DISCUSSION PAPER
A STUDY ON THE IMPACT OF DEMONETIZATION ON
VARIOUS CLASS OF SOCIETY
Akhil Swami
Amity Business School, Amity University, Sector 125, Noida
Isha Jain
Amity Business School, Amity University, Sector 125, Noida
1. ABSTRACT
Demonetization refers to Withdrawal of a particular form of currency from circulation. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be removed and substituted with a new currency unit. The currency was demonetized first time in 1946 and second time in 1978. On Nov. 2016 the currency is demonetized third time by the present Modi government. This is the bold step taken by the govt. for the betterment of the economy and country. The impact of recent demonetization on the Indian system has been discussed in this paper.
Keywords: Demonetization, Black Money, Counterfeit Currency, Corruption
2. INTRODUCTION
Process of removing a currency from general usage, or circulation is known as demonetization. For example, gold was demonetized in this way when it ceased to be used as an everyday currency. The Indian rupee (INR) is the official currency of India. The recent sudden move to demonetize Rs 500 and Rs 1,000 currency notes is not new. Rs 1,000 and higher denomination notes were first demonetized in January 1946 and again in 1978. The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But these notes were demonetized in January 1946 and again in January 1978, according to RBI data. To check undisclosed black money, corruption and fake currency the Government of India on the 8 November 2016 announced demonetization of high denomination currency notes Rs 500 and Rs1000. A new redesigned series of Rs 500 and Rs 2000 banknote is in circulation since 10 November 2016.
3. HISTORY AND BACKGROUND
midnight 8 Nov, Prime Minister Narendra Modi said new Rs 500 note and a Rs. 2,000 denomination banknote will be introduced from November 10. Bank notes in Ashoka Pillar watermark series in Rs 10 denomination were issued between 1967 and 1992, Rs 20 in 1972 and 1975, Rs 50 in 1975 and 1981 and Rs 100 between 1967-1979.The banknotes issued during this period contained the symbols representing science and technology, progress and orientation to Indian art forms. In the year 1980, the legend Satyameva Jayate — ‘truth alone shall prevail’ — was incorporated under the national emblem for the first time. In October 1987, Rs 500 banknote was introduced with the portrait of Mahatma Gandhi and Ashoka Pillar watermark. Mahatma Gandhi (MG) series banknotes – 1996 were issued in the denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (August 2001), Rs 50 (March 1997), Rs 100 (June 1996), Rs 500 (October 1997) and Rs 1,000 (November 2000).
The Mahatma Gandhi Series – 2005 bank notes were issued in the denomination of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1,000 and contained some additional/new security features as compared to the 1996 MG series. The Rs 50 and Rs 100 banknotes were issued in August 2005, followed by Rs 500 and Rs 1,000 denominations in October 2005 and Rs 10 and Rs 20 in April 2006 and August 2006, respectively.
Demonetization is defined as act of stripping a currency unit of its status as legal tender. It refers to cessation of current currency and replacing it with new currency. Demonetization is not a new concept; in the past also it has been utilized by various countries as well as India to curb currency some failed very badly with this move. Table 1 shows the countries which previously banned the notes and their effects on economy.
Table-1:Countries which previously banned the notes and their effects on economy
4. IMPACT
Impacts of Demonetization 1. On Economy
Invalidation of 500 and 1000 notes threatens to push Asia’s third largest economy into liquidity crisis.
Demonetization impacted severely as it led to cash crunch which will ultimately result in GDP growth crashing to 0.5% in the second half of financial year 2016-17 meaning hereby it would decelerate 0.5% down from 6.4% in the previous six months. Growth from October to December quarter it will show negative growth (as per reported by Ambit Capital, Mumbai based equity research firm).
2. Cash Crunched:
People comprising from unorganised sector to big consumer goods have seen their income tumbled by approximately 80 percent in the first week of swap alone.
Population relying on informal, cash based are severely hit. An interview showed that Green grocer of New Delhi borrows money to run his shop and he gave vegetables on credit for first two days but now he is forced to shut down his shop as he doesn’t have enough cash, he also told that if this condition persists for more than a two weeks then his family might have to go foodless.
For bigger firms it has been more difficult to pay their employees.
For construction sectors cash is the basic form in which payments are paid.
