Indian J.Sci.Res. ** (*): ***-***, **** ISSN: ****-0138 (Online)

1Corresponding author

DEMONETISATION IN INDIA: CAUSES, IMPACTS AND GOVT. INITIATIVES PRASANN KUMAR DASa1 AND NIRMAL KUMAR ROUTRAb

abDepartment of MBA, GIFT

ABSTRACT

The demonetisation was done in an effort to stop counterfeiting of the current bank notes alleged to be used for funding terrorism, controlling black money and reducing income inequalities among the people of the country. This article has made an attempt to assess the overall profile of parallel economy in India, particularly in terms of causes, impacts and Govt. Initiatives. The results indicate that Parallel economy has been expanding very rapidly in India as well as in developing countries. It is evident from the study that Govt. Of India already introduced various issues for estimating black economy but estimation reports are not same. Indian Govt. Is more concerned about the prevalence of the parallel economy and various commissioning are formed for controlling it but results are not so impressive. Thus the paper suggests that recommendations of the commissioning or laws should be implemented correcting for reducing bad effects of black economy and it helps to reduce income inequalities and inflation in the country. KEYWORDS: Black Money, Inflation, Income Inequalities, Parallel Economy, Gross Domestic Product. Demonetisation is the act of stripping a

currency unit of its status as legal tender.

Demonetisation 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. Demonetization is a generations’ significant

experience and is going to be one of the economic

events of our time. Its impact is felt by every Indian citizen. Demonetization affects the economy through the liquidity side. An asset is said to be liquid if it is easy to sell or convert in to cash without any loss in its value . Its effect will be a telling one because nearly 86% (Rs 14.2 trillion) of high currency value in circulation was withdrawn without altering bulk of it. As a result of the withdrawal of Rs 500 and Rs 1000 notes, there occurred huge gap in the currency

composition as after Rs 100; Rs 2000 is the only

denomination.

Absence of intermediate denominations like

Rs 500 and Rs 1000 will reduce the utility of Rs 2000. Effectively, this will make Rs 2000 less useful as a transaction currency though it can be a store value denomination.

Demonetization technically is a liquidity

shock; a sudden stop in terms of currency availability. It creates a situation where lack of currencies

squeezes consumption, investment, production,

employment etc. In this context, the exercise may

produce following short term/long term/,

consumption/investment, welfare/growth impacts on

Indian economy. The intensity of demonetization

effects clearly depends upon the duration of the

liquidity shocks. The move by the Govt. Is to tackle the menace of black money, corruption, terror funding and fake currency.

OBJECTIVES OF STUDY

1. To analyse the causes and impact of

Demonetisation in India.

2. To highlight the appropriate initiative which will be taken by Govt. To success the objective of

demonetisation.

RESEARCH METHODOLOGY

The study is based on secondary data. The

required data has been collected from various sources i.e., World Investment Report, Asian Development

Banks’ Reports, various bulletins of Reserve Bank of India, that are available in internet and publications. REVIEW OF LITERATURE

“Demonetization: Impact on the economy”,

by Tax Research Team, working paper number 182,

NIPFP (2016)- this paper has elucidated the impact of demonetization in the availability of credit spending, level of activity and Government Finances. “The

economic consequences of Demonetization of 500

and 1000 rupee notes” by M. Sabnavis, A. Sawarkar

and M. Mishra in Economic Policy View November

09, 2016- this paper suggested that in spite of the initial hiccups and disruptions in the system of

Demonetization today, eventually this change will be well assimilated and will prove positive for the

economy in the long run. “Black Money and

Demonetization” by Rahul Prakash Deodhar, SSRN,

November 2016: This paper has emphasized and

highlighted towards control of black money,

corruption and terrorism through

Demonetization.

CAUSES OF DEMONETIZATION

In a single master stroke, the government has

attempted to tackle all three malaises currently

DAS AND ROUTRA: DEMONETISATION IN INDIA: CAUSES, IMPACTS AND GOVT. INITIATIVES Indian J.Sci.Res. 15 (2): 201-204, 2017

plaguing the economy—a parallel economy,

counterfeit currency in circulation and terror

financing.

In addition, the Indian economy has been

provided a new lease of life—a "reset" if you will— with huge positive implications for liquidity, inflation, fiscal and external deficit in the short term. Over the next two-three years, improvement in India's position on transparency and corruption in the global stage will further add to its investor appeal. With GST to be implemented soon, India is now on the path of higher growth in the medium term and long term also.

