks have
opened about 30 lakh (and still counting) new accounts since the demonetization drive
began on November 8. India's largest bank, State Bank of India (SBI), with its 17,097 branches
-- half of which are in the rural and semi-urban areas – is opening 50,000 accounts a day. The
leading consumer internet companies in India (Flipkart, Snapdeal, Shopclues, CCAvenues, Ola
and Oyo Rooms) have applauded the move, saying it will pave the way for digital payments,

11. References
• Modern Diplomacy
• THE WEEK
• ECONOMIC TIMES
• Main stream weekly
• www.hdfcbank.co.in
• The Newyork Times
(https://www.nytimes.com/2016/11/27/opinion/in-india-
black-money-makes-for-bad-policy.html?_r=0)