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ISSN: 2454-2415 Vol.

5, Issue 7, July 2017

Delineation on Demonetization Impact on Indian Economy

S. Thowseaf (Research Scholar), M. Ayisha Millath (Assistant Professor)

Alagappa Institute of Management, Alagappa University, Karaikudi 630004
Email ID thowseaf786@gmail.com Mobile No. - +91 7358167123
Email ID - ayishamillath05@gmail.com Mobile No. - +919842144984

Abstract: Demonetization had become a vital tool to change in the economy by demonetizing high-value
combat against corruption, terrorism, black money, fake currencies which are large numbers in circulation
cash and promotes accountable transactions. While i.e. Rs. 500 and Rs. 1000. The announcement was
demonetization having various beneficial factors it made during midnight of 8th of November 2016,
setbacks is in equal amount, if the demonetization effect people are informed to exchange the notes on or
is not properly planned. The demand for cash and its before December 26th, 2016 (studydhaba, 2016).
impact on a commercial, capital and community is a clear
This proposal is made by the government with an
indication of a disturbance in economic variables. This
study pertains to impact of demonetization and its impact objective to substantially squeeze cash circulation,
on selected economic variables such as G.D. P., counterfeit notes that could be offered for terrorism
investment, inflation, and interest also the study focuses and to eliminate black economy. The primary
only on the demonization effect that took place in India objective of the study the investigates the impact of
during November 2016. The paper is made using demonetization on selected economic variables -
secondary data collected from blogs, official websites GDP, Investment, Inflation, and Interest. This
and article in newspapers, journals, and magazines. article is based on reviews from blogs, websites,
newspapers, articles, and other such metric-
Keywords: Demonetization G. D. P., investment,
secondary data reported in official websites. The
inflation, and interest
variables for the study have been scrutinized from
Introduction the review collected.
Demonetization is a course of action Reviews
which includes legally forbidding certain currencies
Current demonetization made in India had
produced within the country and replacing the same
removed 86% of currency circulations, which had
with alternative currencies. In the process of
led to an extreme contraction of money supply
demonetization, the currency or series of currencies
within the economy. This contraction, in turn, is
that are banned will not be acceptable as valid
creating a cash imbalance by eliminating many
currency after the maturity period as mention by
commercial and public transactions for the
the government of the country (ncaacademy, 2016).
confined period (Policy, 2016). It is this
Demonetization in any economy is effected in
commercial, capital and community transaction are
order; introduce new currencies, reduce corruption
playing a major role in deciding the Investment,
level, bring out stored-non-taxed income and
Inflation, Interest and Industries of the country
reduce black marketing business i.e. transaction
which directly influences the GDP of the economy
without government concern (wikipedia, 2016).
(Policy, 2016). The major issues concerning
During demonetization cash in hand- will
demonetization is that the production supply will
become an implicit question whether the
succeed demand during this period i.e. due to lack
particular currencies is an asset or liability. Hereby,
of money supply with consumers and continues
to validate the same there is a need for making an
production of goods and service by the producers
accountable transaction through banks or other
will make supply feed forward the demand, thereby
such government institutions, through which cash
the producer are forced suspend their business
will become accountable even there is a possibility
activities or give huge credit to customers and
of black money i.e. tax evaded income becomes
consumers or forced to give huge subsidies on
white money i.e. taxable income. November 8th,
products and service to sustain for the period,
2016 is third demonetization process in India, it
thereby the possibility of inflation occurrence is
was during 1946 and 1978 the first and second
very marginal also government fiscal and monetary
demonetization took place in India. The highest
policy governing interest rate to support producer
value denomination note produced in India was
should be lowered or sustained to support
Rs.10000, 5000, 1000. It was printed in the year
industries (CARE, 2016). It is being reported that
1938 and again printed during the year 1954. As it
most of the sectors such as Consumer goods, Real
is printed twice, it was demonetized twice during
Estate and Property, Gold and luxury goods,
the year 1946 and 1978. The third demonetized
Automobiles owing a significant amount of cash
Indian denominations are Rs. 500s and 1000s.
transaction are severely impacted (Robeco, 2016).
The government of India has executed a major

International Journal of Innovative Knowledge Concepts, 5(7) July, 2017
ISSN: 2454-2415 Vol. 5, Issue 7, July 2017

