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INDEX

SR.NO CONTENT PG.NO


Chaptrer 1 .INTRODUCTION
1 1.1 Defination
1.2 Meaning
1.3 Banking Structure in India
1.4 History of Indian Banking System
Chapter 2. Introduction to Demonetization.
2 2.1 Meaning
2.3 Defination
2.4 Evalution
2.5 History
Chapter 3. Demonetization in India.
3 3.1 Indias past experience with Demonetization.
Executive Summary
Demonetization is the process of withdrawal of a particular form of currency from circulation.
Demonetization becomes necessary whenever there is a change in the national currency. The
old unit of currency must be retrieved and replaced with a new currency unit. It involves either
introducing new notes or coins of the same denomination or completely replacing the old
denominations with the new denomination which is usually carried out as an ambush on the
black market. In India demonetization has occurred thrice. The first was on 12th January 1946
(Saturday), second on 16th January 1978 (Monday) and the third was on 8th November 2016
(Tuesday). The purpose of this study is to compare and analyse the impact of demonetizations
and their significance in the economic development of India by comparing with other
countries. Considering the importance and the influence of Indian economy in the global
financial markets and the growth rate of India’s GDP, this article attempts to document the
historical importance of the demonetizations and their impact on the export and import. This
article also covers the various other countries who tried demonetization, they are, Nigeria,
Ghana, Pakistan, Zimbabwe, North Korea, Soviet Union, Myanmar and Australia. The results of
this study provide an insight into the demonetization process and about its impact on the
growth and development in these countries. Thus, the findings of this study reveal that, India
will achieve a significant growth by adapting the demonetization strategy and it will create a
huge positive impact on the entire economy in a long run.
LITERATURE REVIEW
PRADHAN MANTRI GARIB KALYAN YOJNA

Pradhan Mantri Garib Kalyan Yojana, 2016 (PMGKY) is an amnesty scheme launched by the
Narendra Modi led Government of India in December 2016 on the lines of the Income
declaration scheme, 2016 (IDS) launched earlier in the year. A part of the Taxation Laws
(Second Amendment) Act, 2016, the scheme provides an opportunity to declare unaccounted
wealth and black money in a confidential manner and avoid prosecution after paying a fine of
50% on the undisclosed income. An additional 25% of the undisclosed income is invested in
the scheme which can be refunded after four years.

Valid from December 16, 2016 to March 31, 2017, the scheme can only be availed to declare
income in the form of cash or bank deposits in Indian bank accounts and not in the form of
jewellery, stock, immovable property, or deposits in overseas accounts. Not declaring
undisclosed income under the PMGKY will attract a fine of 77.25% if the income is shown in
tax returns. In case the income is not shown in tax returns, it will attract a further 10% penalty
followed by prosecution.
AN INTRODUCTION TO INDIAN BANKING SYSTEM

 INTRODUCTION
The banking sector is the lifeline of any modern economy. It is one of the important financial
pillars of the financial sector, which plays a vital role in the functioning of an economy. It is
very important for economic development of a country that its financing requirements of trade,
industry and agriculture are met with higher degree of commitment and responsibility. Thus, the
development of a country is integrally linked with the development of banking. In a modern
economy, banks are to be considered not as dealers in money but as the leaders of development.
They play an important role in the mobilization of deposits and disbursement of credit to
various sectors of the economy.

The banking system reflects the economic health of the country. The strength of an economy
depends on the strength and efficiency of the financial system, which in turn depends on a
sound and solvent banking system. A sound banking system efficiently mobilized savings in
productive sectors and a solvent banking system ensures that the bank is capable of meeting its
obligation to the depositors. In India, banks are playing a crucial role in socio-economic
progress of the country after independence. The banking sector is dominant in India as it
accounts for more than half the assets of the financial sector. Indian banks have been going
through a fascinating phase through rapid changes brought about by financial sector reforms,
which are being implemented in a phased manner.

The current process of transformation should be viewed as an opportunity to convert Indian


banking into a sound, strong and vibrant system capable of playing its role efficiently and
effectively on their own without imposing any burden on government.

After the liberalization of the Indian economy, the Government has announced a number of
reform measures on the basis of the recommendation of the Narasimhan Committee to make the
banking sector economically viable and competitively strong.

The current global crisis that hit every country raised various issue regarding efficiency and
solvency of banking system in front of policy makers. Now, crisis has been almost over,
Government of India (GOI) and Reserve Bank of India (RBI) is trying to draw some lessons.
RBI is making necessary changes in his policy to ensure price stability in the economy. The
main objective of these changes is to increase the efficiency of banking system as a whole as
well as of individual institutions. So, it is necessary to measure the efficiency of Indian Banks
so that corrective steps can be taken to improve the health of banking system.
DEFINATION OF BANKING
The Banking Companies Act of India defines Bank as “A Bank is a financial institution which
accepts money from the public for the purpose of lending or investment repayable on demand or
otherwise withdraw able by cheques, drafts or order or otherwise.”

The definition of a bank varies from country to country. See the relevant country pages under
for more information.
Under English common law, a banker is defined as a person who carries on the business of
banking, which is specified as:

 conducting current accounts for his customers,


 paying cheques drawn on him/her and
 Collecting cheques for his/her customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in
relation to negotiable instruments, including cheques, and this Act contains a statutory
definition of the term banker: banker includes a body of persons, whether incorporated or not,
who carry on the business of banking' (Section 2, Interpretation). Although this definition seems
circular, it is actually functional, because it ensures that the legal basis for bank transactions
such as cheques does not depend on how the bank is structured or regulated.
The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are
statutory definitions of the business of banking or banking business. When looking at these
definitions it is important to keep in mind that they are defining the business of banking for the
purposes of the legislation, and not necessarily in general. In particular, most of the definitions
are from legislation that has the purpose of regulating and supervising banks rather than
regulating the actual business of banking. However, in many cases the statutory definition
closely mirrors the common law one. Examples of statutory definitions:

 "banking business" means the business of receiving money on current or deposit account,
paying and collecting cheques drawn by or paid in by customers, the making of advances to
customers, and includes such other business as the Authority may prescribe for the purposes
of this Act; (Banking Act (Singapore), Section 2, Interpretation).
 "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar
account repayable on demand or within less than [3 months] ... or with a period of call
or notice of less than that period;
2. Paying or collecting cheques drawn by or paid in by customers.[14]
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct
debit and internet banking, the cheque has lost its primacy in most banking systems as a
payment instrument. This has led legal theorists to suggest that the cheque based definition
should be broadened to include financial institutions that conduct current accounts for
customers and enable customers to pay and be paid by third parties, even if they do not pay and
collect cheques .

Meaning of Bank
You know people earn money to meet their day-to-day expenses on food, clothing, education of
children, housing, etc. They also need money to meet future expenses on marriage, higher
education of children, house building and other social functions. These are heavy expenses,
which can be met if some money is saved out of the present income. Saving of money is also
necessary for old age and ill health when it may not be possible for people to work and earn
their living. The necessity of saving money was felt by people even in olden days. They used to
hoard money in their homes. With this practice, savings were available for use whenever
needed, but it also involved the risk of loss by theft, robbery and other accidents. Thus, people
were in need of a place where money could be saved safely and would be available when
required. Banks are such places where people can deposit their savings with the assurance that
they will be able to withdraw money from the deposits whenever required. People who wish to
borrow money for business and other purposes can also get loans from the banks at reasonable
rate of interest.

Bank is a lawful organisation, which accepts deposits that can be withdrawn on demand.
It also lends money to individuals and business houses that need it.

Banks also render many other useful services – like collection of bills, payment of foreign bills,
safe-keeping of jewellery and other valuable items, certifying the credit-worthiness of business,
and so on. Banks accept deposits from the general public as well as from the business
community. Anyone who saves money for future can deposit his savings in a bank.
Businessmen have income from sales out of which they have to make payment for expenses.
They can keep their earnings from sales safely deposited in banks to meet their expenses from
time to time. Banks give two assurances to the depositors – a. Safety of deposit, and b.
Withdrawal of deposit, whenever needed on deposits, banks give interest, which adds to the
original amount of deposit. It is a great incentive to the depositor. It promotes saving habits
among the public. On the basis of deposits banks also grant loans and advances to farmers,
traders and businessmen for productive purposes. Thereby banks contribute to the economic
development of the country and well being of the people in general. Banks also charge interest
on loans. The rate of interest is generally higher than the rate of interest allowed on deposits.
Banks also charge fees for the various other services, which they render to the business
community and public in general. Interest received on loans and fees charged for services which
exceed the interest allowed on deposits are the main sources of income for banks from which
they meet their administrative expenses. The activities carried on by banks are called banking
activity. ‘Banking’ as an activity involves acceptance of deposits and lending or investment of
money. It facilitates business activities by providing money and certain services that help in
exchange of goods and services. Therefore, banking is an important auxiliary to trade. It not
only provides money for the production of goods and services but also facilitates their exchange
between the buyer and seller. You may be aware that there are laws which regulate the banking
activities in our country. Depositing money in banks and borrowing from banks are legal
transactions. Banks are also under the control of government. Hence they enjoy the trust and
confidence of people. Also banks depend a great deal on public confidence. Without public
confidence banks cannot survive.
.BANKING STRUCTURE IN INDIA

M consists of non scheduled banks and scheduled banks.

Non scheduled banks refer to those that are not included in the second schedule of the Banking
Regulation Act of 1965 and thus do not satisfy the conditions laid down by that schedule.
Schedule banks refer to those that are included in the Second Schedule of Banking Regulation
Act of 1965 and thus satisfy the following conditions:
A bank must have paid up capital and reserve of not less than Rs. 5 lakh and
Satisfy the Reserve Bank of India (RBI) that its affairs are not conducted in a manner
detrimental to the interest of its deposits.

Scheduled banks consists of scheduled commercial banks and scheduled

Cooperative banks.

The former are further divided into four categories:

(1) public sector banks (that are further classified as Nationalized Banks and the State Bank

of India (SBI) banks);

(2) Private sector banks (that are further classified as Old Private Sector

Banks and New Private Sector Banks that emerged after 1991);

(3) Foreign banks in India, and

(4) Regional rural banks (that operate exclusively in rural areas to provide

Credit and other facilities to small and marginal farmers, agricultural wor mg the

Main objective of this chapter is to setup the ground and logic for the next.
History of Indian Banking System

The first bank in India, called The General Bank of India was established in the year 1786. The
East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840)
and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras)
were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the
first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head
quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In 1921, all presidency
banks were amalgamated to form the Imperial Bank of India which was run by European
Shareholders. After that the Reserve Bank of India was established in April 1935.
At the time of first phase the growth of banking sector was very slow. Between 1913 and 1948
there were approximately 1100 small banks in India. To streamline the functioning and
activities of commercial banks, the Government of India came up with the Banking Companies
Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of
1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as a Central Banking Authority. After independence,
Government has taken most important steps in regard of Indian Banking Sector reforms. In
1955, the Imperial Bank of India was nationalized and was given the name "State Bank of
India", to act as the principal agent of RBI and to handle banking transactions all over the
country. It was established under State Bank of India Act, 1955. Seven banks forming
subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969, major process
of nationalization was carried out. At the same time 14 major Indian commercial banks of the
country were nationalized. In 1980, another six banks were nationalized, and thus raising the
number of nationalized banks to 20. Seven more banks were nationalized with deposits over
200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under
governments ownership. On the suggestions of Narsimhan Committee, the Banking Regulation
Act was amended in 1993 and thus the gates for the new private sector banks were opened. The
following are the major steps taken by the Government of India to Regulate Banking
institutions in the country:-

1949: Enactment of Banking Regulation Act.

1955: Nationalisation of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalisation of 14 major Banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalisation of seven banks with deposits over 200 Corers.


Introduction to Demonetization

Demonetisation means stopping a form of currency from being legal tender. That means the
currency can no longer be legally used.

It occurs whenever there is a change of national currency. The current form or forms of money
is pulled from circulation and retired, often to be replaced with new notes or coins.

Demonetisation was done in 1946 with the complete ban of Rs.1000 and Rs.10000 notes to deal
with the unaccounted money i.e. black money.

Second time it was done in 1978 by government headed by Morarji Desai when Rs.1000,
Rs.5000 and Rs.10000 notes were demonetised.

On 8th November 2016, Government of India had announced that from today onward rupees
500 and 1000 rupee note will not be a legal tender.

It means that 500 and 1000 rupee note will not be accepted by anyone except the organisation
declared by the government.

Public could deposit and change the currency from the banks and post offices till 30th
December, 2016.

Cash withdrawals from bank accounts were restricted to Rs.10000 per day and Rs.20000 per
week per account from 10 to 13 November.

This limit was increased to Rs.24000 per week from 14 November, 2016.

A daily limit on withdrawals from ATMs was also imposed varying from Rs.2500 per day till
31st December, 2016.

This limit was increased to R.4500 per day from January 1, and again to Rs.10000 from January
16, 2017.

Exceptions for withdrawal

 On 17th November, 2016, families were allowed to withdraw Rs.250000 for wedding
expenses from one account provided it was KYC norm.

