1.

1 CHAPTER -1

INTRODUCTION

Demonetization means a withdrawal of particular form of currency from circulation. It is a move that
shock to the whole economy. In India, this is the third time demonetization take place. The banking sector in
India, currently facing the problem of NPA. There are various banks in India like commercial bank which
are nationalized, regional rural bank, SBI. Some foreign banks are also there. Demonetization is the act of
stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national
currency: The current form or forms 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.
Demonetization can cause chaos or a serious downturn in an economy if it goes wrong. Demonetization has
been used as a tool to stabilize the currency and fight inflation, to facilitate trade and access to markets, and
to push informal economic activity into more transparency and away from black and grey markets.

In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal
tender character of the old bank notes in the denominations of 500 and 1000 was introduce. Demonetization
is not a new concept in the past also it has been utilised by various countries as well as India to curb
currency some failed very badly with this move. Zimbabwe, Fiji, Singapore and Philippines were other
countries to have opted for currency demonetization.

The argument posited in favour of demonetisation is that the cash that would be extinguished
would be “black money” and hence, should be rightfully extinguished to set right the perverse incentive
structure in the economy. While the facts are not available to anybody, it would be foolhardy to argue that
this is the only possibility. Therefore, it is imperative to evaluate the short run and medium-term impacts that
such a shock is expected to have on the economy. Further, the impact of such a move would vary depending
on the extent to which the government decides to remonetise. This paper elucidates the impact of such a
move on the availability of credit, spending, and levelling of activity and government finances.

MEANING

Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is
necessary whenever there is a change of national currency. The old unit of currency must be retired and
replaced with a new currency unit. The opposite of demonetization is remonetization where a form of
payment is restored as legal tender.
 Demonetization is a radical monetary step in which a currency unit’s status as a legal tender is declared
invalid. This is usually done whenever there is a change of national currency, replacing the old unit with a
new one. Such a step, for example, was taken when the European Monetary Union nations decided to adopt
Euro as their currency. However, the old currencies were allowed to convert into Euros for a period of time
in order to ensure a smooth transition through demonetization. Zimbabwe, Fiji, Singapore and Philippines
were other countries to have opted for currency demonetization. Denomination is a proper description of a
currency amount, usually for coins or banknotes.

Denominations may also be used with other means of payment like gift cards. For example, five euros is the
denomination of a five euro note.

DEFINITION:

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is
a change of national currency: The current form or forms 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. The opposite of demonetization is remonetisation, in which a form of payment is
restored as legal tender.

Process of removing a currency from general usage, or circulation. Gold was demonetized in this way when
it ceased to be used as an everyday currency.

Ending something (e.g. gold or silver) as no longer the legal tender of a country.

INTRODUCTION TO DEMONITIZATION:

On 8 November 2016, the Government of India announced the demonetization of all ₹500 (US$7.40)
and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series. The government claimed that the action
would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal
activity and terrorism. The sudden nature of the announcement—and the prolonged cash shortages in the
weeks that followed—created significant disruption throughout the economy, threatening economic output.
The move was heavily criticized as poorly planned and unfair, and was met with protests, litigation, and
strikes.

Prime Minister of India Narendra Modi announced the demonetization in an unscheduled live
televised address at 20:00 Indian Standard Time (IST) on 8 November. In the announcement, Modi declared
that use of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series would be invalid past midnight,
and announced the issuance of new ₹500 and ₹2000 banknotes of the Mahatma Gandhi New Series in
exchange for the old banknotes.

The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the very next day after the
announcement. In the days following the demonetization, the country faced severe cash shortages with
severe detrimental effects across the economy. People seeking to exchange their bank notes had to stand in
lengthy queues, and several deaths were linked to the inconveniences caused due to the rush to exchange
cash.

Initially, the move received support from several bankers as well as from some international
commentators. It was heavily criticized by members of the opposition parties, leading to debates in both
houses of parliament and triggering organized protests against the government in several places across India.
The move is considered to have reduced the country's GDP and industrial production. As the cash shortages
grew in the weeks following the move, the demonetization was heavily criticized by prominent economists
and by world media.

In India’s case, the move has been taken to curb the menace of black money and fake notes by
reducing the amount of cash available in the system. It is also interesting to note that this was not the first
time the Government of India has gone for the demonetization of high-value currency. It was first
implemented in 1946 when the Reserve Bank of India demonetized the then circulated Rs 1,000 and Rs
10,000 notes. The government then introduced higher denomination banknotes in Rs 1000, Rs 5000 and Rs
10000 in a fresh avatar eight years later in 1954 before the Morarji Desai government demonetized these
notes in 1978.

