Integrated Workshop

Executive MBA
Integrated Workshop Submission: Oct 2019

Student Name: Nidhi Kadam Enrolment Number: 161300912036

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Integrated Workshop

Demonetization – Long Term Impact

Introduction............................................................................................................................3
Demonetization............................................................................................................3
Remonetization.............................................................................................................3
The recent example from India...........................................................................3
Reasons behind Demonetization (& Remonetisation) –........................................3
Example of the Euro: forming currency union...........................................3
Analysis....................................................................................................................................4
Pros......................................................................................................................................4
Digital India....................................................................................................................4
Personal Finance..........................................................................................................5
Tax Payments.................................................................................................................5
Cons.....................................................................................................................................5
Black Money gets whitened.....................................................................................5
Terror Funding unimpacted......................................................................................5
MSMEs (Medium, Small and Micro Enterprises)...............................................5
Real Estates...................................................................................................................6
Liquidity crunch............................................................................................................6
GDP: The indicator of overall growth...................................................................6
Sector-wise long-term impact.................................................................................7
Overall consumption...................................................................................................7
Conclusion..............................................................................................................................8
In justification of above views.....................................................................................8
Current State – India’s position slips in the world...........................................8
Forecasts that matter – losing faith over time..................................................8

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Introduction
A lot has been said about ‘demonetization’ in the print, electronic and social
media. There were both positive and negative impacts of demonetization and
subsequent re-monetization on Indian business. To begin with, lets review the
definitions of the two important economic terms and the history from across the
world and India.

Demonetization
It is the act of stripping a currency unit of its status as legal tender i.e. a
change of national currency. To implement it, the current form of money is pulled
from circulation and retired, often to be replaced with new notes or coins.
Sometimes, a country completely replaces the old currency with new currency.

Remonetization
The opposite of demonetization is re-monetization, in which a new form of
payment is restored as legal tender. They often go together.

The recent example from India

On Nov. 8, 2016, the Indian government declared to demonetize, with
immediate effect, the Rs. 500/- and Rs. 1000/- notes, the two biggest
denominations in country’s currency system. These notes accounted for 86% of
the country’s circulating cash. Those who possessed them, had to deposit them
in their bank accounts until the end of the year. The remonetisation option was to
exchange the demonetised currency for newly introduced Rs. 2000/- and Rs.
500/- bills.

Reasons behind Demonetization (& Remonetisation) –

Demonetization is undertaken by nations for several reasons.

 It may be used as a tool to stabilize a currency.

 It may fight inflation.
 It may facilitate trade and access to markets.
 It may push informal economic activity into more transparency.
 It may help to keep away from black and grey markets.
 It may help form currency unions.

Example of the Euro: forming currency union

This is an example of demonetization for trade purposes when the nations
of the European Union officially began to use the euro as their everyday currency
in 2002. When the physical euro bills and coins were introduced, the old national
currencies, such as the German mark, the French franc, and the Italian lira were
demonetized. However, these varied currencies remained convertible into Euros
at fixed exchange rates for a while to assure a smooth transition.
Indian government used demonetization as a tool to modernize a cash-
dependent developing economy and to combat corruption and crime i.e.
counterfeiting, tax evasion. We will see the impact of demonetisation in about 3
years of introducing it.

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Analysis
Removing the legal tender status of a unit of currency is a drastic intervention
into an economy because it directly effects the medium of exchange used in all
economic transactions. While it can help stabilize existing problems, it may also
cause chaos in an economy, especially if undertaken suddenly or without
warning.

Pros
Among various positive impacts, faster adoption of alternative payments
technologies such as e-wallets and point-of-service cards has promoted
transparency in cash movements and less dependency on cash centric economy
as India. Below are some more eye-opening analyses -

Digital India

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Pushing India towards becoming a cashless economy was another reason that
demonetization was publicized for. People turned towards digital transactions for
everything from buying groceries from a roadside vendor to paying utility bills
during the time of demonetization. However, as the flow of cash into the
economy began to increase, the use of these apps and digital wallets saw a slide
once again

Personal Finance

Piggybanks have been transformed to savings accounts as people turn towards

increasing bank balances instead of stashing emergency cash in different corners
of the house. People finally began to trust the digital payment systems; because
that was the only option they were left with. Demonetization proved that Indians
can strive and adapt to any changes and made people financially aware about
the different spending options. The government’s efforts to revamp the currency
system provided people with a boost to use the cash that was lying around and
invest it in a more productive way. The more native and conservative people also
opened towards the era of plastic cash and made several Indians tech friendly

Tax Payments

Pushing Indians to deposit and account the cash lying in their house also meant a
rise in the tax payments for the country. According to government reports the
income tax payers saw a record increase in the post demonetization era. 9.1
million New taxpayers were added to the slab which was an 80% rise over the
typical yearly rise. This increase in the number of taxpaying citizens in the
country has been credited to demonetization. This increase was also resonated in
IT returns filing and advance tax payment

Cons

Black Money gets whitened

One of the most important points that pushed people to support demonetization
was its associating with bringing an end to the black money problem in India.
But, almost 99% of the money was deposited back to RBI. The statistics revealed
that either the hoarders found a way to legitimize their black money or did not
hold them in the form of cash. But this was known by many before the RBI
reports as well.