 The rules were also changer for farmers who are permitted to withdraw Rs.25000 per
week from their accounts against crop loans.
Meaning of Demonetization

 Demonetization refers to an economic policy where a certain currency unit


ceases to be recognized or used as a form of legal tender. In other words, a
currency unit still loses its legal tender status as a new one comes into circulation.
 The government can take such decisions to stop the circulation of a denomination of
notes or coins in the economy.
 The currency unit that has been demonetized is withdrawn from circulation. During
the implementation of this policy, the currency unit that has lost its status as a legal
tender is deposited with the banks or other authorized financial institutions and replaced
with units that still have legal tender status.
 The government from time to time formulates fiscal policies that are meant to spur
economic growth. A lot of black money circulates in the economy, and most of it is
unaccounted for because the sources of income are not known to the government. It can
be money generated through illegal trade or unauthorized funding. To mop up this
money out of circulation, the government can demonetize so that the money holders are
forced to deposit the cash with the banks or lose their wealth. It is a strategy that has
worked quite well for some countries.
 Demonetization can also be referred to as the process of moving people from a
cash-based system to a cashless system (digital system).
 Keeping hard cash is a practice that is not encouraged by the government as well as
financial institutions. It is easy for people to evade taxes in an economy where people
mostly deal with cash. Keeping cash out of the bank also erodes the deposit base of
these financial institutions and drives the cost of credits through the roof. It means that
the government has to opt for foreign sources to secure funding and in the process
increase the national debt. The economic impacts of which are many and severe.
Moving people to a cashless system is, therefore, a favorable economic policy for many
stakeholders.
 To demonetize in its simplest definition is thus to do away with cash. In a market
environment that is mainly defined by technology and efficiency, it is every
government’s desire to have a huge section of the population embracing electronic and
mobile payment methods.
 There are several economic as well as social impacts of demonetization. It can
reduce inflation, improve the economy, and result in financial behaviour change among
citizens. However, if not managed well, it may cause a lot of economic hardships to the
people. How the process is managed immensely determines its effects on the economy
of a country.
Definitions
DEFINITION of 'Demonetization'

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs
whenever there is a change of national currency: The current form or forms of money is pulled
from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country
completely replaces the old currency with new currency.

The opposite of demonetization is demonetization, in which a form of payment is restored as


legal tender.

BREAKING DOWN 'Demonetization'

There are multiple reasons why nations demonetize their local units of currency: to combat
inflation to combat corruption and crime (counterfeiting, tax evasion) to discourage a cash-
dependent economy to facilitate trade.
Evaluations
Demonetization is the stripping a currency unit of its status as legal tender. Demonetization
becomes a necessary when there is a change of national currency. The old unit of currency has
to be retired and replaced with a new unit of currency. It include either introducing new notes or
coins of the same denomination or completely replacing the old denomination with the new
denomination which is often carried out as an ambush on the black money and market. The
opposite of demonetization is called as remonetisation in which a form of payment is restored as
legal tender. Currency is a commonly accepted form of money, including coins and paper notes,
which is issued by a government and circulated within the economy. As used a medium of
exchange for goods and services, currency forms the basis for any trade. The currency or legal
tender is issued by a country’s central bank or a monetary authority. The national currency of a
country is usually the principal currency used for most of the financial transactions in that
country. Basically each country has its own currency as Switzerland's official currency is the
Swiss franc, and Japan’s official currency is called the yen. An exception would be the euro,
which is used as the currency for a group of European countries called European Union. In
India the currency is called the Indian Rupees (INR). In most of the cases, the central bank of a
country has the absolute right to issue money or the currency for circulation.
4 History
On 8 November 2016, the Government of India announced the demonetisation of
all ₹500 (US$7.80) and ₹1,000 (US$16) banknotes of the Mahatma Gandhi Series The
government claimed that the action would curtail the shadow economy and crack down on the
use of illicit and counterfeit cash to fund illegal activity and terrorism. The sudden nature of the
announcement—and the prolonged cash shortages in the weeks that followed—created
significant disruption throughout the economy, threatening economic output.
Prime Minister of India Narendra Modi announced the demonetisation in an unscheduled live
televised address at 20:00 Indian Standard Time (IST) on 8 November. In the announcement,
Modi declared that use of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series would
be invalid past midnight, and announced the issuance of new ₹500 and ₹2000 banknotes of
the Mahatma Gandhi New Series in exchange for the old banknotes.
The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the
announcement. In the days following the demonetisation, the country faced severe cash
shortages with severe detrimental effects across the economy People seeking to exchange their
bank notes had to stand in lengthy queues, and several deaths were linked to the rush to
exchange cash
Initially, the move received support from several bankers as well as from some international
commentators. The move has also been criticised as poorly planned and unfair, and was met
with protests, litigation, and strikes against the government in several places across India.
Debates also took place concerning the move in both houses of parliament the move is
considered to have reduced the country's GDP and industrial production. By the end of August
2017, 99% of the banned currency was deposited in banks, leaving only around ₹14,000 crore
of the total demonetised currency

Background
The Indian government had demonetised bank notes on two prior occasions—once in 1946 and
then in 1978—and in both cases, the goal was to combat tax evasion by "black money" held
outside the formal economic system. In 1946, the pre-independence government hoped
demonetisation would penalise Indian businesses that were concealing the fortunes amassed
supplying the Allies in World War In 1978, the Janata Party coalition government demonetised
banknotes of 1000, 5000 and 10,000 rupees, again in the hopes of curbing counterfeit
money and black money.
In 2012, the Central Board of Direct Taxes had recommended against demonetisation, saying in
a report that "demonetisation may not be a solution for tackling black money or economy,
which is largely held in the form of benami properties, bullion and jewellery. According to data
from income tax probes, black money holders kept only 6% or less of their wealth as cash,
suggesting that targeting this cash would not be a successful strategy
DEMONETIZATION IN INDIA

In India demonetization has happened thrice. The first was on the 12th of January 1946
(Saturday), second on 16th of January 1978 (Monday) and the third was on 8th of November
2016 (Tuesday). In the January of 1946, notes of denominations 1,000 and 10,000 rupees were
withdrawn from circulation and new notes of denominations 1,000, 5,000 and 10,000 rupees
were introduced in 1954. Then Janata Party coalition government again demonetised banknotes
of denominations 1,000, 5,000 and 10,000 rupees on 16th of January 1978 with the notion of
curbing counterfeit currency and black money. The highest of all denominations ever printed by
the Reserve Bank of India was the Rs 10,000 note in 1938 and was again in 1954. But these
notes were demonetized in the January of 1946 and again in the January of 1978, based on the
RBI data. The first occurrence was in 1946 and the second in 1978 during which an ordinance
was issued to phase out various notes with denominations of Rs 1,000, Rs 5,000 and Rs 10,000
respectively. The demonetization of denominations Rs. 500 and Rs. 1,000 banknotes was a
policy decision carried out by the Government of India on 8th of November 2016. In the
declaration, the use of denominations of all Rs. 500 and Rs. 1,000 banknotes of the Mahatma
Gandhi Series would be invalid after the midnight of the same day, and was also announced that
the new Rs. 500 and Rs. 2,000 banknotes of the Mahatma Gandhi New Series will be issued in
exchange for the above mentioned old currency notes. The move by the government is defended
as an attempt to eliminate a reasonable volume of currency notes which is in the circulation
because of inflation
INDIA’S PAST EXPERIENCE WITH DEMONETIZATION
India has carried out demonetization exercises twice before, in 1946 and 1978.

In Jan 1978 episode, currency worth INR 1.46 bn (1.7% of total notes in circulation was
demonetized. Of this INR 1.0 bn (or 68%) was tendered back.

In 1978 the value of demonetisation was very small (only 0.1% of GDP). However, the
2016 demonetisation efforts cover 86% of the total currency in circulation (11% of GDP).

THE IMPACT OF THE PAST DEMONETIZATION EXERCISE WAS AS


FOLLOWS:

Deposit Growth -Rose sharply

-Moderately sharply
Currency in circulation

SLR Security - Sharp increase in investment In


government securities by Bank

Credit Growth -Initially subdued but started picking up


after 4 months (by picking up after 4
months (by May 1978)

GDP Growth -No major impact as high Denomination


notes which were cancelled only accounted
for 0.1% of GDP.
7 IMPACT OF DEMONITISATION ON BANKING SECTORS IN INDIA

 Banking Sector

The move towards a cashless economy will boost savings in financial assets. Banks have gained
deposits substantially after demonetisation which they can invest for improving their
profitability. There non-performing advances have also come down. Besides as banks will
reduce their cash holdings due to more digital interface it will add to their long-term
profitability and cash loss for various reasons like theft, dacoity and misappropriation will be
avoided. However, during November and December bank work was largely centered on
accepting and exchanging specified bank notes. As a result other activities like lending during
busy season is affected which will reduce their earnings for the next quarter and profitability.
Further as all ATMs are to be recalibrated for issue of new denomination notes like ₹2000 and
₹500 it will add substantially to their operational expenses. It will reduce their income during
the next quarter. As people are not very much versatile with digital operations, they may face
various operational risks like cyber fraud.

The banks are expected to make a good profit which would eventually benefit the common
man: As the banks get a lot of liquidity in their hands, they will lend the money to the people at
a lower rate of interest. Hence, the interest rate on borrowing will lower down. RBI data now
reflect the initial impact of demonetisation on monetary indicators.

“Bank as Biggest Beneficiaries”:

Yes, the biggest beneficiary from this policy will be the banking sector. The reason behind
being called the beneficiary is very obvious because as lot of people are depositing cash in the
banks; there will be a lot of liquidity with the banks. As the deposits with the banks will
increase so will increase the CASA, which will increase the Net Interest Income and the Net
earnings of the banks. CASA is abbreviation of Current Account Savings Account. It is the ratio
which indicates how much of the total deposits with the bank are in the current account and
savings account. In a simple language, the deposits lying in the savings and current account are
CASA. How a higher CASA does indicate “acche din” for bank? As stated above higher CASA
means large amount of deposits are in current and savings account. This way the banks get
funds at no or very low cost (interest). Banks do not pay interest on the current account deposits
and pays a very low % of interest on savings account deposits. Hence, it is a good measure to
get deposits at no or very low cost.
DEMONETIZATION IMPACT ON BANKS:

“Bank as Biggest Beneficiaries”

Yes, the biggest beneficiary from this policy will be the banking sector. The reason behind
being called the beneficiary is very obvious because as lot of people are depositing cash in the
banks; there will be a lot of liquidity with the banks.

As the deposits with the banks will increase so will increase the CASA, which will increase
the Net

Interest Income and the Net earnings of the banks.

CASA is abbreviation of Current Account Savings Account. It is the ratio which indicates how
much of the total deposits with the bank are in the current account and savings account. In a
simple language, the deposits lying in the savings and current account are CASA.

How a higher CASA does indicate “ache din” for bank?

As stated above higher CASA means large amount of deposits are in current and savings
account.

This way the banks get funds at no or very low cost (interest). Banks do not pay interest on the
current account deposits and pays a very low % of interest on savings account deposits. Hence,
it is a good measure to get deposits at no or very low cost.

The banks are expected to make a good profit which would eventually benefit the common
man: As the banks get a lot of liquidity in their hands, they will lend the money to the people at
a lower rate of interest. Hence, the interest rate on borrowing will lower down. RBI data now
reflect the initial impact of demonetisation on monetary indicators
Demonetisation impact: Bank deposits with RBI reach a record high of
Rs4.3 trillion
Banks have so far received deposits worth Rs6 trillion after the currency notes ban on 8
November.

Mumbai: As banks park a record amount with the Reserve Bank of India (RBI) in the aftermath
of the demonetisation of high-value currency notes, the central bank may have to look at new
collateral to offer against these deposits.

As of Tuesday, banks had parked Rs4.3 trillion in reverse repo operations under the liquidity
adjustment facility wherein RBI accepts money from banks by offering government securities
as collateral.

RBI said on Monday the Indian banking system had collected deposits worth Rs5.12 trillion as
of 18 November. On Wednesday, attorney general Mukul Rohatgi told the Supreme Court that
banks had received deposits worth Rs6 trillion after Rs500 and Rs1, 000 banknotes ceased to be
legal tender.

Considering the fact that deposits have been consistently rising—the centre expects about Rs15
trillion worth of deposits to come in before 30 December—the RBI’s Rs7 trillion worth
government securities kitty is likely to come under pressure.

This is the highest liquidity absorption by RBI ever, according to India Ratings and Research
Pvt. Ltd, easily beating the earlier record of Rs1.7 trillion in May 2009.
In a report released on Wednesday, India Ratings said the best way for the banking regulator
would be to issue cash management bills against the new deposits that are flowing into the
banking system.

“In Ind-Ra’s assessment, sterilization through the issuance of cash management bills (CMB) is
likely to be preferred over other structural measures, namely a hike in the cash reserve ratio
(CRR) or resorting to the use of the market stabilization scheme (MSS), since the sustainability
of such high deposits remains uncertain,” analysts at India Ratings said in a statement on
Wednesday.

CRR is the proportion of deposits that banks have to park with the central bank. RBI issues
MSS securities to mop up excess liquidity from the banking system.

“The sterilization will ensure stability in the money market, in sync with the central bank’s key
objective of ensuring financial market stability,” India Ratings said.

CMBs, according to India Ratings, stand a better chance of being picked as an option to manage
the short-term liquidity surge due to the short duration of the underlying security, which is less
than 91 days, and existing secondary market, among other factors.

“The issuance of CMBs will limit the softening of yields, especially on the shorter end of the
curve,” India Ratings said. Traditionally, CMBs are issued to enable the government to tide
over temporary liquidity mismatches.

