Demonetization

Demonetization

A currency when stripped of its status as a legitimate and legal tender is called demonetization. It is the change of a national currency by pulling out the existing currency notes from circulation and replacing them with new notes and coins. It was something unheard of until the Indian Government made it a well-known phenomenon on 8th November 2016. The demonetization of 500 and 1000 rupee banknotes was announced, along with the issuance of new 500 and 2000 rupee notes to replace the demonetized currency. The respectable Prime Minister of India insisted that demonetization was done to stop illicit economic activities and diminish the use of illegal and forged cash to fund unlawful activity and terrorism. Let’s find out together if it was successful or not.

The announcement of demonetization resulted in an extended cash shortage period in the coming weeks, and it also resulted in significant disruption all around the economy. People stood in long queues to exchange their banknotes.
This wasn’t the first time demonetization was done in India.
In fact, in the past, it had been done three times. The first time was in the year 1946 when the Reserve Bank of India demonetized Rs. 1000 and Rs. 10000 currency notes.
The second time was in the year 1954 when the new currency of Rs. 1000, Rs. 5000 and Rs. 10,000 were introduced by the Indian Government.
The fourth time was in 1978 by The Morarji Desai Government who demonetized Rs. 1000, Rs. 5000 and Rs. 10000 to stop illegal transactions and anti-social activities.

The following are the reasons given by the Indian Government for carrying out the demonetization of Rs. 500 and Rs. 1000 banknotes in 2016 and it accounted for Rs. 15.44 crore -

To stop the financing of the terrorists.
To recover the black money along with the unearthed black money to enlarge the fiscal space of the Government.
To bring down the interest rate charged in the banking system.
To fix the Indian economy by formalizing it. It will bring about a new formation of a less-cash economy by minimizing the hard cash transaction.
Several incentives have been offered to encourage people to use a digital transaction mode by the Indian Government. Already, a lot has been spoken about the effects of demonetization. The effects on the daily activities of the rural and people living in peri-urban areas due to the note ban are still unknown.
Many studies were conducted to understand the impact of demonetization and the usage of the digital financial platform by poor households who are mainly employed in the informal sector. The research studies found out that there have been dreadful effects on the financial and economic livelihood of poor people. It had also been reported that there was roughly a 20 % drop in their income due to numerous reported delays in their salary payments caused by the shortages of notes.

It was found in an RBI report on digital transactions that there was a general rise in the number of digital transactions after demonetization. It was reported that more than 70 % of India’s population were digitally excluded, showing the rise in digital transactions only included the existing 30 % of India’s population who had access to digital platforms already.
Although the Indian Government had promised that suppressing the unaccounted wealth along with making the economy cashless was the primary intention of demonetization but even so in the coming months, the primary objective kept on shifting. Due to the severe scarcity of cash, there was an instant rise in digital transactions which soon came down as the circulation of notes increased over time, so digital transactions had not increased as the Indian Government promised.

In Madras High Court, demonetization was challenged but had to be dismissed by the court as the court stated that it would stand in the way of the financial strategies of the Indian Government. In order to dismiss the Indian Government’s decision, PIL’s were filed in the Supreme Court of India. All the cases related to demonetization were referred to the constitutional bench by the Supreme Court of India to investigate the lawfulness of the Indian Government’s decision. The Supreme Court of India dismissed 14 petitions in November 2017 which were related to demonetization.
Pleas were asked to file by the petitioners with a constitutional bench who reviewed the cases concerning demonetization. NRI’s were permitted to deposit the demonetized notes by 31st December 2016 by the Indian Government.

Indian Industrialists had a mixed reaction to demonetization, while SBI Chairperson Arundhati Bhattacharya, Managing Director and CEO of ICICI Bank Chanda Kochar admired this move as it promised to fight back against Black Money. HDFC Chairman Deepak Parekh at first embraced the decision, but subsequently said that demonetization has quashed the economy and conveyed doubtfulness about its result. Indian Businessmen like Sajjan Jindal, Narayan Murthy, and Anand Mahindra supported the government's decision as it would speed up e-commerce. On the other hand, Industrialist Rajiv Bajaj deplored not only the implementation and execution of the move, but also the idea of demonetization itself.

Let’s sum up the impact of demonetization on Indian people and the Indian economy:

The most important benefit of demonetization was anticipated to be that the common man will incline towards depositing their money in the bank instead of keeping it in their homes, as it would help save money.
Demonetization would result in better circulation of cash by shifting the money to banks and financial organizations from the people. It was expected to lower bank lending rates by lowering the cost of money transfers.
It was expected to result in more cash in the banks, which would then lead to increased circulation of money. More taxes would be received, and more development projects would be undertaken by the Government.
Demonetization couldn’t curb terrorist activities, even though cash was said to be their main mode of transaction. Fake notes could be taken out from the market, as the bank would check old notes if they are counterfeit before accepting them. Digital transaction usage rose initially and then settled.
It recorded the highest surrender of Maoist and Naxalite groups due to a lack of hard cash, which resulted in an initial decrease in their activities.
The income tax filing of the 2016 financial year was boosted because of demonetization.
In the unorganized and informal sector, demonetization resulted in unemployment.
More than 150 deaths were caused due to a large number of people waiting in the queue for hours to exchange their notes.

Conclusion
Thus, it is not possible to determine whether demonetization has been helpful or has been a disaster for the Indian economy as a whole.

The following are the reasons given by the Indian Government for carrying out the demonetization of Rs. 500 and Rs. 1000 banknotes in 2016 and it accounted for Rs. 15.44 crore -

To stop the financing of the terrorists.
To recover the black money along with the unearthed black money to enlarge the fiscal space of the Government.
To bring down the interest rate charged in the banking system.
To fix the Indian economy by formalizing it. It will bring about a new formation of a less-cash economy by minimizing the hard cash transaction.
Several incentives have been offered to encourage people to use a digital transaction mode by the Indian Government. Already, a lot has been spoken about the effects of demonetization. The effects on the daily activities of the rural and people living in peri-urban areas due to the note ban are still unknown.
Many studies were conducted to understand the impact of demonetization and the usage of the digital financial platform by poor households who are mainly employed in the informal sector. The research studies found out that there have been dreadful effects on the financial and economic livelihood of poor people. It had also been reported that there was roughly a 20 % drop in their income due to numerous reported delays in their salary payments caused by the shortages of notes.

The most important benefit of demonetization was anticipated to be that the common man will incline towards depositing their money in the bank instead of keeping it in their homes, as it would help save money.
Demonetization would result in better circulation of cash by shifting the money to banks and financial organizations from the people. It was expected to lower bank lending rates by lowering the cost of money transfers.
It was expected to result in more cash in the banks, which would then lead to increased circulation of money. More taxes would be received, and more development projects would be undertaken by the Government.
Demonetization couldn’t curb terrorist activities, even though cash was said to be their main mode of transaction. Fake notes could be taken out from the market, as the bank would check old notes if they are counterfeit before accepting them. Digital transaction usage rose initially and then settled.
It recorded the highest surrender of Maoist and Naxalite groups due to a lack of hard cash, which resulted in an initial decrease in their activities.
The income tax filing of the 2016 financial year was boosted because of demonetization.
In the unorganized and informal sector, demonetization resulted in unemployment.
More than 150 deaths were caused due to a large number of people waiting in the queue for hours to exchange their notes.

Conclusion
Thus, it is not possible to determine whether demonetization has been helpful or has been a disaster for the Indian economy as a whole.

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