 Evaluation:

Demonetization is the stripping a currency unit of its status as legal tender. Demonetization becomes a
necessary when there is a change of national currency. The old unit of currency has to be retired and
replaced with a new unit of currency. It include either introducing new notes or coins of the same
denomination or completely replacing the old denomination with the new denomination which is often
carried out as an ambush on the black money and market. The opposite of demonetization is called as
remonetisation in which a form of payment is restored as legal tender. Currency is a commonly accepted
form of money, including coins and paper notes, which is issued by a government and circulated within the
economy. As used a medium of exchange for goods and services, currency forms the basis for any trade. The
currency or legal tender is issued by a country’s central bank or a monetary authority. The national currency
of a country is usually the principal currency used for most of the financial transactions in that country.
Basically each country has its own currency as Switzerland's official currency is the Swiss franc,

and Japan’s official currency is called the yen. An exception would be the euro, which is used as the
currency for a group of European countries called European Union. In India the currency is called the Indian
Rupees (INR). In most of the cases, the central bank of a country has the absolute right to issue money or the
currency for circulation.

BREAKS DOWN THE DEMONETIZATION:

There are several reasons why nations demonetize their local units of currency:

1.1.1 To fight against the inflation

1.1.2 To fight the corruption and crime (Fake currency, Tax evasion)
1.1.3 To depress a cash-dependent economy
1.1.4 To assist the trade
1.1.5 To promote a Cashless economy
1.1.6 To eradicate the unaccounted money
1.1.7 Crackdown on Terrorism and Nationalism

DEMONETIZATION OF CURRENCY:

Demonetization of currency means discontinuity of the particular currency from circulation and replacing it
with a new currency. In the current framework it is the exclusion of the 500 and 1000 . International Journal
of Research in Social Sciences http://www.ijmra.us, Email: editorijmie@gmail.com denomination currency
notes as a legal tender. The government stated that the objectives behind the demonetization policy. These
are as follows:

1. First, it is an effort to make India corruption free.

2. Second it is done to stop the unaccounted money.

3. Third to control the growing price rises.

4. Fourth to curb the funds to illegal activities.

 5. Fifth to make the people accountable for every rupee they have and pay income tax return.

6. Finally, it is an endeavor to compose a cashless society and make a Digital India.

HISTORY OF DEMONITIZATION:

Paper Money as a legal tender was first introduced in the late eighteenth century. The Victoria portrait series
was initially issued in few denominations of 10, 20, 50, and 100. Then the Victoria portrait was replaced by
the following under print series in 1867. Rs.1000 and Rs.10,000 currency notes were circulated between
1938 and 1946. Notes in Ashoka Pillar watermark series in Rs 10 denomination were first issued between
the year 1967 and 1992, Rs 20 in 1972 and in 1975, Rs 50 in 1975 and 1981 and Rs 100 was launched
between 1967-1979. The banknotes issued during this period carried the symbols which represent the
science and technology, patron and orientation to Indian arts. In 1980, the legendary Satyameva Jayate —
‘truth alone shall prevail’ — was incorporated under the national emblem for the first time ever. The highest
of all denominations ever printed and circulated by the Reserve Bank of India (RBI) was the Rs 10,000 note
in 1938 and was issued again in 1954. Mahatma Gandhi (MG) series banknotes were issued in 1996 in the
denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (in August 2001), Rs 50
(March 1997), Rs 100 (in June 1996), Rs 500 (in October 1997) and Rs 1,000 (in November 2000). The
Mahatma Gandhi Series – 2005 bank notes were issued in the denomination of Rs 10, Rs 20, Rs 50, Rs 100,
Rs 500 and Rs 1,000 and carried some additional/extra security features as compared

The Southern Regional Conference on Management Education – A Global Perspective, Organized by PSG
Institute of Management, Coimbatore – 06.01.2017 to the 1996 MG series. A new redesigned series of
Rs500 banknotes and a new denomination of Rs 2000 banknote are added and are in circulation since 10th
of November 2016.

First Demonetization:

12 Jan 1946 following the action in several foreign countries, including France, Belgium and the U.K., the
Government of India decided on demonetization of high denomination notes, in January 1946. It is
interesting that as early as April7, 1945, suggested similar action in India as 'one more concrete example for
the Indian Government to follow in its fight against black market money and tax evasions which have now
assumed enormous proportions. The first currency ban was announced as on 12th January, 1946(Saturday)
by RBI headquarter. At that time currency notes of 1000 and 10,000 were totally detached from the
economy. Both these notes were re-introduced in the year 1954. For that time people had given a time period
of 10 days to replace these notes. Further that was extended to 15 days more where by people has to give
reasons why they had not exchanged it in previous 10days. It had not twisted much effect for that time. At
the end of 1947 out of ISSN: 2249-2496 Impact Factor: 7.081 459 International Journal of Research in
Social Sciences http://www.ijmra.us, Email: editorijmie@gmail.com Rs.143.97 crores, notes of only Rs.
134.9 crores were exchanged. Thus notes worth Rs. 9.07 were conceivably ―Demonetized.