Other options available with RBI could be a hike in the CRR, introducing provisions under the
MSS, intervention in the foreign exchange market and opening an uncollateralized window of
liquidity absorption, the rating agency said.
9 Impact of Demonetisation ON Liquidity, Capital And Credit In Indian A

Banking
A large part of this success is predicated on the relative return on liquidity and the ability of the
financial markets to offer diversified liquidity deployment options Demonetisation of two high
value currency notes sent ripples across the financial system and put banks at the centre of the
action. Branches that have typically seen dwindling footfalls due to increased use of digital
channels were flooded with customers seeking to either deposit or exchange notes. While the
flood of customers into branches impacted banking operations temporarily, sustained impact is
likely to be seen on the balance sheet structure and liquidity position of banks. The additional
liquidity absorbed by the banking system due to demonetization is also expected to have
varying impacts on the marginal cost of funds based lending rate (‘MCLR’). While largely retail
focussed banks have seen increase in low cost liquidity, wholesale focussed banks have seen
proportionately lower increase in low cost liquidity. Commensurately, wholesale banks are
likely to see increased pressure on margins as wholesale customers look for re-financing options
as largely retail oriented banks are able to translate low cost liquidity into lower MCLR. Inspite
of lower MCLR, growth in credit off-take continues to be slow due to both macro factors and
regulatory capital constraints of banks. This has created an interesting challenge for banks as
they seek to balance the equation between return of excess liquidity, overall net interest margins
and return on equity.

Walking the liquidity and net interest margin tightrope

The December quarter saw the CASA ratio of banks increase between 5% and 10%. With this
additional liquidity and muted credit off-take, bank treasuries were faced with the task of
deploying this liquidity while maintaining the market, credit and liquidity risk profile of the
bank. Excess liquidity also put pressure on yields in debt markets. Temporary measures to
prevent the liquidity flow impacting bond markets through temporary increase in the cash
reserve ratio helped stabilize bond yields. However, these measures coupled with lower yield on
liquidity not deployed in credit assets are expected to continue to pressure the net interest
margins (‘NIM’) of banks. One of the biggest challenges for bank treasuries in the coming
months will be to find the right assets in debt markets to reduce impact on NIMs. Future cuts in
policy rates will continue to impact overall NIMs of banks until increase in relatively higher
yielding credit off-take off-sets the impact on margins caused by lower yielding treasury
deployments in money market and short-term debt instruments.

Managing the credit and capital conundrum

While excess liquidity creates lending capacity, shortage in regulatory capital leads to credit
rationing. In the current regulatory capital regime largely based on standardized approaches,
credit risk capital is a function of ratings, collateral and at times industry-segment of the
borrower. Borrower specific attributes and risk profile are not always factored into ratings and
industry risk assessments. This can lead to non-collinearity between the real risk profile and the
associated regulatory credit risk capital mandated for the lending. This phenomena is likely to
be more pronounced in the non-collateralised retail lending segment. The excess liquidity
coupled with sometimes misaligned credit risk capital requirements can create a case for
lowering the lending quality. For an industry still reeling from non-performing assets, managing
credit quality in the coming months is likely to be very critical.

Sustaining the liquidity

While demonetization has brought liquidity into the financial system, sustaining the liquidity is
a different challenge. As the dust settles on demonetization, the liquidity is likely to seek higher
returns. Keeping liquidity in the financial system will depend on the ability of banks to offer
attractive longer term deposit rates, engage customers with third party investment products and
enable ease of fund flow within the financial system. If the excess liquidity cannot be dispersed
across the banking system, bond markets and to some extent money markets, liquidity is likely
to find its way back out of the financial system.

Demonetisation has the potential of providing a long-term fillip to the financial system as
savings move towards funding economic investments as opposed to non-generating assets. A
large part of this success is predicated on the relative return on liquidity and the ability of the
financial markets to offer diversified liquidity deployment options.

Disclaimer: The views expressed in the article above are those of the authors' and do not
necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the
author is writing in his/her personal capacity. They are not intended and should not be thought
to represent official ideas, attitudes, or policies of any agency or institution.
Impacts on Macro Variables
Apart from the transition issues faced by banks, in judging the impact on the economy,
it is important to differentiate between the two changes that the demonetisation can bring
about in money supply. The first change, i.e., cash being extinguished, to the extent it was
being used as medium of exchange, would result in a compression in incomes, employment
and consumption in the economy. On the other hand, the effect of the second change, i.e.,
cash being only partially replaced in the system would have the opposite effects of
expansion in potential credit creation. The potential credit creation would translate into
actual credit creation provided there is sufficient demand for credit. If the demand for credit
in the economy is large enough, the potential credit can be realised. Of the credit created,
other things remaining the same, it can be expected that at least a part of the credit, will be
for productive purposes. This would mean expansion in investment in the economy and
subsequently an increase in GDP and employment.
If there is increase in investment in the economy, the demand for capital goods rises. If o
utput can expand in this sector, there would be an expansion in the income generation and in
demand for goods and services. Sectors that are not operating with excess capacity cannot
meet the expanded demand with increased output, leading to increase in prices. This would
hold for agriculture as well as any industry with long gestation lags to investment. In other
words, in the short run there is a possibility of increase in inflation.
With increase in GDP, since imports are supposed to be related to the size of the economy, it
is expected that imports will rise, but the same cannot be said about exports. In other words,
the balance of trade could worsen. This could result in pressures on the rupee towards
depreciation. Any increase in inflationary pressures too could augment these pressures.
MSME is one segment of the economy which is credit constrained15. Expansion in the
potential credit in the economy could expand the credit available to this segment of the
economy which is more employment intensive than the organised manufacturing. In other
words, if the access to credit for this segment can be improved, it can generate many positive
spin-offs. One reason why this segment might get better access to formal sector credit would
be if all their transactions move to the digital format, thereby making available to the lending
institutions evidence of credit worthiness. However, for this the transactions need to move
digital before they can get access to credit. In other words, unless the banking sector is
exploring more risky asset categories, they would not be the beneficiaries of the expansion in
potential credit.
It should be kept in mind that credit is not the only constraint faced by the MSMEs.
There is a cost of compliance with regulation in the formal sector both of tax legislation and
other legislation which would increase the cost of operation. In the absence of economies of
scale, after incurring all these costs, some of the MSMEs might not be viable in the new
environment. In other words, the decision to
move from the informal sector to formal sector is a non-trivial decision for the units and
merely changing the access to credit might not be adequate to alter the status quo. Under
those circumstances, they might explore the use of alternative currencies as a means for
survival.
It is, however, not correct to assume that expansion in credit will definitely materialise. In the
last two years, the demand for credit in the economy has been sluggish at best. In comparison
to a credit deposit ratio of 1.53 in 2011-12, the figures for 2014-15 were as low as 0.54. While
there might be many factors that contributed to this outcome, what is of consequence is that
the demonetisation has been introduced in this environment where demand for credit is rather
low. A compression in demand in the economy would further depress the sentiment driving
investments. In other words, demand for credit would continue to be low and the potential
credit will not be realised immediately.
The first consequence of this would be a fall in the interest rates in the economy which could
revive some of the sentiment since firms with outstanding debt would have lower interest
liabilities and hence, can see improved balance sheets.
The compression in demand would mean a decline in imports while exports might not be
adversely affected. This change in the balance of trade would induce an appreciation of the
currency. Along with lower interest rates, this could result in inflow of investment by FIIs as
well.
If the demand for credit is not very sensitive to interest rates – then the lower interest rates
would not bring in sufficient demand and banks would need to explore alternative ways of
placing the additional deposits available with them. This could mean that banks take in more
risky assets potentially opening up the economy to more volatility and risks. This could
include real estate, consumer credit and consumer credit cards. The housing loan bubble of the
US economy might be one such example of lending to more risky projects, thereby bringing in
more volatility into the system.
Two more extreme possibilities that might follow are: a loss in the confidence of the people in
the official currency leading to bank run kind of situations if the current description of waiting
for long hours for withdrawing money persists and the caps on withdrawal are not relaxed.
Alternatively, they could shift to alternatives to currency. Second, there could be social unrest
if the compression in incomes and consumption are severe and persistent.

Alternatives to currency: would they evolve in the face of demonetisation?

A number of agents in the economy would be required to move from the informal sector
to the formal sector. For these agents as well as for agents who have been operating through
the medium of cash and find the transition difficult, certain informal cash substitutes might
emerge. For instance, even at present, there are coupons like the SODEXO coupons which
are used for paying for certain purchases. These are accepted by a range of establishments in
place of formal currency. It is, therefore, possible to see an expanded use of these coupons.
The change might induce the generation of other tokens as substitutes for money as well - the
agency collecting MCD’s green tax has started issuing tokens in place of change. Similarly,
for high value transactions one can think of bitcoins and other such crypto currencies on one
side and foreign exchange on the other as a mechanism for settling transactions. Perhaps
these would not take on a dimension large enough to challenge the official currency, but it
can disturb the expectation that the unaccounted economy would be brought into the formal
sector since there might exist alternatives to the formal currency. Here it is important to
explore the possibility and acceptability of peer to peer payment instruments – a category
which has been evolving in recent times.

Effects on government finances:

The effects of demonetisation on government finances can be divided into three


categories: the impact through RBI’s finances, the impact through taxes and the impact
through credit available to finance deficits.
Through RBI’s finances: The RBI earns seigniorage through the printing of currency.
In the demonetisation, a part of the currency will be extinguished. For this part of the
currency, the RBI can print the notes given the assets on its books, but there would be no
takers. In other words, this part of the currency would be like new money that can be
introduced into the economy and hence yields seigniorage to the RBI once again when
released into circulation. RBI, however, cannot lend this to the government since that would
involve additional liability build up on its balance sheet. So, this currency can only be
released when foreign exchange is being converted to rupees for instance and not sterilised
thereafter. At this point there would accrue some dividends to the government as well.
However, to the extent the government and the RBI seek to move the economy towards
digital instruments, this option might not be exercised and the dividend might not accrue.
Impact through taxes: There are multiple channels through which taxes will be affected:

 At the point of transition to the new regime, people have attempted to convert cash
balances into commodities like gold or luxuries. On these transactions the governments
would have a spurt of taxes. This would however not last beyond the transition phase.
 In the subsequent period, the impact on indirect taxes would be negative because of the
compression in demand.
 On property taxes, some local bodies have given people a window of opportunity to
pay old as well as current taxes in the scrapped notes. This would result in an increase
in revenue collections in property tax. 16
 On income tax there can be two potential effects: first, with compression in the
economy, there could be a reduction in the tax collection. In the unlikely event of
people choosing to deposit unaccounted balances in the bank and pay taxes and penalty
on the same, or if the tax department through investigation, finds that some of the
deposits are not explained income tax collections would increase. For any individual
depositing balances above Rs 10 lakhs, the tax and penalty together would absorb the
over 90 per cent of the deposited amount. This would serve as a disincentive for people
with large balances to come and deposit the same into accounts. In other words, the
government cannot expect to get major collections in terms of the tax and penalty on
unaccounted incomes revealed.

Through financing of fiscal deficit: The generation of additional deposits and credit,
as a result of the SLR requirements can make more credit available to governments. Given
the FRBM (Fiscal Responsibility and Budget Management) limitations, the amount of
borrowing that governments can take on may be limited and the additional supply can mean a
decline in the interest rate that governments pay on their debt. This could be a positive spin-
off for the governments.
Macroeconomic Impact of Demonetisation -A Preliminary Assessment
Growth and Inflation

This section assesses the impact of demonetisation on growth and inflation and their outlook in
the context of sequent demonetizations.

.1 Growths

The growth of gross value added (GVA)2 is expected to have been impacted primarily by the
liquidity shock, i.e., limited access to currency as a medium of exchange for effecting
transactions in the economy. This impact is expected to have worked through two channels: (a)
decline in demand due to shortage of cash to make payments, mostly on discretionary spending;
and (b) disruption in production activity due to man hours lost as some workers, especially
those in the unorganized sector who get their wages paid in cash experienced temporary loss of
work. The construction sector and some of the labour intensive manufacturing sectors such as
textiles, leather, gems and jewellery and the transportation sector engage casual/migrant
labourers extensively. The loss of wage income for workers is also expected to have caused a
drag on consumption demand.

The wealth effect is another channel through which demonetisation could have impacted
economic activity. However, the precise estimate of currency that returned to the banking
system is not yet available as the reconciliation process is still on. Hence, the adverse wealth
effect on account of SBNs not returning to the banking system. Could be assessed only after the
reconciliation exercise is complete.

The Reserve Bank in its Fifth Bi-monthly Monetary Policy Statement on December 7, 2016
placed the GVA growth for 2016-17 at 7.1 per cent, which was lower than 7.6

of October 4, 2016. The 50 basis points (bps) downward revision in GVA growth was on
account of 35 bps loss in momentum, which was reflected in GVA growth in Q2 estimated by
the Central Statistics Office (CSO) in November 2016 and 15 bps on account of the adverse
impact of demonetisation. The CSO in its first advance estimates released on January 6, 2017
placed the GVA growth for 2016-17 at 7.0 per cent.