IMPACT OF DEMONETIZATION

To understand the impact of Demonetization, 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

corresponding incomes are reported to tax purposes or not. The third category consists largely of agents, who earn incomes below the exemption threshold and

therefore do not have any tax liabilities. The use of that cash is put to for these various segments of the economy can be summarized in the form of table 1.

Table 1: Demand for Cash by various agents in the economy Description of the

activity

Unaccounted

Transactions

(legitimate

transactions but tax

not paid)

Illegal Transactions

(Corruption, Crime,

etc.)

Informal Sector

Transactions

Accounted

Transactions

Medium of

Exchange

Incomes are earned

through exchanges

in cash, payments

are made in cash.

Payments for crime.

Incomes are earned

in cash and spent in

cash.

Transaction demand

for money.

Store of Value Balances held in

interim until

alternative

investment options

become available.

(there exists a

number of

instruments which

yield better return

than cash- real

estate, lending in

the unaccounted or

informal sector and

so on).

Balances held in

interim until

alternative

investment options

become available.

(there exists a

number of

instruments which

yield better return

than cash- real

estate, lending in

the unaccounted or

informal sector and

so on).

Savings as well as

precautionary

purposes (as yet

unbanked in the

psychological

sense)

For emergencies

(precautionary

demand for money)

(Source: http://nipfp.org.in/media/medialibrary/2016/11/WP_2016_182.pdf) Liquidity Crunch (Short Term Effect)

Liquidity shock means people are not able to

get sufficient volume of popular denomination

especially Rs 500. This currency unit is the

favourable denomination in daily life. It constituted to nearly 49% of the previous currency supply in terms of value. Higher the time required to resupply Rs 500 notes, higher will be the duration of the liquidity crunch. Current reports indicate that all security printing press can print only 2000 million units of RS 500 notes by the end of this year. Nearly 16000 mn Rs 500 notes were in circulation as on end March 2016. Some portion of this were filled by the new Rs 2000 notes. Towards end of March approximately 10000

mn units will be printed and replaced. All these

indicate that currency crunch will be in our economy for the next four months.

Welfare Loss For The Currency Using Population

Most active segments of the population who

constitute the ‘base of the pyramid’ uses currency to DAS AND ROUTRA: DEMONETISATION IN INDIA: CAUSES, IMPACTS AND GOVT. INITIATIVES Indian J.Sci.Res. 15 (2): 201-204, 2017

meet their transactions. The daily wage earners, other labourers, small traders etc. who reside out of the formal economy uses cash frequently. These sections will lose income in the absence of liquid cash. Cash stringency will compel firms to reduce labour cost and thus reduces income to the poor working class.

There will be a trickle up effect of the

liquidity chaos to the higher income people with time. Consumption Will Be Hit

When liquidity shortage strikes, it is

consumption that is going to be adversely affected first.

Consumption Production Employment

Growth Tax revenue

Loss Of Growth Momentum

India risks its position of being the fastest

growing largest economy: reduced consumption,

income, investment etc. may reduce India’s GDP

growth as the liquidity impact itself may last three - four months.

Impact On Bank Deposits And Interest Rate

Deposit in the short term may rise, but in the

long term, its effect will come down. The savings with the banks are actually liquid cash people stored. It is difficult to assume that such ready cash once stored in their hands will be put into savings for a long term. They saved this money into banks just to convert the old notes into new notes. These are not voluntary

savings aimed to get interest. It will be converted into active liquidity by the savers when full-fledged new currency supply take place. This means that new

savings with banks is only transitory or short-term deposit. It may be encashed by the savers at the

appropriate time. It is not necessary that

demonetization will produce big savings in the

banking system in the medium term. Most of the

savings are obtained by biggie public sector banks like the SBI. They may reduce interest rate in the short/medium term. But they can't follow it in the long term.

Impact On Black Money

Only a small portion of black money is

actually stored in the form of cash. Usually, black income is kept in the form of physical assets like gold, land, buildings etc. Hence the amount of black money countered by demonetization depends upon the

amount of black money held in the form of cash and it will be smaller than expected. But more than anything else, demonetization has a big propaganda effect.

People are now much convinced about the need to

fight black income. such a nationwide awareness and urge will encourage government to come out with

even strong measures.