Second Demonetization:

On 16 Jan 1978, the ordinance was announced by R. Janaki Raman a senior official of RBI, and at the time of
Moraji Desai led Janata party. via All India Radio at 9 AM. The Ordinance provided that all banks and
government treasuries would be closed on 17 January 1978 for transaction of 'all business except the
preparation and presentation or the receipt of returns' that were needed to be completed in the context of
demonetization. This time public was given even lesser time of 3 days to exchange Rs 1000, Rs 5000 and Rs
10000 notes. Thus the second demonetization also failed because most of the citizens were not having the
1000, 5000 and 10000 currency so this movement didn’t have more impact on the citizens.

Latest demonetization in India On November 8 evening at 8:15 p.m., Prime Minister Modi, in his televised
address to the nation, made Rs 500 and Rs 1000 notes invalid, saying that it was aimed at curbing the
―disease‖ of corruption and black money which have taken deep root. People holding notes of Rs 500 and
Rs 1,000 can deposit the same in their bank and post office accounts from November 10 till December 30.
All notes in lower denomination of Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2 and Re 1 and all coins continued
to be valid, and new notes of Rs 2,000 and Rs 500 were introduced. There was no change in any other form
of currency exchange be it cheque, DD, payment via credit or debit cards etc. The total value of old Rs.500
and Rs.1000 notes in the circulation is to the tune of Rs.14.2 trillion, which is about 85% of the total value of
currency in circulation. This movement rendered everyone surprised as this was momentous decision and
unexpected one which was declared without any prior information. Prime Minister Narendra Modi claimed
that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund
illegal activity and terrorism.
The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed,
which created significant disruption throughout the economy. People seeking to exchange their banknotes
had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

YEAR MONTHS CURRENCY NOTES

1946 JANUARY RS 500, 1000, 10000

1978 JANUARY RS 1000, 5000, 10000

2016 NOVEMBER RS 500, 1000

Along with India many countries in the world had done demonetization in the history. Almost
countries that had done demonetization had some common objectives of demonetization which were to curb
corruption and black money and their government decided to demonetize their higher denomination notes to
rid of these problems. Here is the list of some countries that had done demonetization:
List of countries in the world that had done Demonetization :