The overall GVA growth in the Sixth Bi-monthly Monetary Policy Statement on February 8,
2017 was pegged lower at 6.9 per cent. The impact of demonetisation on GVA growth was
estimated at about 33 bps for the full year 2016-17. After the peak impact in Q3, GVA growth
was estimated to strengthen with the progressive demonetizations in Q4. As per the second
advance estimates of the CSO released on February 28, 2017, GVA growth for 2016-17 is
pegged at 6.7 per cent, which is about 30 bps lower than what was estimated on January 6,
2017. Importantly, Q3 growth (at 6.6 per cent) was only marginally lower than that recorded in
Q2 (6.7 per cent), thereby suggesting that demonetisation had only a modest impact on growth
in Q3 of 2016-17
Impact on Growth: 2016-17
The underlying factors for GVA growth estimate of 6.9 per cent as presented in the Sixth Bi-
monthly Monetary Policy Statement on February 8, 2017 are detailed below.

Organized Sector

Although the organized sector on the whole remained resilient, some manufacturing and
services segments were adversely affected. Within industry, electricity generation was
expected to have been impacted the least, with the share of the unorganised sector being very
low and the share of informal employment close to zero. Weak demand for electricity was
already a challenge before demonetisation, with power generation in excess relative to
demand. In November and December, however, electricity generation increased by 8.9 per
cent and 6.3 per cent, respectively, which was higher than the average growth of 4.5 per cent
recorded during April-October, 2016 (Table 1). In January 2017, however, it decelerated to
3.9 per cent. Coal production also increased by 6.4 per cent in November, 4.4 per cent in
December and 4.8 per cent in January (as against contraction in the previous three months).
rganised manufacturing was impacted adversely as evident from (i) the decline in the sales of
fast moving consumer goods (FMCG) (as per the Nielsen survey) and automobiles in all the
months from November to January; (ii) contraction in the manufacturing purchasing
mangers’ index (PMI) in December for the first time in 2016; and (iii) deceleration in export
growth during November (Table 1). The data released by the Society of Indian Automobile
Manufacturers (SIAM) suggested that auto sales contracted by 4.7 per cent in January 2017
but returned to expansion mode (by 0.9 per cent) in February. In the two-wheeler segment,
the impact was severe, especially in rural pockets. The PMI for manufacturing in January and
February 2017 as well as export growth in December 2016 and January 2017 rebounded. As
regards sales of consumer goods, the 2016 festival season was the best since 2012, coming as
it did on the back of a healthy monsoon and the 7th pay commission award. However,
demonetisation impacted sales performance of consumer durables industry (Table2).
Manufacturers also cut production due to rising inventories. The adverse impact of
demonetisation on disposable incomes and hence on consumer spending resulted in
slowdown in domestic demand for apparels and other end-products of textile industry. The
impact was reportedly most severe for winter-wear retailers and manufacturers focused on
the domestic market, who make a significant part of their annual sales during the period
October-February. Although from the manufacturers’ end, shipments typically take place by
September-October, pressure on sales in the retail space during the subsequent peak season
would have indirectly affected manufacturers. Overall, the impact was expected to have been
felt across the textile value chain
DATA ANAYSIS AND INTERPRETATION

QUESTIONNAIRE ANALYSIS:
Q1) Do you think that Black money exists in India?
Table No. 1: Response of students over Black money exists in India?

Response No of respondents Percentage


Yes 27 90
No 3 10
Total 30 100

100
90
80
70
60
No of respondents
50
Percentage
40
30
20
10
0
Yes No Total

Figure No. 1: Response of student Over Black money exists in India


Interpretation: Most of the student thinks that Black money exists in India
Q2) Do you think the evil of corruption and black money needs to be fought and

eliminated?

Table No. 2: Corruption and Black money needs to be fought and eliminated

Response No of respondents Percentage

Yes 29 96.66

No 1 3.33
Total 30 100

100
90
80
70
60
No of respondents
50
Percentage
40
30
20
10
0
Yes No Total

Figure No. 2: Corruption and Black money needs to be fought and eliminated
Interpretation: Most of the student thinks that the evil of corruption and Black money
needs to be fought and eliminated
Q3) Overall, what do you think about the Government’s moves to tackle Black money?
Table No. 3: Government’s moves to tackle Black money
Response No of respondents Percentage
Denomination 10 33.33
Online traction 15 50
Cash less 5 16.66
Total 30 100

100
90
80
70
60
50
40 No of respondets
30 percentage
20
10
0

Figure 3: Government’s moves to tackle black money


Interpretation: The student likes online transaction as the best Government’s moves
to tackle Black money

\
Q4) what do you think of the Modi Government’s efforts against corruption so far?

Table No. 4: Modi Government’s efforts against corruption

Response No of respondents Percentage


Out standing 14 46.66
Very good 8 26.66
Good 6 20
Ok 2 6.66
Useless 0 0
Total 30 100

100
90
80
70
60
50 No of respondents

40 Percentage

30
20
10
0
Out Very Good OK Useless Total
standing good

Figure 4: Modi Government’s efforts against


corruption
Q5) What do you think of the Modi Government’s move of banning old 500 &

1000 notes?

Table No. 5: Modi Government’s move of banning old 500 & 1000 notes

Response NO OF RESPONDENTS Percentage


Great move in the right 20 66.67
direction
Good move 6 20
Will make no difference 4 13.33
Total 30 100

120

100

80

60 No of respondents
Percentage
40

20

0
great move in the Good move Will make no Total
direction diffrences

Figure 5: Modi Government’s move of banning old 500 & 1000 notes
Interpretation: Most of the student thinks great move of the Modi Government’s of
banning old 500 & 1000 notes.
Q6) Do you think demonetization will help in curbing black money, corruption &

terrorism?

Table No. 6: Demonetization will help in curbing black money, corruption &

terrorism

Response NO OF RESPONDENTS Percentage


It will make an immediate 19 63.33
impact
There will be impact in 7 23.33
medium to long term
Minimal impact 4 13.33
Total 30 100

100
90
80
70
60
50
No of respondents
40
Percentage
30
20
10
0
It will make an There will be Minimal Total
immediate impact in impact
impact medium to
long term

Figure 6: Demonetisation will help in curbing black money, corruption & terrorism
Interpretation: Most the student thinks Demonetisation will help in curbing
black money, corruption & terrorism.
Q7). Demonetisation will bring real estate, higher education, healthcare in the
common man’s reach?

Table No. 7: Demonetisation will bring real estate, higher education,


healthcare in the common man’s reach

Response No of respondents Percentage


Completely agree 15 50
Partially agree 2 6.66
May be 7 23.34
Can’t say 6 20
Total 30 100

100
90
80
70
60
50 No of respondents

40 Percentage

30
20
10
0
Completely partially may be cant say Total
agree agree

Figure 7: Demonetisation will bring real estate, higher education, healthcare in the
common man’s reach

Interpretation: Most of student agrees that Demonetisation will bring real


estate, higher education, healthcare in the common man’s reach
Q8) Did you mind the inconvenience faced in our fight to curb corruption, black
money, terrorism and counterfeiting of currency?

Table No. 8

Response No of respondents Percentage


Not at all 20 66.66
Somewhat but its worth it 5 16.66
Yes 5 16.67
Total 30 100

100
90
80
70
60
50 No of respondents

40 Percentage

30
20
10
0
Not at all Somewhat but Yes total
its worth it

Figure 8: Inconvenience faced in our fight to curb corruption

Interpretation: Student faced not at all inconvenience in the fight to curb corruption,
black money, terrorism and counterfeiting of currency
Q9) Do you believe some anti-corruption activists are now actually fighting in support
of black money, corruption & terrorism?

Table No. 9: Some anti-corruption activists are now actually fighting in support of
black money, corruption & terrorism

Response No of respondents Percentage


Yes 25 83.33
No 1 3.33
Can’t say 4 13.34
Total 30 100

100
90
80
70
60
No of respondents
50
percentage
40
30
20
10
0
Yes No Cant say total

Figure 9: Some anti-corruption activists are now actually fighting in support of black
money, corruption & terrorism

Interpretation: Most of the student thinks that some anti-corruption activists are
now actually fighting in support of black money, corruption & terrorism
Q10) Do you have any suggestions, ideas or insights you would like to share with
PM Narendra Modi?

Table No. 10: Suggestions, ideas or insights you would like to share with PM Narendra Modi

Response No of respondents Percentage


Yes 23 76.66
No 7 23.34
Total 30 100

100
90
80
70
60
No of respondents
50
Percentage
40
30
20
10
0
Yes No Total

Figure 10: Suggestions, ideas or insights you would like to share with PM Narendra Modi
Interpretation: Most of the student wants to express their views, suggestions, ideas or
insights with PM Narendra Modi.
Advantages of Demonetisation

 Black Money Exposed: A major advantage is that demonetisation helped the


government track black money. Large sums of black money were kept hidden by tax
evaders. Demonetisation helped government uncover the huge amount of unaccounted
cash. According to estimates made by RBI, people have deposited more than rupees 3
lakh crores worth of black money in the bank accounts. This has helped the government
in slowing down the plague of parallel economy.

 Reduction in Illegal Activities: A major reason behind demonetisation was that a big
part of black money was being used for funding terrorism, gambling, in inflating the
price of major assets classes like real estate, gold and other social evils. Demonetisation
is acting as an effective countermeasure against such activities. Now all such activities
will get reduced for some time and also it will take years for people to generate that
amount of black money again and hence in a way it helps in putting an end this circle of
people doing illegal activities to earn black money and using that black money to do
more illegal activities.

 Tax Payments: Another benefit is that due to people disclosing their income by
depositing money in their bank accounts, the government gets a good amount of tax
revenue which can be used by the government towards the betterment of society by
providing good infrastructure, hospitals, educational institutions, roads and many
facilities for poor and needy sections of society. Individuals are required to submit PAN
for any deposit above Rs.50000 in cash, which will help tax department to track
individuals with high denominations. Also, deposit up to Rs.2.5 lakhs will not come
under Income Tax scrutiny.

 Jan Dhan Yojana: Pradhan Mantri Jan Dhan Yojana is National Mission for Financial
Inclusion to ensure access to financial services namely Banking / Saving and Deposits
Accounts, Remittance, Credit Insurance, Pension in and affordable manner. Account can
be opened in any bank branch or Business Corresspondent (Bank Mitr) outlet. Now
individuals are depositing enough cash in their Jan Dhan accounts which they were
reluctant to do so a few days back. The amount deposited can be used for the betterment
of the country.
 Towards a cashless economy: The government has proposed the new limits on ATM
withdrawals being restricted to Rs.2000 per day, withdrawal from bank account is
Rs.10000 a day and Rs.20000 per week. It indicates that card transactions will slowly
replace the cash transactions in our daily prone activities

 Financial Intelligence Unit will track all details of the transactions from the banks. So
now it is really difficult to get rid of the black money.

 Exchange of money in banks could only be done producing a valid identity cards like
PAN, Aadhar card and electoral card from 10 to 24 November with a daily amount of
Rs.4000. By doing so it will be easy for the government to track the money which is
being exchanged in banks. There is no limit if the amount we are exchanging are legal
amount.

 Real Estate: Real estate industry is totally corrupted and now by this stringent decision
the real estate sector will bring in more transparency. By doing it in this way we will
have more credibilitu, making it more attractive to the foreign investors as well as
domestic investors.

 Loan burden will also fall: In India, loans sanctioned from April 1, 2016 are with
reference to the MCLR (Marginal Cost of fund-based Lending Rate), instead of the Base
Rate, which was used earlier.

 End of huge donation: Huge amount of donation that is taken in the private education
and health care sectors would be stopped. Schools, engineering, medical collages and
hospitals (private ones) used to take huge amounts of money as donations especially in
the form of hard cash in the denominations of Rs.500 and Rs.1000. These money-
minded people running these institutions won’t be able to make any easy money now.
Same applies to the real-estate sector.

Disadvantages of Demonetisation

 Chaotic Situations Created: The biggest disadvantage of demonetisation has been the
chaos and frenzy it created among common people initially. Everyone was rushing to
get rid of demonetised notes while inadequate supply of new notes affected the day to
day budgets of citizens. Banks and ATMs witnessed long queues while small businesses
suffered temporary financial losses. The situation was even worse in rural India where
people struggled to exchange and withdraw cash due to lack of enough number of banks
and ATMs in their vicinity.

 Printing Cost Overheads: Another disadvantage is that destruction of old currency


units and printing of new currency units in involve costs which has to be borne by the
government and if the costs are higher than benefits then there is no use of
demonetisation. The cost of burden on the tax payers. By replacing all the Rs.500 and
Rs.1000 denominations notes, as ordered by the government, could cost the RBI at least
Rs.12000 crore.

 Another problem is that this move targeted the black money, but many people who had
not kept cash as their black money and rotated or used that money in other asset classes
like real estate, gold and so on were not affected by demonetisation.

 It will be very difficult for half of the population who are not well-versed with the card
transactions.

 Stock Market: Due to currency sucked out of the market coupled with Trump’s victory,
the mood at the stock market was completely bearish. Sensex lost 1600 points at open.
This can adversely have a negative effect on trade in general.