Impact On Counterfeit Currency

The real impact will be on counterfeit/fake

currency as its circulation will be checked after this exercise.

Demonetization as a cleaning exercise may

produce several good things in the economy. At the same time, it creates unavoidable income and welfare losses to the poor sections of the society who gets income based on their daily work and those who

doesn’t have the digital transaction culture. Overall economic activies will be dampened in the short term. But the unmeasurable benefits of having more

transparency and reduced volume of black money

activities can be pointed as long term benefits.

Other Impacts

Impact on Parallel Economy

The removal of these 500 and 1000 notes and

replacement of the same with new 500 and 2000

Rupee Notes is expected to - remove black money

from the economy as they will be blocked since the owners will not be in a position to deposit the same in the banks, - Temporarily stall the circulation of large volume of counterfeit currency and - curb the funding for anti-social elements like smuggling, terrorism, espionage, etc.

Impact on Money Supply

With the older 500 and 1000 Rupees notes

being scrapped, until the new 500 and 2000 Rupees

notes get widely circulated in the market, money

supply is expected to reduce in the short run. To the extent that black money (which is not counterfeit) does not re-enter the system, reserve money and hence money supply will decrease permanently. However

gradually as the new notes get circulated in the market and the mismatch gets corrected, money supply will pick up.

Impact on Demand

The overall demand is expected to be

affected to an extent. The demand in following areas is to be impacted particularly: Consumer goods, Real Estate and Property, Gold and luxury goods,

Automobiles (only to a certain limit),

All these mentioned sectors are expected to

face certain moderation in demand from the consumer DAS AND ROUTRA: DEMONETISATION IN INDIA: CAUSES, IMPACTS AND GOVT. INITIATIVES Indian J.Sci.Res. 15 (2): 201-204, 2017

side, owing to the significant amount of cash

transactions involved in these sectors.

Impact on Prices

Price level is expected to be lowered due to

moderation from demand side. This demand driven

fall in prices could be understood as follows:

Consumer goods: Prices are expected to fall only

marginally due to moderation in demand as use of

cards and cheques would compensate for some

purchases.

GOVERNMENT INITIATIVES TO MAKE

DEMONETIZATION A SUCCESS

The government has taken a number of steps

to curb black money. Searches, seizures, surveys, and scrutiny of income tax returns are being done by the Income Tax Department. Amendments have also been

made to the Finance Act 2004 to intensify efforts to curb black money. For the success of demonetization and smooth functioning of the economy, the

Government has taken the following initiatives:

1. Controlling the election expenses.

2. Find out the root cause of generation of black

money and make emphasis to stop it. Unless this

problem is tacked the menace of black money

will continue to increase.

3. PAN Card is essential for all tax payers but many transactions especially those related to property

and conducted in cash and are unlikely to be

reported. For this it is better to create a property and wealth account in the name of an individual.

4. Government has also taken initiative in the last two years to open Dhana jan Account, which is

essential to judge individual source of income.

5. Government has also taken initiatives and also

motivated the people towards cashless

transactions, which help to make a proper record

about transactions between parties.

6. Government has also taken initiative to aware the people through mass media about the cashless

transactions and income tax, etc.

CONCLUSION

Parallel economy is a new threat for the

Indian economy. In India parallel economy is

expanding very rapidly. There are many factors like Controls and Licensing System, Higher Rates of

Taxes, Ineffective Enforcement of Tax Laws,

Inflation, Funding of political parties etc.

that influence its growth. In India amount of black money are increasing continuously which badly

impacts the economic growth of the nation. Such

money is a new challenge for Indian economy. Indian economy is badly affected by black money as it is

underestimating GDP, increasing inequality of

income, increasing illegal activities etc. Over the past 50 years, the government has at various times

announced several schemes offering opportunities to bring black money overboard but the result are not so effective. Some of these schemes are: introducing the scheme of Special Bearer Bonds, demonetizing high

denomination currency notes, stringent raids and

scheme of voluntary disclosures. These instruments are expected to reduce the volume of the black

economy.

Black money holders will definitely lose out

eventually boosting the formal economy in the long run. Short term fall in real estate prices might benefit for middle class citizens in India.

REFERENCES

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Chopra A., 2010. India targets black money.

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“The economic consequences of

Demonetization of 500 and 1000 rupee

notes”.

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