Country Name Year Objective Results

Nigeria 1984 To fix, debt burdened Economy collapsed

and inflation ridden
economy

Soviet Union 1991 Fight against unearned The economic system of

income, smuggling and the USSR was essentially
corruption crushed

Ghana 1982 To control black money People turned to foreign

currency

Myanmar 1987 To curb black money led political dispute and

died thousands of people

North Korea 2010 To lower down the Miserably Failed

 market of black money

Zimbabwe 2010 Sliding out from Failed

Hyperinflation

Australia 1996 To the curb black money Success

crisis and improve
security features on the
notes

Britain 1971 To bring uniformity in failed in other countries

currency except Britain

Zaire 1990 A plan to withdraw Failed

obsolescent currency
from the system

USA 1969 Due to black money Success

Pakistan 2015 To get rid from Black Messed Up

Money, Counterfeit
Currency

Germany 1923 Due to high domestic Inflation fell

prices

BACKGROUND:
The plan to demonetise the ₹500 and ₹1,000 banknotes was initiated between six and ten months before it
was a report by the State Bank of India (SBI) analysed possible strategies and effects of demonetisation. In
May 2016, the Reserve Bank of India had started preparing for new banknotes and confirmed the design
of ₹2,000 banknotes in August 2016. The printing of new banknotes started in October when the news
stories of forthcoming new banknotes appeared in the media. On 27 October 2016, the Hindi daily Dainik
Jagran  published a report quoting RBI sources speaking of the forthcoming of ₹2,000 banknotes alongside
withdrawal of ₹500 and ₹1,000 banknotes. On 21 October 2016, The Hindu Business Line had also
published a report on the forthcoming ₹2,000 banknote.
The Union cabinet was informed about the plan on 8 November 2016 in a meeting in the evening called by
the Indian Prime Minister Narendra Modi. Soon after the meeting, Modi announced the demonetisation in an
unscheduled live national televised address at 20:15 IST. He declared circulation of
all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the
same day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New
Series in exchange for the demonetised banknotes.
There is a background to the current decision of demonetization of 500 and 1000 rupee notes. The
government has taken a gallant steps in this direction much before its November 8, 2016 announcement.
1. Firstly, the government had urged the people to create the bank accounts under Jan Dhan Yojana. They
were asked to deposit all the money in their Jan Dhan accounts and do their future transaction through
banking methods only.
2. Secondly, the government had initiated a tax declaration of the income and had given a deadline for this
purpose upto 30 October, 2016. With the help of this method, the government was able to mop up a huge
amount of undeclared income.
3. Besides, there were many who still hoarded the unaccounted money, and in order to tackle them; the
government had decided the policy of current decision for the demonetization of Rs500 and 1000 currency
notes.
There are multiple reasons why nations demonetize their local units of currency. Some reasons include to
combat inflation, to combat corruption, and to discourage a cash system. The process of demonetization
involves either introducing new notes or coins of the same currency or completely replacing the old currency
with new currency.
The Indian government had demonetized bank notes on two prior occasions—once in 1946 and then again in
1978—and in both cases, the goal was to combat tax evasion by "black money" held outside the formal
economic system. In 1946, the pre-independence government hoped demonetization would penalize Indian
businesses that were concealing the fortunes amassed supplying the Allies in World War II. In 1978, the
Janata Party coalition government demonetized banknotes of 1000, 5000 and 10,000 rupees, again in the
hopes of curbing counterfeit money and black money.
In 2012, the Central Board of Direct Taxes had recommended against demonetization, saying in a report that
"demonetization may not be a solution for tackling black money or economy, which is largely held in the
form of benami properties, bullion and jewellery." According to data from income tax probes, black money
holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a
successful strategy.
On 28 October 2016 the total banknotes in circulation in India was ₹17.77 trillion (US$260 billion). In terms
of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in
circulation valued to ₹16.42 trillion (US$240 billion) of which nearly 86% (around ₹14.18 trillion (US$210
billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the
report stated that 24% (around 22.03 billion) of the total 90266 million banknotes were in circulation.
In the past, the Bharatiya Janata Party (BJP) had opposed demonetization. BJP spokesperson
MeenakshiLekhi had said in 2014 that "The aamaurats and the aadmis (generalpopulation), those who are
illiterate and have no access to banking facilities, will be the ones to be hit by such diversionary measures."
In June, the Government of India had devised the Income Declaration Scheme, that lasted till 30 September
2016, providing an opportunity to citizens holding black money and undeclared assets to avoid litigation and
come clean by declaring their assets, paying the tax on them and a penalty of 45% thereafter.
In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest
denomination notes. These notes accounted for 86% of the country’s cash supply. The government’s goal
was to eradicate counterfeit currency, fight tax evasion, eliminate black money gotten from money
laundering and terrorist financing activities, and promote a cashless economy. By making the larger
denomination notes worthless, individuals and entities with huge sums of black money gotten from parallel
cash systems were forced to convert the money at a bank which is by law required to acquire tax information
from the entity. If the entity could not provide proof of making any tax payments on the cash, a tax penalty
of 200% of the tax owed was imposed.
In 2015, the Zimbabwean government demonetized the Zimbabwean dollar as a way to combat the country’s
hyperinflation that was recorded at 231,000,000%. The 3-month process involved expunging the
Zimbabwean dollar from the country’s financial system and solidifying the US dollar, Botswana pula, and
South African rand as the country’s legal tender in a bid to stabilize the economy.
Another example of demonetization occurred when the nations of the European Monetary Union adopted the
euro in 2002. In order to switch to the euro, authorities first fixed exchange rates for the varied national
currencies into euros. When the euro was introduced, the old national currencies were demonetized.
However, the old currencies remained convertible into euros for a while so that a smooth transition through
demonetization would be assured. The Coinage Act of 1873 demonetized silver in favor of adopting the gold
standard as the legal tender of the United States. The withdrawal of silver from the economy resulted in a
contraction of the money supply, which subsequently led to a 5-year economic depression in thecountry. In
response to the dire situation and pressure from silver miners and farmers, the Bland- Allison Act
remonetized silver as legal tender in 1878.
OBJECTIVES :
1) Removing black money from country: India has a huge parallel black economy which the government
can’t tax and which forms an island away from the main economy. Nobody knows the exact figure but it has
been estimated to be in the range tens of thousands of crores of Rupees in the past to lakhs of crores today.
You can be sure that a good chunk of this will come into the main economy. It is a Herculean task to merge
the two streams of white and black money and a great beginning has already taken place.
2) Stopping of corruption: by removing the currency notes from circulation, it will have a direct impact on
corruption. People who have this notes will now be left with nothing.
3) Stopping terror funds: because of demonetization, the people or organizations who used to fund terror
groups will be now sitting without any works, they will naturally die and that too with starvation.
4) Curbing fake notes: demonetization will also stop the circulation of fake notes in the economy (although
the amount of fake notes revolving in the economy was around 400 crores).
5) Stopping illegal dabba trading: due to demonetization, the illegal share trading and dabba trading will
cease to exist. This will ensure stability in share markets,especially at these 'times of turbulence'
6) The Uttar-Pradesh elections: it is generally seen that, there is ample liquidity in the states, where elections
are to happen, this thing is considered as vote bank and politicians buy votes of people by offering them
money, if they vote for them. now because of demonetization, vote bank system will not be in existence (the
proof here is currency notes, which were found from river ganga). as an ultimate result, we would see
transparent elections
7)The betting on US presidential election results: it seems that Modiji is well aware of the fact that Indians
are a master in betting at anything like pro!!!! Because of his address to nation at 8:00 pm, there will be no
betting done on the us presidential election results, or at least its quantum would be less than, what it
should be have earlier..
8) To send a clear message that this government is well inclined towards working for the development of
nation: because of his bold step, it will send a clear message that this government is well inclined towards
development of nation. it will also send a message to the international community, that the government is
doing constant efforts to make India a better place to invest and a better place to do business.
REASONS FOR DEMONETIZATION
The reasoning given by the Indian Prime Minister Narendra Modi was:
1) To tackle black money in the economy.
2) To lower the cash circulation in the country which "is directly related to corruption in our country,"
according to PM Modi.
3) To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in
India.
4) The move is estimated to scoop out more than Rs 5 lakh crore black money from the economy, according
to Baba Ramdev, a staunch Modi supporter.

