On November 8th 2016, Prime Minister Modi addressedthe nation and announced the withdrawal of 500 and 1000 denomination notes fromcirculation. It was implemented in order to have on impact on the three mainproblems of that time they were corruption, counterfeit which is the fakecurrency and black money. It also aimed at India’s transition towards cash lesssociety. Demonetization is the act of removing currency from itsstatus as legal tender. It occurs whenever there is change in nationalcurrency.
It means the current form or forms of money is withdrawn fromcirculation and retired, normally to replace with new notes or coins, Sometimesa country replaces the old currency with new currency. It can be also said askilling a currency. This is something that happened in Zimbabwe. Because ofhyperinflation situation, the Zimbabwean government decided to withdraw the oldcurrency and introduce a new currency which helped them to stabilize theeconomy. The other predominant aim of demonetization was to disrupt the cash-centricand largely untaxed informal financial system by getting a larger slice of thepopulation onto the digital financial grid.In India, it was like a half a demonetization, which meansthe government is not trying to kill the currency, it is only an exchange. Itwas like 500 and 1000 denomination notes will no longer be accepted as legaltender but if you have these currencies with you, then you are able to go tothe nearest bank and get them exchanged and the bank will provide us with thenewly issued notes.
When we look at the period between 2011 and 2016, there wasan increase in the circulation of notes of all denominations by 40%. But whenwe look at the circulation of 500 rupees, it was increased by 76% and 1000rupees was increased by 109%. When we compare the period 2011 and 2016, theIndian economy had grown only by 30%. This showed the disproportionate increaseof high denomination notes in the economy. According to the RBI of India, thedata of March 2016 showed the volume of currency which was in circulation wasamounted to Rs16415 billion. Out of these 500 denomination notes accounted for47.
8% in value and 1000 notes was about 38.6%. Together these notes constitutedmore 86% of the total value of the notes which were in circulation. Accordingto Financial Action Task Force, who looks after the criminal use ofinternational financial system, the main reason behind the increase of highdenomination notes in the economy was due to the use of high value notes for blackmailing,cheating, money concealing schemes, drug and people trafficking.Impacts1. Black Money: Demonetization has choked thedelivery of black money stacked in India.
Out of the entire currency incirculate in the country, black money is estimated at mind-boggling Rupees threelakh crore. Black cash is not anything but a depredation to the state. Blackmoney operators run a parallel economy which shakes the very foundation of theIndian economic system. With Prime minister’s move, all domestic black cashwill both be deposited into the banks with heavy penalty or be destroyed.2. Economy: Demonetization could have a massiveresultant effect at the Indian economy. The smooth-up of illegal cash willassist flip around the economic system. First, it will carry more borrowings tothe exchequer, enhance inflation outlook and increase India’s gross domesticproduct.
Second, it’s going to revive funding opportunities and give a boost toinfrastructure and the manufacturing sector. Third, it’s going to assist inreducing interest fees and lower earnings tax charge.3.
Note Bank Politics: The implementation of theact gave a shock to political parties for whom black money was their lifeline. Thewithdrawal of high denomination notes will help in making the election processtransparent and clean. But it has brought hard times for the political partiesand politicians who believed in the concept of buying votes using money.4.
Hawala transactions: The act had a severe impacton hawala rackets. Hawala is a method of shifting money without any actualmoney movement. They direction is used as a method to facilitate cash concealingand terror financing. These rackets run on black cash.
With black cash beingwiped out of the market, their operations have come to a standstill.5. Real Estate cleansing: It’s far stated that realestate is an industry constructed on black cash. The amount of money flowing inthis industry is huge. This act had an impact on rectifying illegal practicesin this industry. This eventually resulted in price decline.6.
Agriculture: In this sector we are able to seeexcessive cash transactions and therefore the liquidity ratio prevailing in therural areas are affected. As farmers face a temporary scarcity of cash inhand, it may lead to postpone in chargewhich in turn might harm the related companies within the quick period. Asliquidity eases and cashless transactions advantage attractiveness, thefundamentals might be pushed through the longer term drivers of normal monsoonsand advantageous traction in acreage. ProspectsBan of black money This act has resulted in bringing a drasticdrop in the volume of black money in the country. This is due to the unavailablemoney are all in 500 and 1000 denominations and there are only two-way outs forthe holders. Those who wanted to exchange their money must visit a bank withvalid ID and address proofs which eventually led to the attention of income taxdepartment to know the bank balance of the people who tries to exchange.
It wasquite clear that the main aim of the act was to identify black money holders inthe country and to take strict legal actions against them. Thus all thecorruptions related to black money came into light.Fall in fakecurrencies Nearly ninety percent of fake notes circulatedwithin the Indian economy system annually are made from high denominations.
Therefore, pretty naturally, the note ban has absolutely abolished fake notesfrom the country’s economy and banking sector.Going towardDigitalization The ban on currency will pressure the humanbeings to use more plastic money in the form of debit cards, credit cards, cellwallets, online transactions etc. This manifestly is going to enable India togo cashless and the dream of virtual India will come into action. There will beless environmental issues when there are lesser currencies available in theeconomic system of the country. HoldbackInflation Lesser the cash in the hands of people willlead them spend less, and they will keep the prices of ordinary commodities attake a look at.
When the amount of black money is less in the market, it willcause the level of inflation to downfall, as there might less cash compared to thevariety of goods available. This can play an important role in assistinginflation. The fundamental essential sectors on the way to be benefited fromthis inflation are educational and medical sector.
Rational decline interrorist and criminal activities It is an open mystery that all the blackmoney available was in fact used to fund all forms of terrorist and criminalactivities within and outside the country. Eventually, this ban will result inhelping to deliver down the extent of terrorist and all types of crookactivities on a larger scale. In another point of view this ban has led to the boostin national protection. Furthermore, all types of illicit and illegalactivities with the aid of land and underground mafia will come to screechingstandstill.
The most affected sector is real estate as this are includes handiestcash transactions and a huge amount of black transactions.