 Problem for house-wives: Many Indian housewives store money secretly so that they
could be of help during times of financial crisis in their households. The accumulated
money of our respected Indian housewives is of no use now until they exchange in the
banks and post-offices.
12 Merits of Demonitisation
The demonetization policy will help India to become corruption-free. Those indulging in taking
bribe will refrain from corrupt practices as it will be hard for them to keep their unaccounted
cash.
This move will help the government to track the black money. Those individuals who have
unaccounted cash are now required to show income and submit PAN for any valid financial
transactions. The government can get income tax return for the income on which tax has not
been paid.
The move will stop funding to the unlawful activities that are thriving due to unaccounted cash
flow. Banning high-value currency will rein in criminal activities like terrorism etc.
The ban on high value currency will also curb the menace of money laundering. Now such
activity can easily be tracked and income tax department can catch such people who are in the
business of money laundering.
This move will stop the circulation of fake currency. Most of the fake currency put in
circulation is of the high value notes and the banning of 500 and 1000 notes will eliminate the
circulation of fake currency.
This move has generated interest among those people who had opened Jan Dhan accounts under
the Prime Minister’s Jan Dhan Yojana. They can now deposit their cash under this scheme and
this money can be used for the developmental activity of the country.
The demonetization policy will force people to pay income tax returns. Most of the people who
have been hiding their income are now forced to come forward to declare their income and pay
tax on the same.
Even though deposits up to Rs 2.5 lakh will not come under Income tax scrutiny, individuals are
required to submit PAN for any deposit of above Rs 50,000 in cash. This will help the income
tax department to track individuals with high denominations currency.
The ultimate objective is to make India a cashless society. All the monetary transaction has to
be through the banking methods and individuals have to be accountable for each penny they
possess. It is a giant step towards the dream of making a digital India. If these are the merits,
there are demerits of this policy as well.
Demerits of Demonitisation
The announcement of the demonization of the currency has caused huge inconvenience to the
people. They are running to the banks to exchange, deposit or withdraw notes. The sudden
announcement has made the situation become chaotic. Tempers are running high among the
masses as there is a delay in the circulation of new currency.
Mode of payment and spending behavior

There is growing literature that points out to the possibility of changes in spending behavior as a
result of moving to instruments other than cash. There are many substitutes for cash in the
modern economy ranging from cheques, debit cards, pre-paid cards, credit cards and mobile
wallets. When compared to cash, these instruments differ in a number of key characteristics.
Temporal separation or degree of coupling is the extent to which a purchase and the payment
for the transaction from resources are separated in time. If the two are de-coupled, people may
not perceive a sense of separation from money at the time of incurring the expenditure and
hence may overspend.

The second characteristic is related to the pain of payment flowing from salience. It is argued
that people perceive the pain of payment depending on the tangibility or salience of the outflow.

A third feature is the stringency of budget constraint – while cash limits one’s ability to spend to
the amount of cash in hand, a debit card expands it to the balances available in the account and
a credit card further relaxes it to include future earnings as well .

Payment Salience of Salience of Transparency Temporal Temporal


Mechanism form amount Separation Orientation
High High Very High No Do not Perception
exist of present-
Cash present
Medium High High Low Perception
of present-
present
Cheque /future
Medium Medium Medium High Perception
of present-
Credit Card future
Debit card Medium Medium Medium No Do not Perception
exist of present-
present
Store Value Low Low Low Medium Perception
Card of present-
present
Auto Pay Very Low Very Low Very low Low Perception
(direct debit of present-
from bank present
account )
Digital Medium Medium Medium High Perception
Wallet of present-
present
/future
14 Data Analysis & Interpretation
November 8, when the whole world was waiting for the outcome of US presidential elections,
Prime Minister Narendra Modi came out with his master stroke on corruption, counterfeit
currency, terrorism and black money by announcing demonetisation and ceasing Rs 500 and Rs.
1000 notes as a part of legal tender in India.

The Reserve Bank of India manages currency in India and derives its role in currency
management on the basis of the Reserve Bank of India Act, 1934 and a new redesigned series of
Rs 500 banknote, in addition to a new denomination of Rs 2000 banknote is in circulation since
November 10, 2016.The new redesigned series is also expected to be introduced to the banknote
denominations of Rs 1000, Rs 100 and Rs 50 in the coming months.

The term demonetisation is not new to the Indian economy. 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 demonetised in January 1946 and again in January 1978, according to RBI
data.

Since less than 5 percent of population in India had access to such notes and most banks never
had such currency notes, demonetisation did not have a big impact on the country. The decision
was taken to curb the illegal use of high denomination currency which was used for corrupt
deals in the country.

However, with the latest round of demonetisation, the common public and bankers are
undoubtedly facing hardship since more than 85 percent of currency in circulation has been
rendered illegal in one single stroke. Demonetisation is surely hampering the current economy
and will continue to do so in the near term and will also impact India’s growth for the coming
two quarters but will have positive long lasting effects. The question that arises is why
demonetisation was required at this point of time. There are certain pros and cons of
demonetisation.

Pros
One of the biggest benefits of this move is that it is going to drastically affect the corrupt
practices. People who are holding black money in cash will not be able to exchange much as
they would be in a fear of getting penalised and prosecuted by the authorities. Enemies of the
country which are involved in counterfeit currency and terrorism will not be able to continue it
further for quite some time at least.

The smuggling of arms and dealing with the terrorist will not sustain further as all of the money
will be on record now. Secondly, the banking system will improve as it will slowly head
towards a cashless society. Cashless society will increase credit access and financial inclusion.
The existing white money of people will be known to the government and it will remain with
banks so that it can be put on loan, and interest can be generated from it (though interest rates
would fall) with a corresponding fall in Inflation.

Further Banking System will get a boost, as more than Rs 7-8 lakh crore base money (new
legal money) will enter the system. However, it needs to be seen how much money actually
remains in the system, once the cash withdrawal limits are eased.

Thirdly, it will reduce the risk and cost of cash handling as soft money is safer than hard
money. It will also reduce government liability. Since every note is a liability for the
government, the old currency will become worthless for those people, who choose not to
disclose their income. Thus, this will extinguish government's liability to that extent. It is
expected approximately Rs 5 lakh crore may come to the government in the form of
extinguished RBI liability, taxes and penalties. This amount is enough to take care of India's
entire fiscal deficit for one year or more.

It will also reduce tax avoidance. Whatever money will be deposited or exchanged, authorities
will keep a track of it and they will be extra cautious in this period. Dealing in this period in
sectors like jewellery and real estate will be on radar and those entering into Loan transactions
may also undergo tax scrutiny. Search and Seizure activities of the IT Department will also rise
to curb such malpractices. Limits have already been prescribed for reporting to the IT
Department those bank accounts in which excess cash deposits are being made in this 50-day
window (Rs 2.5 lakh in case of individuals and Rs 12.5 lakh in case of firms).

Importantly, in the longer run, tax and interest rates on loans are expected to come down as
higher income tax collections arising from better compliance would offer scope to reduce rates
over the long term. This, in turn, will drive up disposable income. This can give a positive
impact on consumption demand in long term.

Cons
The liquidity squeeze caused by demonetisation will be negative across sectors with high level
of cash transactions. Real estate, jewellery, retailing, restaurants, logistics, consumer durables
and luxury brands, cement and some segments in retail/SME lending space will be facing short
term instability. Those companies with high level of debt will face more pressure and can face
loan defaults.

Secondly, there will be an added replacement costs of currency. We cannot ignore the
increased cost of operating ATMs need to be refilled more often and also it will be a huge
burden on banks. Initially, it is very difficult to create a cashless society as more than 50 percent
of Indian population is not well versed with card transactions. Also for these initial months, it
will be very difficult to make cash transactions of a higher amount. But the government is
taking steps to improve liquidity into the system and reduce inconvenience as much as possible.
India is certainly going to experience "Acche Din" in Modi's regime. The decision of this
surgical strike on black money was not taken in a day or two. Rome was not built in a day and
similarly, this plan is the result of Prime Minister's meticulous planning and never ending fight
against corruption. As a result, he has successfully made the right stroke at the right time
Further, the penal provisions are hefty enough to ensure that corrupt practices will find it hard to
take roots again. Despite certain short term troubles, demonetization is certainly going to give a
boost to the Indian economy in the long run. As of now, all of us should stand and support this
bold move of our Prime Minister and help those needy, around us.
Previous experience of India of demonetisation
Demonetisation by Akbar

Review: Towards a Monetary History of India, Reviewed Work: The Imperial Monetary
System of Mughal India by John F. Richards, Review by: Arun Banerji, Economic and
Political Weekly, Vol. 23, No. 41 (Oct. 8, 1988), pp. 2103+2105+2107 [all the standard silver
coins of the preceding 300 years were demonetised by Akbar’s …]

India’s 1946 demonetisation

See extensive note here.

Further

Hundred rupee currency notes were demonetised by the Government of India with immediate
effect in 1946. A time limit was fixed for exchange of demonetised notes by genuine holders at
the Reserve Bank of India or its agencies on the basis of their declarations. Their declarations
and explanations regarding the source of earnings and others were investigated carefully. The
exchange was not permitted if the explanation of the source of income was not satisfactory. But
this caused great difficulties to people. It did not also produce impressive results.

At that time, total notes of the value of Rs 1,235.93 crore were in circulation of which hundred
rupee currency notes of the value of Rs 143.97 crore were demonetised. In fact, only Rs 9 crore
worth of hundred rupee currency notes were immobilised. [Sanjeev: this suggests that only 6.25
per cent of the currency was destroyed] [Source: Chasing black money in India – Kishore C.
Samal, Journal of Indian School of Political Economy, April-June 1992]

Further:

In 1946, demonetization was resorted to but the Direct Taxes Enquiry Committee in its interim
report observed, “Demonetization was not successful then, because only a very small proportion
of total notes in circulation were demonetized in 1946 and its worth was Rs.1,235.93 crores.”
[Source: THE PARALLEL ECONOMY IN INDIA: CAUSES, IMPACTS AND
GOVERNMENT INITIATIVES, Sukanta Sarkar, Economic Journal of Development Issues
Vol. 11 & 12 No. 1-2 (2010) Combined Issue]

See extensive note here.

India’s 1978 demonetisation

Further

I’ve commented on the horrible analysis by CBDT re: India’s 1978 demonetisation (see this).
But the following extract from Samal is more promising:

On the night of January 16, 1978, Government withdrew from circulation currency notes of
denomination of Rs 1,000 and above. Banks were asked immediately to prepare statements of
all currency notes of Rs 1,000, Rs 5,000 and Rs 10,000 in their possession. Persons holding
such notes could exchange them before January 19, 1978, at the designated branches of the
Reserve Bank of India and other Public Sector banks provided they disclosed the source, the
time and the manner of acquisition along with a proper attestation of identity. If for some reason
an individual could not apply for exchange of high denomination notes by January 19, 1978 he
could do so by January 24, 1978 to the Reserve Bank of India, together with a satisfactory
explanation of the reasons for not applying within the earlier time limit.

Demonetisation in 1978 was better implemented than in 1946. The value of these high
denomination notes in circulation on January 17, 1978 was estimated at about Rs 180 crore. Of
these, notes worth Rs 20 crore were immobilised. [Sanjeev: This suggests that 11.1 per cent of
the liabilities were extinguished] But, most holders of high denomination notes did not turn up
at bank branches to exchange them. They sold them to others who could present them at the
bank with less suspicion. An estimated Rs 20 crore worth of high denomination currency notes
were so exchanged at discount for small denomination notes. The element of intended surprise
and secrecy was also not well maintained and thousand rupee notes were already out of
circulation one week before the demonetisation. Reportedly large amounts of high
denomination notes were sent to the Gulf countries especially to Dubai and Kuwait a few days
before the Ordinance was announced. In due course, they were presented to the Reserve Bank
of India through official channels of the middle-east based foreign banks that had connection
with such operations [Venugopal, 1978].

In spite of these limitations, the demonetisation served some useful though limited purpose.
First, it brought out into open, cash circulating in the illegal informal economy. Second, the step
gave an effective blow to the political use of unaccounted money at that time. Third, the
declaration made during the exchange of demonetised notes gave tax officials clue for further
investigation. But frequent demonetisation of currency notes does not help; people with black
money in high denomination notes convert them in time into smaller denomination notes.
[Source: Chasing black money in India – Kishore C. Samal, Journal of Indian School of
Political Economy, April-June 1992]

Further

On January 16, 1978 demonetization of high demonisation notes was introduced. The high
demonetization rates as on that day amounted to Rs. 146 crores. Notes tendered to Reserve
Bank of India amounted to Rs. 125 crores as per data available till August 1981 (Lekhi, 2003,
195). [Source: THE PARALLEL ECONOMY IN INDIA: CAUSES, IMPACTS AND
GOVERNMENT INITIATIVES, Sukanta Sarkar, Economic Journal of Development Issues
Vol. 11 & 12 No. 1-2 (2010) Combined Issue] [Sanjeev: this suggest that 14.4 per cent of the
high value currency was destroyed. It is hard to understand why two writers provide two
different figures; but then we have the crazy case of the CBFT which says that 85 per cent of
the currency was immobilised.]

Further

In January 1978, the Indian government had demonetised that Rs 1,000, Rs 5,000 and Rs
10,000 notes in a bid to counter black money in the economy. The move was enacted under the
High Denomination Bank Note (Demonetisation) Act, 1978. It was termed as “an Act to
provide in the public interest for the demonetisation of certain high denomination bank notes
and for matters connected therewith or incidental thereto.”