Advantages of Demonetization:

First of all, demonetization significantly reduces corruption from taking place. It certainly puts a full stop to
corrupt practices. Demonetization significantly hampers individuals dealing in black money from carrying out
their evil ideas. Most noteworthy, corrupt people in the future will feel scared of hoarding cash.

Demonetization improves the banking system significantly. Demonetization would certainly infuse more
sophistication in the banking system. The economy of a nation will move into a cashless direction due to
demonetization. Moving in the cashless direction would mean better access to credit and revamping of financial
operations.

Another notable advantage of demonetization is reduced liability for the government. This is because
demonetization reduces the risk and liability of liquid currency. Furthermore, handling soft money is far easier
than handling hard money. Also, every note is a liability for the government. Hence, demonetization reduces
this liability by removing certain notes from circulation. Therefore, the old currency becomes useless for those
who don’t disclose their income.
Demonetization will lead to fewer instances of tax avoidance. This certainly is a massive advantage of
demonetization. Money that is deposited will be taken track of by income tax authorities. Therefore, people will
hesitate to use tax avoidance tactics. Furthermore, the loan transaction will also be under scrutiny.
Consequently, there would be an increase in the flow of taxes. This would certainly result in government
undertaking more public welfare measures.According to estimates made by RBI, people have deposited more
than rupees 3 lakh crores worth of black money in the bank accounts. This has helped the government in
slowing down the plague of parallel economy.

A major reason behind demonetization was that a big part of black money was being used for funding terrorism,
gambling, in inflating the price of major assets classes like real estate, gold and other social evils.
Demonetization is acting as an effective countermeasure against such activities. Now all such activities will get
reduced for some time and also it will take years for people to generate that amount of black money again and
hence in a way it helps in putting an end this circle of people doing illegal activities to earn black money and
using that black money to do more illegal activities.

Another benefit is that due to people disclosing their income by depositing money in their bank accounts
government gets a good amount of tax revenue which can be used by the government towards the betterment of
society by providing good infrastructure, hospitals, educational institutions, roads and many facilities for poor
and needy sections of society.

Disadvantage in Demonetization:
The first challenge is the internet connection and availability. Due to demonetization, many people would go
cashless. Therefore, they would resort to E-cash and E-payment. However, in many developing nations, internet
connectivity is quite poor. Hence, this forms a major challenge for any government which intends to implement
demonetization.

Cash shortage is a natural consequence of demonetization. The scarcity of cash can certainly lead to chaos. This
is exactly what took place during the 2016 Indian banknote demonetization. Furthermore, people face various
difficulties in depositing or exchanging the demonetized banknotes. Also, the ATM’s can run short of cash for
many weeks or months.

