DEMONITISATION AND ITS EFFECT ON INDIAN ECONOMYWhat is Demonetization Demonetization is the act of stripping a currency unit of its status as legal tender The opposite of demonetization is remonetization where a form of payment is restored as legal tender. Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as a official mode of paymentIntroduction The Indian government launce a surgical attack on November 8, 2016 against black money in the economy. Prime Minister of India Mr. Narendra Modi, in an unscheduled live televised address to the nation on November 8, 2016 declared circulation of all INR 500 and INR 1000 bank notes are void with immediate effect. Issuance of new currencies of value INR 500 and INR 2000 in exchange of old void currencies.History of Demonetisation in Indian economy It is not the first time that the government launched demonetisation, Historically previous Indian governments had demonetized bank notes. In January 1946, Banknotes of 1,000 and 10,000 rupees were withdrawn and new notes of 1,000, 5,000 and 10,000 rupees were introduced in 1954. The Janata Party coalition government had again demonetized banknotes of 1,000, 5,000 and 10,000 rupees on 16 January 1978 as a means of curbing black money. h Sey Bogus mail theory exposedDemonetization has been embraced in the past by several other countries. They include: * Some of the countries have met the purposes and whereas have failed Feounery dear curencyvaiie | Nigeria 1984 Ghana 1982 Zimbabwe 2010 Soviet Union 1991 Australia 1996 100 Ni 50 cedis $100 000 000 000 000 50 and 100 ruble ira Full series of polymer bank notes * In 1996, Australia became the first country to have a full series of circulating polymer bank notes after replacing all paper-based notesNeed for demonetization High denomination notes are known to facilitate generation/ circulation of black money Total number of bank notes in circulation rose by 40 percent between 2011 and 2016 Increase in number of notes of INR 500 denomination was 76 percent and for INR 1,000 denomination was 109 percent during this period Infusion of new series bank notes will be monitored and regulated by RBI The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7 percent of the GDP in 1999 and rising to 23.2 percent in 2007 A parallel shadow economy corrodes and eats into the vitals of the country's economy resulting in: -Inflation adversely affects the poor and the middle classes —Depriving the Government of its legitimate revenues —Forged cash used to fund terrorist activities against India_ Phases of Demonetisation Income Declaration Scheme (Rs.65,250er disclosed)Positive side of demonetisation 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 penalized 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. Real estate prices dip to be seen in the long run. Reduction in inflationNegative side of Demonetisation The liquidity squeeze caused by demonetization 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. The Story Continues tkBanking About 3 trillion rupees in the form of old INR 500 and INR 1000 banknotes deposited in the banking system . 500 billion rupees dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters . Spike in the usage of debit card and credit card post demonetization was also reported Business E-commerce E-commerce companies saw up to a 30 percent decline in cash on delivery (COD) orders. E-payment options like PayTM and BHIM saw a rise Real Estate Primary transactions may not be impacted, secondary sales may to some extent.Conclusion The government is taking steps to improve liquidity into the system and reduce inconvenience as much as possible. 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. Asa 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.