On all denominations by 40%. But when we

On November 8th 2016, Prime Minister Modi addressed
the nation and announced the withdrawal of 500 and 1000 denomination notes from
circulation. It was implemented in order to have on impact on the three main
problems of that time they were corruption, counterfeit which is the fake
currency and black money. It also aimed at India’s transition towards cash less
society.

Demonetization is the act of removing currency from its
status as legal tender. It occurs whenever there is change in national
currency. It means the current form or forms of money is withdrawn from
circulation and retired, normally to replace with new notes or coins, Sometimes
a country replaces the old currency with new currency. It can be also said as
killing a currency. This is something that happened in Zimbabwe. Because of
hyperinflation situation, the Zimbabwean government decided to withdraw the old
currency and introduce a new currency which helped them to stabilize the
economy. The other predominant aim of demonetization was to disrupt the cash-centric
and largely untaxed informal financial system by getting a larger slice of the
population onto the digital financial grid.

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In India, it was like a half a demonetization, which means
the government is not trying to kill the currency, it is only an exchange. It
was like 500 and 1000 denomination notes will no longer be accepted as legal
tender but if you have these currencies with you, then you are able to go to
the nearest bank and get them exchanged and the bank will provide us with the
newly issued notes.

When we look at the period between 2011 and 2016, there was
an increase in the circulation of notes of all denominations by 40%. But when
we look at the circulation of 500 rupees, it was increased by 76% and 1000
rupees was increased by 109%. When we compare the period 2011 and 2016, the
Indian economy had grown only by 30%. This showed the disproportionate increase
of high denomination notes in the economy. According to the RBI of India, the
data of March 2016 showed the volume of currency which was in circulation was
amounted to Rs16415 billion. Out of these 500 denomination notes accounted for
47.8% in value and 1000 notes was about 38.6%. Together these notes constituted
more 86% of the total value of the notes which were in circulation. According
to Financial Action Task Force, who looks after the criminal use of
international financial system, the main reason behind the increase of high
denomination notes in the economy was due to the use of high value notes for blackmailing,
cheating, money concealing schemes, drug and people trafficking.

Impacts

1.     
Black Money: Demonetization has choked the
delivery of black money stacked in India. Out of the entire currency in
circulate in the country, black money is estimated at mind-boggling Rupees three
lakh crore. Black cash is not anything but a depredation to the state. Black
money operators run a parallel economy which shakes the very foundation of the
Indian economic system. With Prime minister’s move, all domestic black cash
will both be deposited into the banks with heavy penalty or be destroyed.

2.     
Economy: Demonetization could have a massive
resultant effect at the Indian economy. The smooth-up of illegal cash will
assist flip around the economic system. First, it will carry more borrowings to
the exchequer, enhance inflation outlook and increase India’s gross domestic
product. Second, it’s going to revive funding opportunities and give a boost to
infrastructure and the manufacturing sector. Third, it’s going to assist in
reducing interest fees and lower earnings tax charge.

3.     
Note Bank Politics: The implementation of the
act gave a shock to political parties for whom black money was their lifeline. The
withdrawal of high denomination notes will help in making the election process
transparent and clean. But it has brought hard times for the political parties
and politicians who believed in the concept of buying votes using money.

4.     
Hawala transactions: The act had a severe impact
on hawala rackets. Hawala is a method of shifting money without any actual
money movement. They direction is used as a method to facilitate cash concealing
and terror financing. These rackets run on black cash. With black cash being
wiped out of the market, their operations have come to a standstill.

5.     
Real Estate cleansing: It’s far stated that real
estate is an industry constructed on black cash. The amount of money flowing in
this industry is huge. This act had an impact on rectifying illegal practices
in this industry. This eventually resulted in price decline.

6.     
Agriculture: In this sector we are able to see
excessive cash transactions and therefore the liquidity ratio prevailing in the
rural areas are affected. As farmers face a temporary scarcity of cash in
hand,  it may lead to postpone in charge
which in turn might harm the related companies within the quick period. As
liquidity eases and cashless transactions advantage attractiveness, the
fundamentals might be pushed through the longer term drivers of normal monsoons
and advantageous traction in acreage.

                                                       Prospects

Ban of black money

            This act has resulted in bringing a drastic
drop in the volume of black money in the country. This is due to the unavailable
money are all in 500 and 1000 denominations and there are only two-way outs for
the holders. Those who wanted to exchange their money must visit a bank with
valid ID and address proofs which eventually led to the attention of income tax
department to know the bank balance of the people who tries to exchange. It was
quite clear that the main aim of the act was to identify black money holders in
the country and to take strict legal actions against them. Thus all the
corruptions related to black money came into light.

Fall in fake
currencies

            Nearly ninety percent of fake notes circulated
within the Indian economy system annually are made from high denominations.
Therefore, pretty naturally, the note ban has absolutely abolished fake notes
from the country’s economy and banking sector.

Going toward
Digitalization

            The ban on currency will pressure the human
beings to use more plastic money in the form of debit cards, credit cards, cell
wallets, online transactions etc. This manifestly is going to enable India to
go cashless and the dream of virtual India will come into action. There will be
less environmental issues when there are lesser currencies available in the
economic system of the country.

Holdback
Inflation

            Lesser the cash in the hands of people will
lead them spend less, and they will keep the prices of ordinary commodities at
take a look at. When the amount of black money is less in the market, it will
cause the level of inflation to downfall, as there might less cash compared to the
variety of goods available. This can play an important role in assisting
inflation. The fundamental essential sectors on the way to be benefited from
this inflation are educational and medical sector.

Rational decline in
terrorist and criminal activities

            It is an open mystery that all the black
money available was in fact used to fund all forms of terrorist and criminal
activities within and outside the country. Eventually, this ban will result in
helping to deliver down the extent of terrorist and all types of crook
activities on a larger scale. In another point of view this ban has led to the boost
in national protection. Furthermore, all types of illicit and illegal
activities with the aid of land and underground mafia will come to screeching
standstill. The most affected sector is real estate as this are includes handiest
cash transactions and a huge amount of black transactions.