Rural areas face huge trouble due to demonetization. This is because rural areas and the agricultural
sector highly depend upon cash. Furthermore, these people lack the financial literacy to handle the situation.
Moreover, most people in such areas are ignorant of computing technology and the cashless economy.

To sum it up, demonetization is certainly a revolutionary step in a country’s economic system. It is something
that has been practiced by countries from time to time. Furthermore, the objectives for demonetization remain
more or less the same the world over. Most noteworthy, the decision to demonetize should come by keeping the
national interests at the forefront. However the public expectation from demonetization was much more as
revealed by survey done by Dr. Arun Mittal explained in the table.

Another disadvantage is that destruction of old currency units and printing of new currency units involve costs
which has to be borne by the government and if the costs are higher than benefits then there is no use of
demonetization.

Another problem is that this move was targeted towards black money but many people who had not kept cash as
their black money and rotated or used that money in other asset classes like real estate, gold and so on were not
affected by demonetization.
Principles of Tackling Black Money:

The first principle is that remove the systemic pain that leads to creation of black money in the first place.
Blame lies with the tax department. Black money is nothing but money generated in legitimate transactions
which are hidden from government so as to avoid paying the transaction cost (usually tax) in the legitimate
economy his is usually done by using physical cash. This cash thereafter must be processed to convert into
consumption or investment. Black economy refers to various activities, transactions etc. that help process
this physical cash, create returns on this cash, facilitate consumption using this cash etc. The second
principle has two parts. First, not all cash transactions are necessarily black money transaction. They become
black money transactions only if they are hidden from the legitimate economy. Thus, a shopkeeper who does
not give receipt but declares the sale (it’s only hypothetical) does not create black money. Conversely, a
shopkeeper who gives a receipt but discloses other receipt book to the tax authorities (happens all the time)
creates black money transaction. Second, the black money must at some time or other be plugged into
legitimate economy. Thus, it cannot be done using user created currency that cannot be exchanged with local
currency. So it depends on legal tender. It means somewhere down the chain there must exist a person for
whom part of this black money is legal cash income which he can use for his own consumption in legitimate
channels. Usually, this is the construction worker, or other poorest of the poor who will give certain services
and his income will remain under the government radar. It can also be illegal traders in gold or diamonds etc.
who can convert this into precious items that have quasi legal tender status. The third insight is that black
economy is continuously fed by parts of white economy that go underground. Quite a few people who do not
want to promote black money contribute to it. They are either coerced say developer forcing buyer to pay
him in cash or government officer seeking bribes in cash. Therefore, preventing white money from
becoming black the starting point. The recommendations of Report titled Measures to tackle Black Money
in India and Black economy depends on black money financiers. These are money lenders earning like 2%
per month on their investments for financing the activities in black money friendly sectors. Film financing,
construction financing, retailers, dance bars, alcohol, etc. These financiers also need enforcement
mechanism to ensure their money is safe. Naturally they ally with criminal elements. Al Capone, the famous
Chicago mobster, was previously an enforcer but later a financier.

Expectation of General Public from Demonetization:

1. Decrease in corruption.
2. Curbing Black money and making black money to come in the main stream in the economy.
3. Destroying the counterfeit currency.
4. Reduction in terrorism.
5. Reduction in Nationalist problem.
6. Increase in liquidity in banks.
7. Down fall in real estate prices.
8. Decreased in housing loans and other loan rates.

Impact on the Economy

Short-term impact:

The demonetisation, by removing 86 per cent of the currency in circulation, has resulted in a very severe
contraction in money supply in the economy. This contraction, by wiping out cash balances in the
economy, will eliminate a number of transactions for a while, since there is no or not enough of a
medium of exchange available. Since income and consumption are intrinsically related to transactions in
the economy, the above would mean a severe contraction in income and consumption in the economy.
 This effect would be more severe on individuals who earn incomes in cash and spend it in cash. To a
lesser extent it would also affect individuals who earn incomes in non-cash forms but need to withdraw
in cash for consumption purposes, since a number of sectors in the economy still work predominantly
with cash. In terms of the sectors in the economy, the sectors to be adversely affected are all those
sectors where demand is usually backed by cash, especially those not within the organised retailing. For
instance, transport services, kirana, fruits and vegetables and all other perishables, would face
compression in demand which is backed by purchasing power. This in turn can have two effects: while it
is expected that supply exceeds demand, there would be a fall in prices, however, if supply too gets
curtailed for want of a medium of exchange, prices might, in fact, rise. Thus, while generally people
seem to expect prices to fall, it is quite possible that prices would instead rise. Alternatively, to keep the
flows going, people might take recourse to credit - both the retailers and other agents in the economy
might make supplies on credit in the hope that when the liquidity status is corrected, the payments can be
realised. In these cases, the price of commodities might rise instead of falling. In other words, the impact
of an incremental reduction in money supply where the demand and the supply chain remain unaffected
would be different from a case where there is a drastic reduction in money supply and outputs might
adjust rather than the adjustment being in prices. In other words, the expectation that inflation would
decline might be believed.