Under the law all “high denomination bank notes” ceased to be legal tender after January 16,
1978. There was a prohibition of transfer and receipt of high denomination bank notes. Plus, all
banks and government treasuries had to send to the Reserve Bank the total value of high
denomination bank notes held by it at the close of business on the January 16. People who
possessed these notes were given till January 24 the same year — a week’s time — to exchange
any high denomination bank notes. [Source]

Further

It was in the early 1970s that the Wanchoo committee made recommendations about
withdrawing the bank notes while talking about the menace of black money in the country.
However, these recommendations could not be publicised for the fear of it being
counterproductive – black money operators could get rid of high-value notes.

It was on 16 January 1978 that the country was told that the Janata Party coalition, which had
assumed office a year earlier, has decided to scrap Rs 1,000, Rs 5,000 and Rs 10,000 notes.

The Reserve Bank of India’s (RBI) history (third volume) details how things happened. In his
article for India Today, Jay Dubashi wrote that the move was directed at freezing the secret
funds of politicians, especially Indira Gandhi’s Congress. Morarji Desai, the then Prime
Minister said that the party had been spending money “like water”. Gandhi had reportedly
denied allegations saying that “even a ten-rupee note is a luxury to me”

After the ordinance was drafted, it was sent to President N Sanjiva Reddy for assent. It was
through the All India Radio’s (AIR) 9 am news bulletin that people were informed about the
policy decision. It added that all banks and treasuries would be closed the next day, on 17
January.

What’s interesting to note, however, is that IG Patel, the then RBI governor, was not in favour
of the step. He felt that many in the government perceived the step as a measure targeted at the
“corrupt predecessor government or government leaders”.

In his book, Glimpses of Indian Economic Policy: an Insider’s View, Patel writes that when the
then finance minister HM Patel told him about the step, he asserted that steps like these rarely
have striking results.

He added that most people in possession of black money rarely keep their ill-gotten earnings in
the form of currency for long. Thinking that black money is stashed away under mattresses or
suitcases is naive, he said.

Dubashi in his article also wrote that demonetisation of currency is not entirely effective
because one can’t really know how much black money there is in circulation, and more
importantly “whether black money can really be defined in precise terms in all its shades.”
“Black money stashed as high-value currency is much less than black money as untaxed
income, part of which might be splurged in conspicuous consumption or used for investment in
real estate, commodities, stocks, benami lending or plain graft to secure political or
administrative goodwill,” Dubashi wrote. [Source]

Further

VIII. HASN’T IT BEEN DONE BEFORE?

Indeed, it has. The first demonetization took place in 1946 and Rs 1000 and Rs 10,000 notes
were demonetized. Later in 1978, Rs. 1000, Rs. 5000 and Rs. 10,000 were demonetized. This is
the third time demonetization has taken place.

The critical difference is in the quantum however. The first and second demonetisations
effected really high value notes which formed a small part of notes in circulation. We can arrive
at the estimates by comparing the denomination of the note with the annual per capita GDP. In
1960, India’s per-capita GDP was Rs. 400 (then currency), in 1978 per capita GDP was Rs.
1722/- whereas today it is Rs. 103,000/- (today’s currency). Thus in 1960, a 1000 Rupee note
was 2.5X and in 1978 it was 0.5X per capita GDP, considerably easy to withdraw. The second
aspect is that today the 500/- and 1000/- currency notes represents ~85% of physical money in
circulation. At that time, it was considerable less.

RBI earlier removed pre-2005 notes of all denominations from circulation as they have fewer
security features compared with subsequent notes. The process of removing the older notes
from circulation continued for nearly one year. The deadline was extended till December 2015
and those notes continued to remain legal tender till November 8. This was not exactly
demonetisation but removing from circulation and has now subsumed into the present
demonetisation. [Source: Black Money and Demonetisation, Rahul Prakash Deodhar,
University of Mumbai, November 14, 2016]

REINTRODUCTION
While high denomination notes (`1000, `5000 and`10000) were demonetised in 1978,
subsequently, the `500 note was introduced in 1987, which started being issued in substantial
quantity since 1996 and `1000 was reintroduced in 2000. [Source: Modelling Currency Demand
in India: An Empirical Study]
16RBI changed, reworked demonetisation guidelines
With the infusion of new currency, RBI changed rules for withdrawal, exchange and deposit of
cash several times.The Reserve Bank of India had been preparing for the roll-out of
demonetisation policy six months before Prime Minister Narendra Modi announced it on
November 8. But the implementation of the policy has not been smooth, with banks failing to
meet the demand for cash in new currency. With the infusion of new currency, RBI changed
rules for withdrawal, exchange and deposit of cash several times. In days that followed the roll-
out of new currency notes on November 10, Economic Affairs Secretary Shaktikanta Das held
several press conferences thereafter to announce new rules

.November 08, 2016/2016-2017/1142: Government of India vide their Notification no. 2652
dated November 8, 2016 have withdrawn the Legal Tender status of Rs 500 and Rs 1,000
denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India
till November 8, 2016. This is necessitated to tackle counterfeiting Indian banknotes, to
effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

For their immediate cash needs, these notes of value up to ` 4,000 per person can be exchanged
for cash over the counter of these bank branches. Cash withdrawals from bank accounts, over
the bank counters, will be restricted to a limited amount of ` 10,000 per day subject to an
overall limit of ` 20,000 a week from November 9, 2016 till end of business on November 24,
2016.

Demonetisation, demonetisation effects, demonetisation deaths, bank queues, bank deaths,


west bengal, west bengal demonetisation, currency demonetisation, narendra modi, PM
modi, india news, Indian express news People queue outside a bank to withdraw cash and
deposit their old high denomination banknotes in Kolkata, India November 30, 2016.
(Source: Reuters)

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate
recalibration. When ready, they will be reactivated and cash drawals from ATMs will be
restricted to ` 2,000 per day per card up to November 18, 2016 and the limits shall be raised to
` 4000 per day per card from November 19, 2016

One Month Of Demonetisation: Public Reaction

November 08, 2016/2016-2017/1143: All scheduled and non-scheduled banks, including


public, private, foreign, cooperative, regional rural and local area banks, will remain closed for
public on Wednesday, November 9, 2016.

November 08, 2016/2016-2017/1145: The Reserve Bank of India will shortly issue ` 2000
denomination banknotes in the Mahatma Gandhi (New) Series, with the inset letter R, bearing
signature of Dr. Urjit R. Patel, Governor, Reserve Bank of India, and the year of printing 2016
printed on the reverse of the banknote.

November 08, 2016/2016-2017/1146: The Reserve Bank of India will shortly issue ` 500
denomination banknotes in Mahatma Gandhi (New) Series with inset letter E in both the
number panels, bearing the signature of Dr. Urjit R. Patel, Governor, Reserve Bank of India, the
year of printing 2016 and Swachh Bharat Logo printed on the reverse of the Banknote.

November 09, 2016/2016-2017/1161: All scheduled and non-scheduled banks, including public,
private, foreign, cooperative, regional rural and local area banks, will remain open for public on
Saturday, November 12 and Sunday, November 13, 2016. Banks are advised to keep all their
branches open on November 12 and 13, 2016 as regular working days for transacting all
business. Banks may give due publicity about availability of banking services on these days.

kerala, kerala pay day, pay day demonetisation, demonetisation pay day, demonetisation
salaries, pension and salary lines, kerala pensioners, kerala govt employees, demonetisation
problems, india newsNov 10, 2016/2016-2017/1164: Consequent to the banks being open for
public transactions on Saturday, November 12 and Sunday, November 13, 2016, it has been
decided that Payment Systems (RTGS, NEFT, Cheque Clearing, Repo, CBLO and Call
markets) shall remain open on Saturday, November 12 and Sunday, November 13, 2016. All
participants/member banks are advised to facilitate operations on the above payment systems
for their customers on November 12 and 13, 2016 as on regular working days. Banks may give
due publicity about availability of above payment system services on these days.

November 11, 2016/2016-2017/1182: The Reserve Bank of India has said that consequent to
the withdrawal of Legal Tender Character of existing Rs 500 and Rs 1000 Bank Notes, it has
made arrangements to distribute the notes in new Rs 2000 and other denominations across the
country.

There is enough cash available with banks and all arrangements have been made to reach the
currency notes all over the country. Bank branches have already started exchanging notes since
November 10, 2016. As mentioned in RBI communications, it may take a while for the banks to
recalibrate their ATMs; once the ATMs are functional, members of public will be able to
withdraw from ATMs up to a maximum of Rs 2,000 per card per day up to November 18, 2016;
and after that withdraw up to Rs 4000 per day per card. The facility for exchanging the
withdrawn denominations of Rs 500 and Rs 1000 is available for nearly 50 days. The Reserve
Bank appeals to members of public to be patient and urges them to exchange their old notes at
their convenience, any time before December 30, 2016.

November 12, 2016/2016-2017/1189: The Reserve Bank of India today clarified that as part of
the instructions issued to banks, including to cooperative banks, regarding withdrawal of legal
tender status of the existing Rs 500 and Rs 1000 bank notes (specified bank notes), detailed
reporting system has been put in place. The Reserve Bank further stated that with a view to
preventing misuse of the facility, the authorities are closely monitoring the information
received through these reports about exchange and deposits of the specified bank notes by the
public with the banks, including cooperative banks.

November 12, 2016/2016-2017/1190: Keeping in mind the need for other denomination notes
which are legal tender (including Rs 2000), adequate stocks of these notes are kept ready in the
Currency Chests located at more than 4,000 places across the country. Bank branches are
linked to them to source their requirements from them. To sustain the demand, Printing Presses
are printing the currency notes at full capacity so that adequate quantum of notes is available.

While these efforts are afoot, public are encouraged to switch over to alternative modes of
payment, such as pre-paid cards, Rupay/Credit/Debit cards, mobile banking, internet banking.
All those for whom banking accounts under Jan Dhan Yojana are opened and cards are issued
are urged to put them to use. Such usage will alleviate the pressure on the physical currency
and also enhance the experience of living in the digital world.

November 13, 2016/2016-2017/1194: The Reserve Bank assures members of the public that
enough cash in small denominations is also available at the Reserve Bank and banks. The
Reserve Bank urges that public need not be anxious; need not come over to banks repeatedly
to draw and hoard; Cash is available when they need it.
mumbai-cash-rush-759November 13, 2016/2016-2017/1196: The Reserve Bank of India
will shortly issue Rs 500 denomination banknotes in Mahatma Gandhi (New) Series with
inset letter L in both the number panels, bearing the signature of Dr. Urjit R. Patel,
Governor, Reserve Bank of India, the year of printing 2016 and Swachh Bharat Logo
printed on the reverse of the Banknote.

November 14, 2016/2016-2017/1197: Constitution of Task Force for enabling


dispensation of Mahatma Gandhi (New) Series Banknotes Recalibration and reactivation
of ATMs. It has become necessary to re-calibrate all ATMs/ Cash handling machines to
dispense the new design notes following introduction of Mahatma Gandhi (New) Series
Banknotes including a new High Denomination (Rs 2000) in new designs. Re-calibration
of ATMs involves multiple agencies banks, ATM manufacturers, National Payment
Corporation of India (NPCI), Switch Operators, etc., and multiple activities making it a
complex operation requiring immense coordination among these agencies. With a view to
providing direction and guidance in this regard, it has been decided to set up a Task Force
under the Chairmanship of Shri S. S. Mundra, Deputy Governor, Reserve Bank of India.

November 14, 2016/2016-2017/1198: The Reserve Bank of India has today clarified that
District Central Cooperative Banks (DCCBs) can allow their existing customers to
withdraw money from their accounts up to Rs 24,000 per week up to November 24, 2016.
However, no exchange facility against the specified bank notes (Rs 500 and Rs 1000) or
deposit of such notes should be entertained by them. The Reserve Bank has accordingly
advised all banks to permit withdrawal of cash by DCCBs from their accounts based on
need. The cash withdrawal limit of Rs 24,000 per week is not applicable to withdrawal of
cash by a DCCB from its account with any other bank.
November 14, 2016/2016-2017/1199: The Reserve Bank of India has today decided
that banks shall waive levy of ATM charges for all transactions (inclusive of both financial
and non-financial transactions) by savings bank customers done at their own banks ATMs as
well as at other banks ATMs, irrespective of the number of transactions during the month. The
above waiver of charges on ATM usage will be effective from November 10, 2016 till
December 30, 2016, subject to review.
November 15, 2016/2016-2017/1215: There were reports that some cooperative banks were not
strictly adhering to the instructions issued in connection with the withdrawal of legal tender
status of the existing Rs 500 and Rs 1000 bank notes (specified bank notes). The Reserve Bank
of India today informed that it has advised the Urban Cooperative Banks through its Regional
Offices and the State Cooperative Banks through National Bank for Agricultural and Rural
Development (NABARD) of the need to ensure strict compliance with the instructions issued
with regard to exchange of specified bank notes as also deposit of such notes into the accounts
of their customers.

November 17, 2016/2016-2017/1235: The Reserve Bank of India has once again clarified today
that there is sufficient supply of notes consequent upon increased production which started
nearly two months ago. Members of public are requested not to panic or hoard currency notes.