5. OBJECTIVES
Primary:To find out the impact of demonetization on various class of society and analysing the ground reality post the implementation of demonetization and having an insight of what people in a society according to their learning and needs.
Secondary:
1. To study what exactly people think about demonetization. 2. To identify the factors that influence people’s mindset.
3. To find how much people are using different modes of exchange. 4. To understand whether the inconvenience is caused or not.
6. LITERATURE REVIEW
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. The move by the government is to tackle the menace of black money, corruption, terror funding and fake currency.
Another element of the demonetization would be reduction in cash transactions in real estate. This is likely to reduce to real estate prices and make it affordable to some extent. However there could be near term challenges. In the immediate term, the reduced ability of the unorganized sector to deal in cash would impact the demand. Consumption items which had large element of cash dealing involved may see lower demand. Real estate and allied sectors may see near term to medium term negative impact. This may also lead to corporate earnings getting impacted in Q3FY17, as a large part of the old currency gets extinguished and takes time for fresh money to come into circulation.(Demonetization and its impact, 2016)
The demonetisation, by removing 86 per cent of the currency in circulation, has resulted in a very severe contraction in money supply in the economy. This contraction, by wiping out cash balances in the economy, will eliminate a number of transactions for a while, since there is no or not enough of a medium of exchange available.
In terms of the sectors in the economy, the sectors to be adversely affected are all those sectors where demand is usually backed by cash, especially those not within the organised retailing. For instance, transport services, kirana, fruits and vegetables and all other perishables, would face compression in demand which is backed by purchasing power. This in turn can have two effects: while it is expected that supply exceeds demand, there would be a fall in prices, however, if supply too gets curtailed for want of a medium of exchange, prices might, in fact, rise. Thus, while generally people seem to expect prices to fall, it is quite possible that prices would instead rise.
Alternatively, to keep the flows going, people might take recourse to credit - both the retailers and other agents in the economy might make supplies on credit in the hope that when the liquidity status is corrected, the payments can be realised. In these cases, the price of commodities might rise instead of falling.
The short-term effect on the economy would depend on the speed with which and the extent to which the cash is replaced by the authorities. If the entire cash is replaced within a short duration of time, the effects beyond the very short term of 1-2 months might be little. But a few sectors are likely to be seriously affected.
If, on the other hand, the authorities choose to replace only a fraction of the total cash that was surrendered by the people to the banking sector, then one would witness some other changes/effects in the economy. For transactions to be restored to the pre-change level, a number of agents who are using cash as a medium of exchange have to move to using digital versions of money as the medium of exchange. While this change is gradually happening in the economy, if it is forced by making cash inaccessible, the compression in demand as well as in income generation in the economy would continue for a longer period until people get familiar with the functioning and use of these media. (Demonetisation: Impact on the Economy, 2016).
7. RESEARCH METHODOLOGY SOURCES OF DATA COLLECTION-The research will be based on:
2. SECONDARY DATA:for theoretical overview, secondary data will be collected from different research papers, websites, newspapers and articles.
SAMPLE SIZE AND SAMPLING DESIGN
Sample size- The sample size is restricted to 400. The sample for the research is categorized as undergraduates, post graduates, housewives, businessmen, students and general public of Delhi.
8. FINDINGS
Table-2: Analysis of inconvenience faced
Did you mind the inconvenience faced in our fight to curb corruption, black money and counterfeiting of currency?
Under which income group you belong Not at all Somewhat, Yes Grand
to (per annum)? but it was Total
worth it
1 lakh- 5 lakhs 18 45 18 81
5 lakhs- 10 lakhs 25 57 24 106
Less than 1 lakh 32 90 34 156
More than 10 lakhs 12 29 15 56
Grand Total 87 221 91 399
Table-3: Analysis of personally affected
How has this personally affected you? Which of the following
pertains to you? Extremelyproblematic Huge, butwill manage Little, easilymanageable No problemat all GrandTotal
Businessman 18 15 35 13 81
Housewife 1 7 6 9 23
Service class 17 14 78 19 128
Student 7 11 43 10 71
Unemployed 7 20 54 15 96
Grand Total 50 67 216 66 399
Table-4: Analysis of education qualification
What is your education qualification? Which of the following medium of
exchange you have been using post demonetization?