In relation to the public, though demonetization lack of currencies to replace demonetized notes,
effect has a profound influence on consumption most of the circulating money would be in
pattern, it doesnt felt much on the economy due to electronic, cheques, DD and other such forms,
cultural events and festivals which arrived during thereby transaction cost would get added up to the
this specific period have belatedly sustained the common public in form of service cost. Apart from
consumption and neutralized the impact on the service cost, energy and waiting time and
economy (studydhaba, 2016). processing time led by the public and commercials
is a major issue. Apart from the visible impact on
Impact of demonetization on economic variables
the individual, there is the possibility of
The potential problem raised out of demonetization creating impression on invisible
demonetization in India was; first - people making economic variables such as G. D. P., investment,
cash holding cannot give reasons and deposit into inflation and interest this study involves bringing
the banks for exchange if it above the prescribed out its visible impact that it has created on Indian
limit, thereby this part of currencies will get economy.
extinguished and cannot be replaced. Second - due
Effect on GDP
Month-Year Reference Actual Previous Forecast (IMF)
05-2016 Q1 7.9% 7.2% 7.3%
08-2016 Q2 7.1% 7.9% 7.4%
11-2016 Q3 7.3% 7.1% 7.2%
02-2016 Q4 7.3% 6.6%
Source: (tradingeconomics.com, 2016)
The GDP of the country would have been impacted to great extent, but due to consumption demand
created by festivals and cultural events especially on specific period had offset the impact. It is this reason
Indian GDP is outperforming IMF (International Monetary Fund) forecast i.e. as per the forecast for 3rd Quatre
the growth percent were calculated to be 7.2%, whereas the actual value calculated was 7.3% which is 0.1%
greater than IMF forecasted value despite demonetization. Hereby, there is the possibility of GDP not getting
significant variation in case the stream of cash transactions becomes normal prior before the lack of cash
influencing demand and supply and then hitting GDP significantly.
Effect on Investment
Date Open High Low Close Growth % Std. Dev.
01-Sep-16 28459.09 28548.85 28386.61 28423.48
30-Sep-16 27807.82 27955.21 27716.78 27865.96 -0.01961 473.6413
03-Oct-16 27997.29 28273.02 27919.89 28243.29 0.013541
30-Oct-16 28066.32 28095.71 27890.14 27930.21 -0.01109 21.03643
01-Nov-16 27966.18 28029.8 27845.63 27876.61 -0.00192
30-Nov-16 26441.02 26680.55 26395.5 26652.81 -0.0439 1025.397
01-Dec-16 26756.66 26769.32 26540.82 26559.92 -0.00349
30-Dec-16 26441.51 26678.6 26406.53 26626.46 0.002505 94.95737
Source: (BSE, 2016)
Date Open High Low Close Growth% Std. Dev.
01-Sep-16 8793.6 8813.25 8759.95 8774.65
30-Sep-16 8581.5 8637.15 8555.2 8611.15 -1.86332 115.612
03-Oct-16 8666.15 8745.2 8635 8738.1 1.474251
30-Oct-16 8672.35 8678.25 8616.25 8625.7 -1.28632 79.4788
01-Nov-16 8653.15 8669.6 8614.5 8626.25 0.006376
30-Nov-16 8172.15 8234.25 8139.25 8224.5 -4.6573 284.0801
01-Dec-16 8244 8250.8 8185.05 8192.9 -0.38422
30-Dec-16 8119.65 8197 8114.75 8185.8 -0.08666 5.020458
Source: (NSE, 2016)

International Journal of Innovative Knowledge Concepts, 5(7) July, 2017
ISSN: 2454-2415 Vol. 5, Issue 7, July 2017

