3. Understanding the Beast named
DEMONITIZATION
On November 8th of 2016 a beast named Demonitization was unleashed.
A beast so strange and powerful that politicians , media, economists and
every other stakeholder have since turned into blind men trying to describe
it.
While economists like Amartya Sen And Jagdish Bhagwati remain sharply
divided over its impact, politicians bicker and commentators get tethered to
their prejudicial divides.
Lets try to understand the beast by the means of two case studies of two
different companies and how it has affected employment in their respective
avenues.
4. CASE STUDY-I : AMUL (good)
Amul is a diary cooperative jointly owned by 36 lakh milk
prouducer in Gujrat.
Adapts cashless mode.
Since 8th November 5.4 lakh farmers have opened savings accounts
in various banks.
18 lakh milk prouducer are getting their money directly in their
bank account.
MD of Amul R.S Sodhi claims farmers save alot more b optimally
plannig financially goals and getting loans for lesser interset rate.
Farmers now immune to laon sharks with high interest trap.
According to Amul's data their has been no reduction in their sales
except for few products such as ice-cream
Amul's milk producer have benifited from the cashless mode. No
impact on employment whatsoever.
5. NEED FOR DEMONETIZATION
There are multiple reasons why nations demonetize their
local units of currency.
Some reasons include to combat inflation, to combat
corruption, and to discourage a cash system.
The process of demonetization involves either
introducing new notes or coins of the same currency or
completely replacing the old currency with new currency.
6. THE INDIAN STORY
In 2016, the Indian government decided to
demonetize the 500- and 1000- rupee notes, the
two biggest denomination notes.
These notes accounted for 86% of the country’s
cash supply.
The government’s goal was to eradicate
counterfeit currency, fight tax evasion, eliminate
black money gotten from money laundering and
terrorist financing activities, and promote a
cashless economy.
7. THE INDIAN STORY (CONT.)
By making the larger denomination notes
worthless, individuals and entities with huge sums
of black money gotten from parallel cash systems
were forced to convert the money at a bank which
is by law required to acquire tax information from
the entity. If the entity could not provide proof of
making any tax payments on the cash, a tax penalty
of 200% of the tax owed was imposed.
8. case study- II : RAYMOND (BAD)
Raymond 91 year old behemoth of textiles and
garments experienced 30% reduction in sales post
demonetization.
CEO Sanjay bahl claims that 90% of textiles market
is baised on cash.
Sudden demonetization drive has crippled the
industry.
9. contd.
30% 0f products are not selling as of now.
10000 can be potentially laid off.
Raymond however is confident about stabalization of
market with the introduction of new currency and
GST.
10. EFFECT ON MONEY SUPPLY
With the older 500 and 1000 rupee notes being
scrapped until the new 500 and 2000 notes get
widely circulated in the market the money supply got
reduced in short run . However as the new notes got
circulated in the market and the mismatch got
corrected the money supply slowly started to pick up.
11. EFFECT ON PRICE
Effect on price level is expected to be lowered due to
moderation from demand side.
Prices tend to fall only marginally due to moderation
in demand as use of cards and cheques would
compensate for some purchases .
Prices in real estate and properties are expected to
fall as the major transactions are carried on through
cash rather than in cheques or bank transfers.
12. EFFECT ON GDP
The GDP would be impacted by reduction in the
consumption demand . However with the recent rise
in festival demand is expected to offset the fall in
overall impact .
This impact on GDP would not be significant as
some of this demand will only be deferred and re-
enter the stream once the cash situation becomes
normal.
13. CASE STUDY - III : Foxconn (ugly)
Foxconn is a Taiwanese multinational electronics contract
manufacturing company. 3rd largest in terms of revenue.
Due to demonetization the sales of electronics gadgets and
mobile phones have reduced. The ugliest impact can be seen
at Foxconn.
2,000 workers asked to go on paid leave for 2 weeks.
If situation doesn't improve they can be asked to resign as
well.
1/4th of work force is getting hit by demonetization.
50% reduction in mobile phone sales.
Make in India handsets market has shrunk to 175-200 crore.