Medium-term effects:

In the medium term, the effects would be related to the extent to which the currency is not replaced
within the economy. If the entire currency is replaced, there would not be any major effects on the
economy. However, it is to be expected that the entire currency would not be replaced – to the extent
currency is extinguished and to the extent some of the currency remains as bank deposits, there would be
some impact on the economy. The first effect would be a compression of the economy to the extent the
extinguished currency was working as a medium of exchange. The currency that is placed in the banks
but not withdrawn, it is argued, would generate an expansion in deposits in the economy. In the
discussions on demonetisation, there is a consistent reference to the resultant increase in credit creation
in the economy. Like Finance Minister Arun Jaitley says, “Bank deposits will increase and they will
have more capacity to support the economy.” The total cumulative credit that can potentially be
generated is defined in terms of the reserve ratio. Total credit potential = incremental deposit
generated*(1/reserve ratio) In India, the cash reserve ratio is 4 per cent while there is a statutory liquidity
ratio of 22 per cent In determining the credit creation, it is important to take into account only the CRR
and the additional credit creation can be 25 times the amount of money deposited in the banks as a result
of the proposed demonetisation.6 this amount however, will be generated only if there exists an
equivalent demand for credit in the economy.

Effects on government finances:

The effects of demonetisation on government finances can be divided into three categories: the impact
through RBI’s finances, the impact through taxes and the impact through credit available to finance deficits.
Through RBI’s finances The RBI earns seignior age through the printing of currency. In the demonetisation,
a part of the currency will be extinguished. For this part of the currency, the RBI can print the notes given
the assets on its books, but there would be no takers. In other words, this part of the currency would be like
new money that can be introduced into the economy and hence yields seignior age to the RBI once again
when released into circulation. RBI, however, cannot lend this to the government since that would involve
additional liability build up on its balance sheet. So, this currency can only be released when foreign
exchange is being converted to rupees for instance and not sterilised thereafter. At this point there would
accrue some dividends to the government as well. However, to the extent the government and the RBI seek
to move the economy towards digital instruments, this option might not be exercised and the dividend might
not accrue. Impact through taxes: There are multiple channels through which taxes will be affected:
 At the point of transition to the new regime, people have attempted to convert cash balances into
commodities like gold or luxuries. On these transactions the governments would have a spurt of taxes. This
would however not last beyond the transition phase.

 In the subsequent period, the impact on indirect taxes would be negative because of the compression in
demand.

 On property taxes, some local bodies have given people a window of opportunity to pay old as well as
current taxes in the scrapped notes. This would result in an increase in revenue collections in property tax.
16

 On income tax there can be two potential effects: first, with compression in the economy, there could be a
reduction in the tax collection. In the unlikely event of people choosing to deposit unaccounted balances in
the bank and pay taxes and penalty on the same, or if the tax department through investigation, finds that
some of the deposits are not explained income tax collections would increase. For any individual depositing
balances above Rs 10 lakhs, the tax and penalty together would absorb the over 90 per cent of the deposited
amount. This would serve as a disincentive for people with large balances to come and deposit the same into
accounts. In other words, the government cannot expect to get major collections in terms of the tax and
penalty on unaccounted incomes revealed. Through financing of fiscal deficit: The generation of additional
deposits and credit, as a result of the SLR requirements can make more credit available to governments.
Given the FRBM (Fiscal Responsibility and Budget Management) limitations, the amount of borrowing that
governments can take on may be limited and the additional supply can mean a decline in the interest rate that
governments pay on their debt. This could be a positive spin-off for the governments.

POSITIVE EFFECT

Human trafficking:

Nobel laureate Kailash Satyarthi and others working to fight human trafficking said that the note ban had led to
a huge fall in sex trafficking. Satyarthi said the demonetization would be effective in combating exploitation of
children as well as corruption and would be a great obstacle to traffickers. However, 2 months later he expressed
his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.

