INTRODUCTION –
DEMONETISATION
Demonetisation
is defined as the process of stripping the status of ‘legal tender’ from any
currency unit. It generally takes place wherever there is a change in the units
of national currency; when the present form of currency/money is removed from
circulation and/or retired, in most cases to be replaced by new notes or coins.
Sometimes, an economy may completely replace its old currency with the new one.
In
India, demonetisation took place on November 8, 2016, when the Prime Minister
Narendra Modi took to the news channels to announce the demonetisation of all
the ₹500 and ₹1,000 bank notes, at 20:00 IST. He also declared the issuance of
new ₹500 and ₹2,000 bank notes. According to the Government of India, this
untimely demonetisation was done to bring down the use of fake and counterfeit
currency in order to fund illegal actions and terrorism. Due to the sudden and
untimely nature of demonetisation, there were prolonged shortages of cash in
the following weeks that disrupted the economy, while threatening the economic
output.
In
its initial stages, demonetisation received a great support from several
bankers and international economists and more eminent personalities. However,
this process was also heavily criticised as it was poorly planned, and perceived
as unfair, and saw a lot of protests, litigations and strikes against the
Indian Government across the country. The process of demonetisation also
reduced the industrial production of the country, as well as the growth rate of
GDP.
This
wasn’t the first time the process of demonetisation was initiated in the Indian
economy. Its history can be traced back to the year 1946, and again in 1978. In
both the cases, the objective was to fight the tax evasion by black money,
which is usually held outside of the formal economic and financial system.
THE PROCESS OF
DEMONETISATION
·
FORMAL
PUBLIC ANNOUNCEMENT – On November 8, 2016, Narendra Modi
took to the major Indian news channels to announce the process of
demonetisation in an unscheduled and untimely live national television address.
In that, he declared the circulation invalid of all the ₹500 and ₹1,000 bank notes
that would be in effect from midnight of the same day.
·
EXCHANGING
THE OLD NOTES – The next step in the process of
demonetisation was the exchange of the old notes. The Reserve Bank of India
brought forward a stipulation that the demonetised notes would need to be
deposited with banks over a fifty-day time period, until December 30, 2016.
There were limits imposed on these exchanges in order to avoid shortages of
cash, which was inevitable.
·
WITHDRAWAL LIMITS ON CASH FROM BANKS –
Limits were also set on the withdrawal of cash from banks to avoid shortage of
cash as demonetisation was a sudden act. The limit was initially ₹10,000 per
day, which was later increased to ₹24,000 per day.
EFFECT OF
DEMONETISATION
The
sudden withdrawal of legal status of ₹500 and ₹1,000 notes created a ruckus in
the country, hugely impacting the economy of India. The process of
demonetisation was initiated to curb the illegal funding of terrorist groups
and identify black money hoarders in the economy. However, the process of
demonetisation impacted each and every person, sector, unit of the economy of
India.
·
IMPACT
ON GDP/ GROWTH RATE OF THE INDIAN ECONOMY
The
short-term impact of demonetisation affected the GDP of India negatively,
causing a notable decline in the GDP for the quarters that followed, due to a
reduction in the demand of consumers, as a result of irregularity in cash flow
post demonetisation.
However,
the situation was brought under control as the cash flow became normal and
regular.
Demonetisation
caused a major setback in the Indian economy. Cancelling the legal tenders of
₹500 and ₹1,000 greatly affected the Indian economy, where more than 85 per
cent of the financial transactions take place in cash. Ultimately there was a
decline in the GDP by 1 per cent.
·
IMPACT
ON THE STOCK MARKETS
Stock
markets all over the world work on the principal of speculation in the markets.
Any major event, related to financial, regional, political or legal nature, can
hence affect the speculation in the financial markets, thus influencing the
stock market. Due to demonetisation and the US presidential election happening
during the same time, there was a drop in the indices of the stock market to a
six-month low. BSE SENSEX crashed almost 1,689 points the day that followed the
announcement of demonetisation.
·
SHORTAGE
OF CASH
The
Indian economy relies heavily on cash transactions. Estimates have shown that
more than 85% of the financial and economical transactions in India take place
in cash. Hence, there inevitably was a huge shortage of cash, post
demonetisation, worsened by the untimely and sudden nature of the same. To add
to the same, the limitations imposed by the Reserve Bank of India on the value
of notes that could be exchanged or withdrawn per day worsened the situation,
adding to the shortage of cash. All this
resulted in the ATMs running out of cash, and banks and ATMs experiencing huge
queues outside, making the entire issue uncontrollable and chaotic.
·
IMPACT
ON THE AGRICULTURE SECTOR
The
agriculture sector was greatly impacted by the sudden and untimely nature of
demonetisation. This is because most of the financial transactions in the
agriculture sector are made in cash. Hence, ceasing the circulation of ₹500 and
₹1,000 banknotes resulted in a setback in the agriculture sector. The farmers
faced difficulty in purchasing seeds, fertilisers, and other necessities for
the plantation of rabi crops, which is usually done in mid-November, hence just
days after the announcement of demonetisation. All these factors led to a huge
drop in the prices of common vegetables like tomatoes and onions due to reduced
demand.
·
IMPACT
ON TAX COLLECTIONS
The
demonetisation of ₹500 and ₹1,000 bank notes was done primarily to curb the
illegal funding of terrorist groups and solve the issue of black money, that is
the money that is not accounted for or the money on which taxes are not paid. Hence, a huge impact was expected
on the tax collections post demonetisation. The income tax department carried
out raids across the country to identify and bust tax-evasive businesses. Huge
sum of cash was seized from states such as Chhattisgarh, Punjab, Maharashtra
and Delhi.
Since
the government permitted the use of demonetised notes to pay the municipal
taxes, the revenue collections saw an all-time high.
DEMONETISATION: MERITS AND DEMERITS
MERITS
·
There was a fall in the rate of
inflation post demonetisation. The country saw a fall in prices of commonly
used commodities like pulses, vegetables, fruits, etc.
·
There was a shift towards a cashless
economy thanks to demonetisation of ₹500 and ₹1,000 banknotes. Since the supply
of new ₹500 and ₹2,000 banknotes was limited, people had no choice but to
resort to online transactions.
·
The stock market experienced a bullish
phase post demonetisation.
·
There was an increase in bank’s lending
for small businesses.
·
The also was an increase in the sales of
automobiles.
DEMERITS
· The economic growth slowed down post demonetisation. The growth fell from 9.1% to 5.7% within a year.
·
The percentage of stalled projects in
real estates experienced an all-time high, thanks to demonetisation, GST and
RERA. Demonetisation also hampered the sale of luxury housing segments.
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(2018). What Demonetisation did to tax collections . The Hindu .
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