November 18, 2016/2016-2017/1255: The Reserve Bank of India had issued instructions to
banks on November 14, 2016 that banks shall waive levy of ATM charges for all transactions
by saving bank customers done at all ATMs, irrespective of the number of transactions during
the month, from November 10, 2016 till December 30, 2016, subject to review. As another
customer-centric measure, the limit for cash withdrawal at POS has been made uniform at to
Rs 2000/- per day across all centres (Tier I to VI) for all merchant establishments enabled for
this facility and (ii) customer charges, if any, being levied on all such transactions waived till
December 30, 2016, subject to review.

November 21, 2016/2016-2017/1265: Consequent to the announcement of withdrawal of


Legal Tender status of banknotes of Rs 500 and Rs 1000 denominations from the midnight of
November 8, 2016, the Reserve Bank of India made arrangements for exchange and /or
deposit of such notes at the counters of the Reserve Bank and commercial banks, Regional
Rural banks and Urban Cooperative Banks.

Banks have since reported that such exchange/deposits effected from November 10, 2016 up to
November 18, 2016 amounted to Rs 5, 44,571 crore (exchange amounted to Rs 33,006 crore
and deposits amounted to Rs 5,11,565 crore). They have also reported that the public have
withdrawn, during this period, Rs 1, 03,316 crore from their accounts either over the counter or
through ATMs.

November 22, 2016/2016-2017/1282: In order to meet the transactional needs of the public
through digital means, the Reserve Bank has introduced additional measures by way of special
dispensation for small merchants and enhancement in limits for semi-closed Prepaid Payment
Instruments (PPIs).

A special dispensation has now been enabled for small merchants whereby PPIs issuers can
issue PPIs to such merchants. While balance in such PPIs cannot

Exceed Rs 20,000/- at any point of time, the merchants can transfer funds from such PPIs to
their own linked bank accounts up to Rs 50,000/- per month, without any limit per transaction.
Merchants only need to provide a self-declaration in respect of their status and details of their
bank account.

The limit of semi-closed PPIs issued with minimum details has been enhanced to Rs 20,000/-
from the existing Rs 10,000/-. The total value of reloads during any given month has also been
enhanced to Rs 20,000/-.

Extant instructions for other categories of PPIs remain unchanged. Full KYC PPIs with balance
up to Rs 1, 00,000/- can continue to be made available by authorised PPI issuers.
The above measures will be effective from November 21, 2016 till December 30, 2016,
subject to review.

The earlier PPI guidelines did not specifically provide for opening of PPIs for such merchants
as a separate category and the limit for semi-closed PPIs issued with minimum details was Rs
10,000/-.

November 22, 2016/2016-2017/1283: The facility for public to exchange the specified bank
notes (old notes in Rs 500 and Rs 1000) for legal tender notes and allowing them to deposit into
bank accounts in unlimited amounts is provided to enable members of the public in possession
of these notes as on the date of the announcement to secure the value of these notes either
through exchange or by deposit into their bank accounts.

It is reported that certain gullible persons are exchanging these notes on behalf of other; some
are even helping them by depositing the hoarded cash into their own bank accounts. Even
Pradhan Mantri Jan Dhan Yojana accounts are being put to use for this.

Members of public are cautioned that exchanging /dealing in Specified bank notes in
unauthorised manner is illegal and liable to strict punitive action.

November 25, 2016/2016-2017/1317: The Reserve Bank of India advises members of public
that exchange of banknotes in Rs 500 and Rs 1000 denominations, whose legal tender status has
been withdrawn, will continue to be available at the counters of the Reserve Bank up to the
current limits per person as hitherto. (However such exchange facility is no longer available at
other banks counters).

November 28, 2016/2016-2017/1349: Consequent to the announcement of withdrawal of legal


tender status of banknotes of Rs 500 and Rs 1000 denominations from the midnight of
November 8, 2016, the Reserve Bank of India made arrangements for exchange and/or
deposit of such notes at the counters of the Reserve Bank and commercial banks, Regional
Rural banks and Urban Cooperative Banks.

Banks have since reported that such exchange/deposits effected from November 10, 2016 up to
November 27, 2016 amounted to Rs 8,44,982 crore (exchange amounted to Rs 33,948 crore and
deposits amounted to Rs 8,11,033 crore).

They have also reported that the public have withdrawn, during this period, Rs 2, 16,617
crore from their accounts either over the counter or through ATMs.

December 01, 2016/2016-2017/1382: It has been reported that certain


guidelines/instructions purported to be issued by the Reserve Bank are being circulated
in the social media by some unscrupulous elements creating confusion in the minds of
the public/bank personnel.

Banks and members of the public are, therefore, cautioned to be guided by only those
instructions which are either uploaded on the Reserve Banks official website or
received through the Reserve Banks official mail.

The banks and members of the public are advised that they should not rely on other unsecured/
unofficial channels like social media in which the authenticity of the documents circulated
is questionable and not verifiable.

December 19, 2016/2016-2017/1859: The Reserve Bank has notified that tenders of SBNs in
excess of Rs 5000 into a bank account will be received for credit only once during the
remaining period till December 30, 2016. For amounts exceeding Rs 5000 in old Rs 500 and
Rs 1000 notes, they can now be deposited only once per bank account. The limit for
withdrawals has remained unchanged at Rs 24,000.
Effects on government finances:
The effects of demonetisation on government finances can be divided into three categories: the
impact through RBI’s finances, the impact through taxes and the impact through credit available
to finance deficits.

Through RBI’s finances


The RBI earns seignior age through the printing of currency. In the demonetisation, a part of the
currency will be extinguished. For this part of the currency, the RBI can print the notes given
the assets on its books, but there would be no takers. In other words, this part of the currency
would be like new money that can be introduced into the economy and hence yields seignior
age to the RBI once again when released into circulation. RBI, however, cannot lend this to the
government since that would involve additional liability build up on its balance sheet. So, this
currency can only be released when foreign exchange is being converted to rupees for instance
and not sterilised thereafter. At this point there would accrue some dividends to the government
as well. However, to the extent the government and the RBI seek to move the economy towards
digital instruments, this option might not be exercised and the dividend might not accrue.

Impact through taxes: There are multiple channels through which taxes will be affected:

At the point of transition to the new regime, people have attempted to convert cash balances
into commodities like gold or luxuries. On these transactions the governments would have a
spurt of taxes. This would however not last beyond the transition phase. In the subsequent
period, the impact on indirect taxes would be negative because of the compression in demand.
On property taxes, some local bodies have given people a window of opportunity to pay old
as well as current taxes in the scrapped notes. This would result in an increase in revenue
collections in property tax. 16 On income tax there can be two potential effects: first, with
compression in the economy, there could be a reduction in the tax collection. In the unlikely
event of people choosing to deposit unaccounted balances in the bank and pay taxes and
penalty on the same, or if the tax department through investigation, finds that some of the
deposits are not explained income tax collections would increase. For any individual depositing
balances above Rs 10 lakhs, the tax and penalty together would absorb the over 90 per cent of
the deposited amount. This would serve as a disincentive for people with large balances to come
and deposit the same into accounts. In other words, the government cannot expect to get major
collections in terms of the tax and penalty on unaccounted incomes revealed. Through financing
of fiscal deficit: The generation of additional deposits and credit, as a result of the SLR
requirements can make more credit available to governments. Given the FRBM (Fiscal
Responsibility and Budget Management) limitations, the amount of borrowing that governments
can take on may be limited and the additional supply can mean a decline in the interest rate that
governments pay on their debt. This could be a positive spin-off for the governments.
STRENGTHS:

Black Money and Counterfeits: Two primary reasons were touted for this drastic move – to hit
at black money and to check counterfeits. This move left the parallel black economy choked
and gasping. The elimination of fake currency is inevitable, and one also hopes that a check is
well in place while these notes are routed through banking channels. It will be a tremendous
achievement.
Countering Terror & Crime: While the government has clearly pointed out the use of fake
currencies by terror outfits, some have spoken about uses of cash by criminals. This move has
already halted many terror operations and has the potential to force a significant shift in the
terror infrastructure.
As the large chunk of Hawala money is delivered to separatist leaders and local politicians to
fuel protesters, the four-month-long unrest in the valley is also getting wiped out in the absence
of cash inflow, security agencies believe. Besides, the lack of Hawala money would also hit the
Maoists activities and other insurgent groups across India, especially in the northeast region,
intelligence officials said.
Timing: No timing is perfect, but in hind-sight, the timing seems obvious. If we connect the
dots, the very first decision of Modi Govt was to establish a SIT on Black Money. Then came
the massive roll-out of the Pradhan Mantri Jan-Dhan Yojana (PMJDY) nearly completing all
citizens’ access to bank accounts. The next was crack down on hoarders /foreign accounts
(approximately RS. 80,000 Cr was collected). Then followed the Income Declaration Scheme,
with a deadline of 30th Sept 2016. Another window of opportunity was given to people to
declare their amassed wealth. (Rs. 65,000 Cr collected) Now, if you still have the Black Money,
the government will ensure that either you declare and become mainstream or else face the
hammer. Commendable chronology!
Reformist Stance: Demonetisation is not a foolproof measure, but it attacks the black money
problem with unprecedented force and at multiple layers. If the objectives are achieved through
sound implementation, this will show a strong signal about India’s anti-corruption drive and
also its reformist stance.

WEAKNESSES:

Preparedness: The entire banking and postal system were caught unaware. The government says
that it will now take two more weeks to configure all ATMs. The situation is testing in small
towns, most ATMs are still not dispensing cash, and some branches are easily running out of
cash. It seems that the planning ahead of such massive event lacked matching preparedness.
But the government could not have stashed large cash in banks and reconfigured ATMs. It
would have led to the corrupt getting wind of the announcement and overnight getting much of
their illicit wealth converted.

Logistics: There is always the risk that the infusion of the new currency notes is not sufficient to
satiate the demand for currency. The government has fixed certain limits, which for all practical
purposes seem moderately small.
Unaccounted Wealth: There are many means to store wealth; in cash, foreign currency, gold,
real estate, and several other instruments. Out of which hard cash is relatively unattractive as it
earns a negative rate of return, whereas, other modes of unaccounted wealth are laundered, and
becomes much harder to identify. So this strike is only on black-cash and not on the entire
parallel economy per se.
Cutting Corruption: Demonetisation does not promise that there will not be any future
corruption. Crooks are always creative and will find ways to circumvent this demonetisation. At
best, this is a reset button.
Sluggish Economy: This process would increase bank deposits with an obligation to pay
interest. Can the financial institutions mobilize these funds fast enough and be able to disburse
as loans, especially in a sluggish economy?

Swot analysis

In an exclusive broadcast, PM Modi shook the country by announcing surgical strike on fake
currency and black money, unparalleled in its scale and scope, by demonetising Rs. 500 and
1,000 notes effective from 9th November, midnight. Note that this came exactly 27 years after
the fall of the Berlin wall.

We are in the second week since this decision came. The outcome cannot be accurately
predicted, neither can the sound implementation be ensured amidst such large-scale disruption,
especially in a complex, multi-layered society like India. One way to analyse such high impact
policy proposal is to compare its expected benefits with the expected costs.

It is the time that we do an in-depth analysis of the strengths and weaknesses that are integral to
this hard-hitting measure. We must also analyse the broader opportunities and threats to identify
the potential problems or say, the cost to the society that needs to be recognised and possibly
addressed. We shall also look into the politics of this move.
WHAT ARE THE CAUSES OF DEMONITISATION?

The causes for demonetisation are as follows:

 Black Marketing

 Currency Storage

 Corruption

 Fake Currency in the Economy

 Stop funding of illegal activities

What caused the demonetization in India?

Demonetization is a step initiated by the Modi government last year in the month of

November for the establishing and ensuring a healthy economy of the country. There are
several causes for demonetization to occur some of which are listed below
One of the major reasons for demonetization to happen was to eliminate large chunks of
black money possessed by some of the corrupt politicians and bureaucrats.

To convert the present economy into a cashless economy so as to promote and cultivate the
concept of digitalization among the citizens of India.

Also, it was believed that this step would definitely flush out the fake currency notes which still
persisted in several parts of the country though it was not completely successful but helped to a
must greater extent.

Generally, the currencies of high value are vulnerable to be used for unfair purposes, and hence,
it becomes necessary to take such big steps to eradicate the malfunctioning elements from
society.
Research Methodology
Objectives of Study

To know about actual present outcomes of the note banned decision. To know the potential of
the note ban decision. To estimate the consequences for future of the note ban decision. To
know the impact of note ban decision on the Indian economy.

Scope of Study

This study will helpful for the citizens of India, Indian government, businessman and the Indian
customers. Through this study government will be able to know about the future conditions of
the economy. This study will help to the government for policy making to the betterment of the
economy. This study will also helpful for the Indian citizen because they would be able to know
the present and future condition of the economy and they can take rational decision on their
income and expenditure. Any businessman can also take the wise decision so that he will be
able to generate more revenue and can earn the profit in the actual market scenario. Finally
everybody would be able to know the impact of note banned decision on Indian economy as
well as Indian markets.

Data Collection Method

Secondary data has used for the study.

Secondary data is collected from library, text books, and journals, articles from newspapers and
from relevant websites available on internet
Analysis and Interpretation
Demographic Profile of the People: Table no.1 describes the demographic profile of the
respondents for the study. Out of 100 respondents who were taken for the study: it has
been identified that most (63%) of the respondent are male, (57%) whose age group is
under 26 to 50 years, most (68%) of the respondents are up to school Level, (46%) of
the respondents are businessman and the annual income of (44%) respondents is
above Rs.2,50,000, (64%) of the respondents belong to nuclear family.