Even companies like lava, Karbonn & Intex have fired 10-
40% of work force in India.
14. Cont.
Lava closed down one of thier major plants on 12th
December.
Micromax's Rudrapur plant slows down production.
Focxconn's plant in Andra has reduced
manufacturing of handsets from 2.5 million a month
to 1.2 million.
Foxconn show cases the ugliest example of an
industry being hit with demonitization.
16. Electronic Payment is a financial exchange that takes
place online between buyers and sellers. The content of this
exchange is usually some form of digital financial instrument
(such as encrypted credit card numbers, electronic cheques or
digital cash) that is backed by a bank or an intermediary, or by a
legal tender.
• All Central Government Departments
and Public Sector Enterprises are being
instructed to use the method of e-
payments to the maximum extent
possible.
• RBI has advised National Payments
Corporation of India (NPCI) to waive its
transaction charges on transactions
settled through National Financial
Switch(NFS) till 31st December, 2016.
17. INFLATION
The demonetization that has been in effect since
November 9 is expected to have a negative impact on
inflation.
Consumer spending activity fell to a near halt.
Consumers are refraining from making any
purchases except essential items from the consumer
staples, healthcare, and energy segments.
18. INFLATION (CONT.)
Activity in the real estate sector, which includes a
lot of cash and undocumented transactions, slowed
down significantly, Metropolitan and Tier 1 cities
reported up to a 30% fall in house prices.
19. overheating economy
Due to demonetization people have deposited and
people will deposit large amount of money in banks.
Banks are multiplier of money. After deducting CRR
and SLR, they’ll loan the left over major part. That
means more money in market and more inflation.
20. increased supply side constraints
Like other developing countries, our inflation is
largely affected by supply side constraints, which are
beyond RBI’s control.
Especially CPI is badly affected by inflation in food
products. Now, this demonetization has affected
unorganized sectors and agriculture is unorganized
sector. Means its performance will be affected along
with other sector in this quarter.
So, again there will be less supply, more inflation.
21. psychological effect
Now on, corrupt people will have less amount of
trust in currency.
This will develop tendency of spending instead of
hoarding black money. More money in market
means more inflation.
Remember, Govt dosen’t have capacity to scrutinize
all small amount transactions.
22. FOOD ITEM INFLATION
Food item inflation, measured by changes in the
Consumer Food Price Index, accounts for 47.3% of the
overall CPI. Due to 86.4% of the value of the currency
notes in circulation going out of the financial system
and re-monetization being slow, the supply and
demand of food items fell. It will exert more
downward pressure on inflation.
23. IMPACT ON FINANCIAL MARKET
Indian equity markets have been on a near secular
falling trend since the government demonetized the
500 rupee and 1,000 rupee currency notes after
midnight on November 8, 2016.
24. FINANCIAL MARKET (CONT.)
The two benchmark equity indices—the Nifty 50 and
the S&P BSE Sensex—fell on each trading day since
the demonetization except for November 10 and
November 22.
While the Nifty 50 fell 6.3% from November 8 until
November 22, the S&P BSE Sensex fell 5.9% during
the same period.
Due to the rise in the US dollar, the dollar
equivalents of the Sensex and the Nifty fell more
than 8% each
25. ECONOMISTS VIEW
In spite of the initial hiccups and disruptions in the
system eventually this change will be assimilated
and will prove positive for the economy in the long
run .
Black money holders will eventually lose out
boosting the formal economy in the long run.
Short term fall in real estate prices might benefit
middle class citizens .
26. Impact on investment
BSE sensex opened with a loss of 1300 points.
Value buying opportunity
Luxury goods market is likely to be effected
gold price rises
Real estate suffers a massive down fall as it is the
biggest receiver of black money.
27. CONCLUSION
The advantages are much dominating and it will be
in the long term interest of our country
comfortably outweighing the disadvantages.
Government need to take all the necessary steps so
as to ensure that there will be a smooth flow of
currency exchanges. It would turn into chaos if
government takes no necessary steps to circulate
money correctly. It will make a massive change in
our economy. We congratulate the entire
government and those hidden brains of our
democracy who brought this decision.