High
School Less thanhigh school
Post Under
graduate GrandTotal
graduate
Credit basis 2 5 8 6 21
Freecharge 11 3 16 13 43
Mobiquick 3 5 22 19 49
Paytm 15 9 86 66 176
Plastic money 7 2 75 26 110
Table-5: Analysis of profession
Which of the following pertains to you? Did the new 2000 notes
Affect your day to day₹ transactions?
Business Housewife Service
class Student Un-employed GrandTotal
Can’t say 16 7 24 8 25 80
No 31 10 45 22 37 145
Yes 34 6 59 41 34 174
Grand Total 81 23 128 71 96 399
9. CONCLUSION
Demonetisation is a very right move taken by the Modi Government but the execution could have been better. The supply of new currency should have been fast paced so that people could have eased into the change easily. Practically speaking, poor were the ones who were negatively affected. This is because that apart from withdrawing money for themselves, they were allocated the work of withdrawing money for their employers as well. Thus the whole process for them became time consuming are tiring as well. Secondly, rural class especially women are not well versed with the system of electronic cash. Thus transition for them for very cumbersome as apart from the cash crunch, they were lacking the technical know-how. Another problem that was faced by the public was the new Rs. 2000 note. It was very difficult for public to make purchase using that note as no one had the change or no one was willing to give the change back to the customer. Hence, despite of having the new currency in the hands of the public, public was helpless for a while until the advent of Rs. 500 note. Since then, things started smoothening. But the move enabled the government to get the supply of 95% of the currency that was in circulation. The banks played a major role in the whole scenario. The whole move was possible with the
efforts that were put in the banking officials. Since the cash crunch, shopping behaviour of people have been greatly affected. The reason being, to save the legal tender with them, people only spent on necessities and curtailed on luxuries. In the attempt of going cashless, lot of hassles were faced. First and foremost was the hassle of being “cashless”, and secondly, due to inadequate knowledge of mobile wallets and net banking, immediate transition was difficult. But services like Paytm, Freecharge, and Mobiqwik spread awareness on their usage on a large-scale so as to make people well versed with the new system. Personal effect of demonetization on people was more towards the negative but people are sensible enough to see the long term benefits behind the move and hence they have adjusted to the new system. Most people are of opinion that the move was good but the implementation could have been better. The reason for that may be that very less people were involved in the planning committee of the move. Hence the move was a little short sighted.
based on impressions rather than on facts. While the facts are not available to anybody, it would be foolhardy to argue that this is the only possibility. As argued above, it is possible that these cash balances were used as a medium of exchange. In other words, while the cash was mediating in legitimate economic activity, if this currency is extinguished there would be a contraction of economic activity in the economy and that is a cost that needs to be factored in while assessing the impact of the demonetisation on the economy and its agents.
10. REFRENCES
[1] Forbes Welcome. (2017). Forbes.com. Retrieved 29 January 2017, from http://www.forbes.com/sites/timworstall/2016/11/19/effects-of-demonetisation-on-indias-gd p-difficult-to-calculate-we-dont-even-know-the-sign/#2afd1fba4a1a
[2] Here's A List Of Countries That Have Tried Demonetisation Before India. (2017). indiatimes.com. Retrieved 29 January 2017, from http://www.indiatimes.com/news/world/here-s-a-list-of-countries-that-have-tried-demonetisa tion-before-india-265743.html
[3] International Scholarly Open Access Research. (2017). Edupediapublications.org. Retrieved 29 January 2017, from https://edupediapublications.org/journals
[4] Kumar, A. (1985). The Black Money Report: A Critical Review. Social Scientist, 13(9), 61. http://dx.doi.org/10.2307/3517494
[5] Reddy, D. (2012). Strategies to Tackle the Issue of Black Money in India. Global Journal For Research Analysis, 3(3), 19-21.http://dx.doi.org/10.15373/22778160/mar2014/8
[6] White Paper On Black Money, Ministry Of Finance, Govt. Of India, CBDT, 2012
[7] A Study Of Issues And Challenges Of Tackling Black Money Menace In India Prof.[7] Dr. Rahul Goyal, Dr Parul Saxena, ISJTM Vol. 5 Issue 8 Aug 2016