Factor Numbers of Percentage


Respondents N=100
Male 63 63
Female 37 37
AGE (years)
Up to 25 14 14
Up to 50 57 57
Up to 50 29 29
Educational Qualification
Up to school level 68 68
Graduated 21 21
House wife 11 11
Occupation
Business 46 46
Employee 30 30
professional 24 24
Annual income
Up to rs 100000 14 14
Rs 100001 to 250000 42 42
Above 250000 44 44
Type of family
Nuclear Family 36 36
Joint family 64 64
Table 2: Relationship between the Demographic Profile of the respondents
and Impact of Demonetization

Variables Level of awareness Total X2 Table remarks


value value
Low moderate High
Gender
Male 13 22 38 63 7.634 5.991 s
Females 8 13 16 37
Up to 25 4 5 5 14
25 to 50 17 26 14 57 11.499 9.488 s
Above 12 5 12 29
Educational qualification
Up to school
level 26 20 22 68
Graduated
8 8 5 21 11.823 9.448 NS
House wife
4 3 4 11
Occupation 30
Bossiness 13 17 16 46
Employee 5 19 6 30 11.823 9.448 s
professional 9 8 7 24
Annual income
Up to
rs100000 5 3 6 14
rs100001 to
rs250000 10 19 13 42 21.823 9.448 s

Above
rs250000 14 18 12 44
Type of family
Nuclear 7 20 9 36 NS
family 3.598 5.991
Joint family 18 34 12 64

*significant at 5% percent level

1.2 Relationship between the Demographic Profile of the Respondents and Impact of
Demonetization: Table no.2 depicts the relationship between selected demographic
variables and Level of Impact of demonetization of the respondents. It is clear that , the
calculated Chi-square value is less than the table value at five percent level, there does not
exists any significant association between educational qualification ,type of family of the
respondents and level of impact on demonetization. Thus the null hypothesis is accepted.
Case Study/Articles
Case Study; I expect that most of you will by now have read a fair bit about the (to my mind)
fabulous living monetary experiment that is India. Obviously, I feel sorry for people who have
been (to put it mildly) inconvenienced by the chaos caused by the removal of 85% of the cash
“in circulation” in the country, but as a student of monetary history and the interaction between
technology and economics, it is absolutely fascinating to look at what is happening.

Indian Prime Minister Narendra Modi has announced that the existing 500 and 1,000 rupee
banknotes will be withdrawn from the financial system overnight. The surprise move is part of a
crackdown on corruption and illegal cash holdings, he said in a nationwide address on
television.

From India scraps 500 and 1,000 rupee bank notes overnight – BBC News

I saw some television reports of aggrieved and panicked Indians who were unable to get any
cash and since much of the economy is cash-based, worrying about a slowdown in economic
activity. It’s a bit of shock to go to the bank and discover it is closed. When the banks re-
opened, it was with new money. Or at least it would have been with new money, had
replacement been produced and distributed beforehand.

On November 8 evening, Reserve Bank of India governor Urijit Patel and senior government
officials unveiled the new currency note of Rs 2000 and redesigned Rs 500 note.

From New Rs 2000 note to be introduced in India after banning old Rs 500 & 1000 notes:
Pictures of 8 best looking currency notes across the globe – India.com

The result was pandemonium. People went to ATMs to try to obtain new bills only find that
there were none to be had. Rich people started paying poor people to stand in line for them to
get money. I even saw a photo of people praying to a garlanded ATM! India is a big country
and the ATM

Vendors had no more warning of the change than anyone else, so as you can imagine the
planning and logistics were complex. The ATM operators were as non-pulsed as the general
public by the sudden change.

“Re-configurations takes time so it has to be done one by one. Things should be normal in ten
days. You have to understand there are 2 lakh ATMs in the country but there are only three to
four vendors.”

From Just 35,000 personnel to replenish ₹16 lakh crore in ATMs | business-news |
Hindustan Times

The net result of all of this was that the country ran out of money. Literally. There was no
money available for commercial transactions. So to Indians, it really was a big deal and a major
disruption.

So why was this done? There were two explicit reasons given for the demonetisation. One was
that it was an attack on terrorist funding, and the second was that it was an attack on the black
economy. I don’t know enough about terrorist financing in India to comment on the efficacy of
the move, but it seemed to target counterfeiting operations in Pakistan.

It disrupts the production of FICN in Pakistan, and makes redundant existing stocks of fake
currency with a vast network of terror funders-the hawala traders and money launderers. “The
phase-out of these notes is a double whammy for Pakistan,” says Colonel Vivek Chadha of
the Institute of Defence Studies and Analyses, Delhi.

From Taking out Pakistan’s terror mints: The Big Story – India Today 21112016

As for the black economy, there is no doubt that the move has had, and will have, an impact.
There was an awful lot of money sloshing around outside of the banking system, and as far as I
understand, there was rampant tax evasion amongst the better-off amongst the population.
Having spoken to a couple of people recently returned from India, I got the impression that

members of the public were comfortable that the disruption, bad though it was, was a price
worth paying. And there is no doubt that the move shifted many transactions on the record
immediately.

“A majority of our transactions have suddenly become white because of card payments and
people are also not tipping as much now,” a waiter at the restaurant said.

From demonetisation of currency: Card payments surge, trip & steady after restricted
flow of money – Times of India

The government’s plan was that people would bring their cash to the bank, declare it, pay tax
on it and then either get new cash in return or actually start using bank accounts (a great many
of which are dormant). And, indeed, this is what seems to have happened, with the cash being
returned in amounts greatly exceeding the government’s calculations. By the end of the year,
almost all of the notes had been deposited.

Banks have received 14.97 trillion rupees ($220 billion) as of Dec. 30, the deadline for
handing in the old bank notes, the people said, asking not to be identified citing rules for
speaking with the media. The government had initially estimated about 5 trillion rupees of the
15.4 trillion rupees rendered worthless by the sudden move on Nov. 9 to remain undeclared

From Govt likely to put curbs on jewellers | Business Standard News

That seems a reasonable deal. Pay tax to the government and potentially have to give up the
rest of the cash because of anti-corruption investigations … or pay tax to the jeweller and
mum’s the word. Since India has a long tradition of using gold jewelry as a store of value, this
seems unsurprising in retrospect. It led to another crackdown on those who decided to convert
their black money into black (but still quite liquid) gold.

This move will halt such sales of gold at a huge premium against old currency notes, which
jewellers were doing till the Income Tax (I-T) department raided them across the country on
Friday and sent around 600 notices to jewellers asking the details of daily sales from November
7 to 10. The I-T department, in its notices, also asked for CCTV footages, especially of cameras
near cash counters, to seek date-wise information and to check if PAN numbers or ID proofs
were collected from customers.

From Govt likely to put curbs on jewellers | Business Standard News

Anyway, the upshot of all of this was that cash vanished from circulation without a viable
alternative in place. What kind of alternative might there have been? Well, the answer is
obvious. India really should have a widespread, vibrant and effective mobile payment
infrastructure, but it has been slow to develop. I wrote about this a few years ago, noting that it
was the regulatory environment that was holding back the evolution of the sector (the Reserve
Bank of India’s “calibrated approach” to mobile payments). As the figures from Kenya that I
recently posted show, it is possible to use mobile phones as an alternative to cash.

Look at Kenya, where there are now more than 33 million mobile money users and 174,000
mobile agent locations. The most recent figures from the Central Bank of Kenya (CBA) show
an astonishing trend. From February 2013 until September 2016, the number of monthly M-
PESA transactions almost tripled, going from 53 million to 131 million, while the number of
card transactions fell from 34 million down to 18 million.

From Fish without cash | Consult Hyperion

So, Kenya (and, for that matter, China) show just how effective mobile solutions can be. Hence
my thinking that it may have been better for India to have waited until the more flexible
regulatory regime had begun bear fruit before taking the quite drastic step of removing those
banknotes. I’m sure I will blog again and in more detail about the Indian experiment as more
data comes in, but I think we can already see a shift in government rhetoric from corruption and
terrorism to cashlessness and efficiency, with officials urging banks, merchants and mobile
players to accelerate the deployment of alternatives.

Meanwhile, I just want to pull in a couple of other observations on the great experiment
underway in India right now. First, the potential for alternatives:

‘Bitcoin adoption in India sees surge’

From ‘Bitcoin adoption in India sees surge’ – The Hindu

In fact, bitcoin volume on India exchanges doubled in the couple of weeks following the
announcement but then fell back again at the end of the year. I think it highly unlikely that
bitcoin will step in to fill the gap left by the removal of the highest value banknotes. It looks to
me that a more widely-used alternative to cash will be… nothing. In the cities, the merchants
are getting payment terminals or mobile phone alternatives, but outside the cities, people could
easily get by for some time without a circulating means of exchange.

This is not wild prediction. I have previously posted about the famous case study of the Irish
bank strikes that demonetized the Emerald Isle in the 1960s and 1970s. Subsequent economic
analysis showed that the absence of money had surprisingly little impact on the economy!
People just began to write cheques or IOUs and these debt instruments began to circulate.

Murphy points out that one of the key reasons why a “personalised credit system” could
substitute for cash was the local nature of the circulation — which… was centred on pubs — so
that the credit risk was minimised.

From Payments without banks | Consult Hyperion

In summary Ireland was a more rural economy in those days so life continued in a reputation
based transaction economy. Well, guess what: the same thing is happening in India.

However being a very close knit society, local people count on each other so they are able to
buy the essential commodities from the shops in good faith, the payment of which they would
make later on after having money. So this way, they are not feeling panicky like rest of the
country

From Here, banks are giving only 10 rupee coins – Times of India

OK so the demonetization of Ireland and the demonetization of India are wholly different in
origin, scale, purpose and destination. Still. Mr Modi’s actions must have set a few more
national leaders thinking about taking radical action to move toward a less-cash economy more
quickly than otherwise might have been the case – especially since we know that high-value
banknotes in many countries (e.g., the UK) are primarily used for criminal purposes.
Recommendations & Conclusion
Through demonetization, Prime Minister Modi successfully portrayed himself as a leader
willing to take decisive and, if necessary, drastic steps to tackle bribery, money-laundering and
channels of income-generation, by-passing the formal mechanisms of the Indian state. While
the long-term impact of demonetization is yet to be seen, the policy illustrates the priorities of
the Modi government: Corruption is primarily presented as a cash-based issue; demonetization
did not explicitly target noncash-based corrupt activities such as property transfers, gold or the
use of tax havens. By creating and cementing a narrative on corruption that emphasizes the role
of cash, demonetization may therefore divert attention from future attempts at shaping anti-
bribery and corruption policies taking a more holistic approach.

One of the reasons for this development lies in the increasingly prominent role anti-corruption
plays within electoral politics in India. Returning “black money” from foreign tax havens and
distributing it to the poor was one the key promises made in Modi's successful 2014 election
campaign; demonetization, thus, can be seen as more than economic policy but rather as a
political tool. With previous schemes, such as a 2016 amnesty offer for tax evaders, being less
successful than anticipated, Modi and his party have a strong impetus to portray demonetization
as a show of their commitment to anti-corruption. In order to do so, the government had to
establish in the public mind a strong relationship between cash and corruption. This, however,
may have skewed the public understanding of anti-bribery and corruption frameworks,
downplaying not only other means of acquiring and storing income generated from corrupt
activities but also presenting corruption as a conflict between rich hoarders of cash and the
marginalized poor. The Prime Minister's attempts to position himself as a “Robin Hood”-type
character whose focus is to take illicit cash from the rich and redistribute it among the poor risks
reducing ABC initiatives to a precarious binary of “us-vs.-them”, which in turn may undermine
more serious discussions on the role of policy, the law and institutions.

Internationally-recognised ABC objectives such as strengthening checks and balances, building


capacity of public institutions and incentivising integrity and transparency measures within the
private sector may have a harder time gaining recognition in India after the top-down and

somewhat simplistic policy of demonetization captured the public imagination on what the fight
against corruption should look like.

The outlook is not all gloomy, however. Demonetization is a continuation of a larger trend that
demonstrates the increasing role of anti-corruption policies in the Indian public discourse. The
Modi administration has successfully incorporated some of the momentum of the India Against
Corruption Movement, which had its high-points in the year 2011. At a time when one-third of
Indian members of parliament were facing criminal prosecution, the Modi successfully
campaigned on a platform of good governance. The fact that the number of MPs with criminal
charges against them has not significantly reduced since 2014, on the other hand, also points
towards the fact that a lot remains to be done when it comes to transparency and integrity in
Indian electoral politics (Vaishnav, M. 2016).

Demonetization may be an important step in that direction, having garnered significant public
support for ABC policy-making and further strengthening the relevance of integrity within the
political discourse. Political parties across the board are paying attention to the re-invigorated
debate on bribery, corruption and nepotism. We expect their ability to portray themselves as
tough on corruption to play an increasingly important role in electoral politics. A recent
example for this trend are the elections in Uttar Pradesh state, which saw the current chief
minister Akhilesh Yadav go through a highly-publicized break from his father, a former chief
minister of the state, to portray himself as an honest leader in a party riddled by corruption.

Demonetization has changed the tone and pace at which corruption is spoken about in India.
Crucial for the long-term success of ABC policy-making, however, will be in how far the policy
has set the agenda on the relationship between cash and corruption and the role of institutions
and the private sector