From the data, it can be interpreted that NSE and BSE overall closing price value or Index is found to
be possessing comparatively low value than previous 3 months, i.e. during pre- demonetization period. It is
examined and reported that only less than 2% of the total population in India have indulged in stock exchange
(wikipedia, 2016) also the transaction has been transformed from manual system to electronic system by the
SEBI (Security Exchange Board of India) guidelines, hereby investment should not have affected actually.
Whereas the low value of closing price during the demonetization period clearly indicates the flaw lying on the
side of the performance of the companies listed on NSE and BSE. It is also been noted the great extent of
standard deviation considering price during the demonetization period.
Effect on Inflation
Month Inflation in percentage
January 5.69
February 5.263
March 4.825
April 5.468
May 5.757
June 5.772
July 6.068
August 5.048
September 4.386
October 4.203
November 3.63
December 3.41
Source: (tradingeconomics, 2016)
The major benefit of demonetization is the reduction in inflation. It can be interpreted from the data that
during November and December the inflation rate had fallen to 4.403 to 3.63 and 3.63 to 3.11% respectively,
which is very low compared previous months in the same year. It is being reported that major cause of the
decrease in inflation is due the demand for cash from the consumer and customer end and continuous production
carried out by various industrial sectors on another end. The goods produced must be sold whereas the limited
cash availability with the consumer and customers, thereby the producers are forced to sell at the lowest rate,
lend credit, allow term deposit and follow other such pricing strategies to sell their product at a considerable
rate. This situation had suppressed the inflation, and have made goods and service available to the public at
lowest cost along with the considerable type of transaction which is either favorable or unfavorable.

Effect on interest
Month-Year Reference Actual Previous Forecast
08-2016 Q1 6.50% 6.50% 6.50%
10-2016 Q2 6.25% 6.50% 6.50%
12-2016 Q3 6.25% 6.25% 6%
02-2016 Q4 6.25% 6%
Source: (economics, 2016)
TEM 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016
Basic Goods 175.1 182.4 174.6 176.0 174.5 182.2 184.4 175.4 188.7 173.5 178.8

Capital Goods 219.2 203.6 225.1 207.7 204.6 222.8 205.6 185.2 280.7 231.1 212.2

Consumer 248.3 273.8 298.5 261.4 258.4 259.5 267.2 289.2 288.3 277.2 260.5
Consumer 176.1 173.9 185.0 171.8 175.6 184.1 180.8 182.8 204.0 200.8 202.1
Consumer Non- 147.5 134.3 140.0 136.3 142.8 154.2 146.5 140.6 170.6 170.5 178.9
Intermediate 153.2 158.8 157.2 161.4 164.1 162.3 164.0 156.7 171.8 159.2 162.8
Source: (dbie.rbi, 2016)

International Journal of Innovative Knowledge Concepts, 5(7) July, 2017
ISSN: 2454-2415 Vol. 5, Issue 7, July 2017

The Government of India through RBI employees for wages are generally affected to great
have subsidized the interest rate for the wellbeing extent. Apart consumer non-durable industries like
of Industries which serves society. The fallen construction and other such industries which
interest rate is considered a boon to Industries to involve huge money cash transaction had been
avail loan for betterment, it is this reason the affected to great extent.
production index of the various industrial sector Conclusion
has not shown significant variation. whereas the Indian economic variables considered for
fallen interest doesnt have created significant the study i.e. G. D. P., investment, inflation,
effect as per the report because public are not in the interest, and industries are making sustainable
position to consume produced goods despite progress irrespective of various interventions such
cultural events and festivals to fullest extent due to as demonetization. The G. D. P. performance of
cash demand but the scene has neutralized the India had indicated a value greater than I.M.F.
demonetization impact, whereas it been reported (International Monetary Fund) projected value
that public savings have been intensely affected due despite demonetization effect. On considering
to reduction in interest rate but benefited public investment aspects, the NSE and BSE average
borrowed term loans. It is being reported that the closing price value indicated the great extent of
level of productions is unaffected in most of the fluctuation and reduction in values comparing to
industries but the level of profit is considerably pre-demonetization period, the standard deviation
affected. Various studies pertaining to agricultural thus calculated indicated the abnormal value and
sector had stated, there will be an increment in fluctuation leap. On close sight on interest rate and
value of agricultural commodities despite same inflation, there exists a favourableness, as its
level of production or less production in India (S. noticed there is a reduction in inflation and interest
Thowseaf M. k., 2016) (S. Thowseaf M. A., 2016) rate in percentage which is best suited for public
where made incorrect due to unexpected and industries. Relatively, the considered Indian
demonetization. Apart from consumer durable and economic variables havent surprised much due to
capital goods, it is consumer non-durable goods- demonetization, It is public and business involving
producing industries and industries employing huge transaction that is much affected.
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International Journal of Innovative Knowledge Concepts, 5(7) July, 2017

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