impact of demonitization in india

To track the same problem of fake currency notes and to stop people to have black money, the government of India announced that 500 and 1000 notes will be no longer be legal from midnight, 8 November 2016. As per the reports, number of fake notes in the banking systems in 2005 was 1. 23 lakh and it went to 5. 33 lakh in 2016. Apart from monitoring black money, the main purpose is also to check fake currency (used in finance terrorism) and corruption. New redesigned series of 500 notes, to a new denomination of 2000 notes come up in circulation from 10 November 2016. Though demonetization is not new in India, the 2016 effect of demonetization has drastic effect on people.

This may be due to lack of proper planning and sudden introduction. It was announced that the higher income people would be affected seriously but reality remains contradictory to it. The middle and low income people suffered a lot. However, demonetization made country’s citizens face lot of problems because of long queues, hurdles in everyday life, especially those who are working and employed find more difficult to exchange currencies. According to the government, why there is a need of banning existing currency:

1. To reduce the corruption.
2. To make black money worthless.
3. To block the funding for terrorist activities.

Objectives of the Study

1. To analyze, whether government objectives of demonetization has been fulfilled.
2. To find out positive and negative impacts of demonetization on Indian Economy.
3. To reduce negative impacts and increase positive effects.

Literature Review

Demonetization in India

The government made a major change in the economy by demonetizing the currency notes – of Rs 500 and Rs 1000 denomination. This proposal by the government involves the elimination of existing notes from circulation and replacing them with 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 have in hand Demonetization was introduced to overcome two major problems: such as, to control counter notes that could be contributing to terrorism, in other words a national security concern and second, to eliminate the “black economy”.

Short term and medium term impacts

Demonetization led to removal of 86% of currency in circulation which has further led to contraction, for the supply, in the economy. This means that, number of transactions, eliminated for a while since, there was not enough medium of exchanges available. Since, incomes and consumptions are directly related, this, has also, led to reduction, in income and therefore reduction in consumption.

This was adversely, impacted the individuals who use to, earn income, in cash and use cash as, medium to spend. This had least impact on the individuals, who had non-cash incomes. In medium term, the effects are related to the extend, in which currency is not replaced within the economy. It is argued, the currency is placed in the banks and isn’t withdrawn would generate expansion in deposits on economy, the cash reserve ratio in India is 4 per cent, while there is a (SLR) statutory liquidity ratio, credit creation ratio out of 22 per cent. In determining, credit creation, it is important to take into accounts the cash reserve ratio (CRR) only and the additional credit creation, it can be 30 times the amount of money which is deposited in the banks as a result of the proposed termination. This amount however, will be, generated, only if there exists, an equivalent demand for credit, in the financial condition.

Effects of Demonetization in India

On Black Money and CorruptionBlack money is targeted by the government is a very good measure took by the modi ji. it targeted only 1% of the total black wealth held in the country and only 3. 5% indirect income was generated in 2016. during the termination of current currency many people started exchanging their cash in to new currency and started depositing their cash in to banks overnight. People started making queues outside the banks and some of them slept outside the banks just to make sure their turn will come at first.

The people who are doing services and jobs in mnc’s were not at risk rather than those people who only rely on cash and small incomes of rickshaw Wala, preswala, auto drivers, milkman etc. were at greater risk. Richer families stared investing their money in buying jewelry and started buying expensive jewelry and other luxury items. These items were buy by the help of dalas and other mediators. However there is a reduction in cash money by 3. 98 lakhs. After giving notice to the people publically the registration of 2. 25 lakh companies cancelled and their accounts was sealed. public declared 15,498 crore unaccountable money that is 38% more than last year.

On Fake Currency

The first and the foremost reason that was stated was that it would reduce the huge pile-up of black money into a pulp of waste paper. The second reason was to destroy the circulation of counterfeit currency which according to this government is huge in number and is funding terrorist activities. The third reason was to encourage people to start cashless transactions and hence make a push towards the idea of a “Digital India”. Demonetization will go a long way in curbing corruption in India. On tax Compliance India's duty commitment to GDP ratio is at very low just 16. 6% contrasted with the other developing economies.

After demonetization, access base has been expanded, and 58 lakh new citizens of India have recorded their salary expense form. As indicated by the service of funds, the current monitering year of (2017-18) from April to October helps in the expense gathering. It has been expanded by 15. 2%. Government focused to gather 9. 8 lakh crore from current spending plan out of it 4. 39 lakh crore has been gathered till October 2017.

Positive Effects

Changes in the habits of savings termination of currency played an important role in transferring cash to all the financial markets. It has increased the habit of savings. Gross financial savings has increased from 10. 9% of gross national disposable income (GNDI) in FY16 to 11. 8% of GNDI in FY17. Instead of keeping or saving cash at home or in banks now people are investing in mutual funds and insurance policies. Increment in these mutual funds will help the government to raise money on long term bases that can be used to develop infrastructure of the country.

Other positive effects are:

1. Business Revenue of local government is increased by 3%.
2. There is a reduction in real estate sector rates hence, houses and property are within the reach of middle classes.
3. It may help in eliminating black money.
4. Reduce the circulation of fake currency.

Negative Effects

1. GDP Growth-The previous PM Dr. Man Mohan Singh, said on the anniversary of demonetization, that the economy of india would grow at 10. 6% in the present government’s fifth year for it measure up to the 10-year average growth of the economy, under this united progressive alliance (UPA) government led by him but GDP growth has declined from 8% in 2015-16 to 7. 1% in 2016-17 and will be 5. 7% in future due to this demonetization.
2. Agriculture Sector - Agriculture is a life of India, and provide employment to 48. 9% Population and contributes about 20% in exports. In this sector, where all transactions, are done in cash. Demonetization hardly hit the sectors as there was cash shortage and for banks it was very difficult to take cash to these remote areas.
3. Industrial Sector - The industrial sector in India is an important contributor of growth Accounting 31. 1 % of the total gross value added (GVA) in 2016-17. A strong and robust industrial and manufacturing sector helps in country development, exports and employment. Demonetization hit hard in this sector especially in manufacturing and construction sector. As per latest CSO data industrial performance has declined from 8. 8% in 2015-16 to 5. 6% in 2016-17.
4. On Employment – Being very populated India has the most noteworthy number of jobless individuals too. Consistently, 200 million individuals are entering, to the activity advertise. Since demonetization, hindered the customer request, consequently mechanical creation so work age is unfavorably influenced. As assembling, area and land segment two are the fundamental businesses and both are landing moderate so no positions or less occupations are being made leaving substantial no. of individuals jobless. The inside for observing, Indian economy (CMIE) a private forecaster appraises that around 1. 5 million occupations, were lost between January-April 2017 as work level fall 405 million individuals. (CMIE, 2017) During January-April work, investment rate was 44. 3% much lower than 46. 9% in October 2016. The purpose behind, it request isn't originating from shopper side, so new speculations, no new occupations.
5. Increase in Cyber Crime – According to report, and crime investigation Bureau, Noida cybercrime has increased fold after demonetization. As digital transactions, increased after demonetization, and new user and general public is not aware of cybercrime, also our police not equipped to deal with it, taking advantage, of it cyber crime