Terror Funding unimpacted

The second reason to support demonetization was its role in curbing terrorism by
increasing the obstacles in terror funding. Terrorist organization were known to
use fake Indian currency notes for funding their projects and the government
believed that this could be contained with the help of demonetization. The
Income Tax department seized Rs. 474.37 crore in new and old currency from

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November 9, 2016 to January 4, 2017 (the demonetization period). However,

there are no reports if the money seized had any association with terror funding.

MSMEs (Medium, Small and Micro Enterprises)

Demonetization had a lasting effect on MSMEs. Various medium and small

enterprises turned towards digitalization, however, the micro industries were
affected by the worst of its wrath. The micro industry owners were not a part of
the black economy and they were clearly unprepared for the effects of
demonetization. Many micro industry workers returned back to villages and the
growth rate of these companies went as low as 1%. The MSME sector has been
recovering from the drastic changes and its impact on the revenue.

Real Estates
Real Estate sector came to a stand still and is still gasping for buyers of the
constructed and half constructed inventory without buyers. This has resulted in
poor cash flow leading to a poor demand. Initiatives such as interest waivers on
home loans, the government’s push for affordable housing through Pradhan
Mantri Awas Yojana (PMAY) and the ‘Housing for all by 2022’ mission have come
to the forefront over the past one year. Various policy initiatives, amendments
and reforms were all aimed at making the real estate sector more transparent,
organised and fundamentally stronger. Demonetisation played a significant role
in this process.

In the long term, the real estate sector is likely to regain a faster growth
trajectory and is estimated to contribute around 13 per cent to India’s gross
domestic product by 2028. This optimistic forecast is very much attainable
because the various reforms now redefining the realty landscape in India will not
only incrementally boost consumer sentiment but also improve investment
inflows from foreign and domestic institutional investors.

Liquidity crunch

India has a substantial informal economy that runs on cash. A large portion of
this involves legitimate activities that are below the tax threshold and therefore
should not be thought of as part of the “black” economy. Agriculture, for
example, constitutes around 15 per cent of GDP, runs mainly on cash, and is
mostly tax-exempt. The farm economy was hit by the sudden withdrawal of cash
from the system during demonetisation. The fact that sales of ₹5 biscuits have
declined tells its own story.

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The Centre for Monitoring Indian Economy reported that 1.5 million jobs were lost
in the unorganised sector during January-April 2017, just after demonetisation

GDP: The indicator of overall growth

Gross domestic products (GDP) is a monetary measure of the market value of all the final
goods and services produced in a specific time period, often annually.
India’s GDP
India is amid a very worrying economic slowdown. Last quarter’s GDP growth
rate of 5 per cent is the lowest it has been in six years. Nominal GDP growth is
also at a 15-year low. This slowdown has affected multiple key sectors of the
economy.

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Sector-wise long-term impact

Automotive and ripple effect

The automotive sector is in a crisis with a drastic decline in production.
Over 3.5 lakh jobs have already been lost. Automotive hubs such as Manesar,
Pimpri-Chinchwad and Chennai are experiencing a lot of pain. The ripple effects
are now being felt across other allied industries. Even more worrying is the
slowdown in truck production, which is a clear indicator of a slowing demand for
goods and essential commodities. The overall slowdown has taken a toll on the
service sector as well, which has experienced a slowdown in job creation since
earlier this year.
Rural Sectors and Unemployment
The rural economy continues to suffer from inadequate crop prices.
Unemployment is at a 45-year high for 2017-18. The overall situation is dire.

Overall consumption

Consumption, is a reliable engine to propel economic growth, has slowed to

an 18-month low.

The drop-in consumption is also affected by the limited availability of

consumer loans and a drop in household savings. We are already experiencing
the short-term effects of the resulting decline in demand.

Conclusion
Indian economist and politician Manmohan Singh who served as the Prime
Minister of India from 2004 to 2014 and as the Finance minister from 1991 to
1996, stated that, for monumental blunders like demonetisation, sector-wise
piecemeal approaches wouldn’t be enough. He did not promote such
economic actions during his tenures as Finance Minister and Prime Minister of
India, respectively in 1991 India when was at verge of an economic collapse and
in 2008 when there was major global financial crisis.

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3 years from demonetisation now we suffered with prolonged economic

slowdown due to both structural and cyclical forces at the same time. The first
step in such a crisis is to acknowledge that we are facing one. The government
must instil confidence in the people and send a message to the world.

In justification of above views

Current State – India’s position slips in the world

India's GDP-Current
State - Animated Slide.pptx

Forecasts that matter – losing faith over time

While there are other factors (besides demonetization) that should be corrected –

 Simplify and Rationalise the GST regime even at some loss of

revenue in the short term
 Find innovative ways to kickstart rural consumption

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 Revive agriculture
We cannot deny that the overall economy trembled down starting from the point
when demonetization was introduced unplanned, followed by everchanging GST
norms and ways to correct sectors one by one.

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