Radical groups The Demonetization has badly hit Maoist and Naxalites as well. The surrender rate has reached
its highest since the demonetization is announced. It is said that the money these organizations have collected
over the years have left with no value and it has caused them to reach to this decision. The move also reportedly
crippled Communist guerrilla groups (Naxalites) financing through money laundering. On 10 November the
police arrested a petrol pump owner at Ranchi when he reportedly tried to deposit ₹2.5 billion, belonging to a
person affiliated with the banned Communist Party of India (Maoist). According to Chhattisgarh Police
demonetization has affected the Naxalite activities. It is reported that insurgents have stashed more than ₹70
billion in the Bastar region. While Manohar Parrikar claimed that the move has also helped in reducing the
incidents of stone-pelting in the Kashmir valley, his claim has been disputed.

Hawala :

Mumbai Police reported a setback to Hawala operations. Hawala dealers in Kerala were also affected. The
Jammu and Kashmir Police reported the effect of demonetization on hawala transactions of separatists.
Railways As of November 2016, Indian

Railways:
 did not have the option to make payment with cards at the counters. After the demonetization move, the
government announced to make card payment options available at railway counters in the country.The railways
placed an order for 10,000 card reader machines in January 2017.

NEGATIVE EFFECT:

Cash shortage :

The scarcity of cash due to demonetization led to chaos, and most people holding old banknotes faced
difficulties exchanging them due to endless lines outside banks and ATMs across India, which became a daily
routine for millions of people waiting to deposit or exchange the ₹500 and ₹1000 banknotes since 9
November.ATMs were running out of cash after a few hours of being functional, and around half the ATMs in
the country were non- functional. Sporadic violence was reported in New Delhi, but there were no reports of
any grievous injury, people attacked bank premises and ATMs, and a ration shop was looted in Madhya Pradesh
after the shop owner refused to accept ₹500 banknotes. The CMD of Punjab National Bank said that panic after
demonetization started fading on 19 November 2016. As of 18 December 2016, there were still long queues at
banks and ATMs. Three months after the withdrawal of banknotes, a quarter of the ATMs were still short of
cash.

Deaths :

Several people were reported to have died from standing in queues for hours to exchange their old banknotes.
Deaths were also attributed to lack of medical help due to refusal of old banknotes by hospitals. As of 15
November 2016, the attributed death toll was 25. and 33 deaths as of 18 November. In an interview, Chief
Minister of Delhi Arvind Kejriwal lashed out at a BBC reporter who asked him to justify his 19 November
claim that 55 deaths were linked to demonetization. By the end of the year, opposition leaders claimed that over
100 people had died due to demonetization.

Stock market crash :

As a combined effect of demonetization and US presidential election, the stock market indices dropped to an
around six-month low in the week following the announcement. The day after the demonetization
announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the
end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and
the NIFTY 50 index was below 8100 intraday.

Transportation halts

After the demonetization was announced, about 800,000 truck drivers were affected with scarcity of cash, with
around 400,000 trucks stranded at major highways across India were reported. While major highway toll
junctions on the Gujarat and Delhi-Mumbai highways also saw long queues as toll plaza operators refused the
old banknotes. Nitin Gadkari, the Minister of Transport, subsequently announced a suspension of toll collections
on all national highways across India until midnight of 11 November, later extended until 14 November and
again until midnight of 18 November, and yet again till 2 December.

Agriculture

Transactions in the Indian agriculture sector are heavily dependent on cash and were adversely affected by the
demonetization of ₹500 and ₹1,000 banknotes. Due to scarcity of the new banknotes, many farmers have
insufficient cash to purchase seeds, fertilizers and pesticides needed for the plantation of rabi crops usually sown
around mid-November. Farmers and their unions conducted protest rallies in Gujarat, Amritsar and
Muzaffarnagar against the demonetization as well as against restrictions imposed by the Reserve Bank of India
on district cooperative central banks which were ordered not to accept or exchange the demonetized banknotes.

Dumping of agricultural produce

The demonetization led to unavailability of cash to pay for food products. The reduction in demand that arose in
turn led to a crash in the prices of crops. Farmers were unable to recover even the costs of transportation from
their fields to the market from the low prices offered.The prices dropped as low as 50 paise per kilo for tomatoes
and onions. This forced the farmers across the country to dump their products in desperation. Some farmers
resorted to burying unsold vegetables. Agricultural produce such as vegetables, foodgrains, sugarcane, milk and
eggs were dumped on roads. Some farmers dumped their produce in protest against the government.

Banking

In the first four days after the announcement of the step, about ₹3 trillion (US$45 billion) in the form of old
₹500 and ₹1,000 banknotes had been deposited in the banking system and about ₹500 billion (US$7.4 billion)
had been dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters.
Within these four days, the banking system has handled About 180 million transactions. The State Bank of India
reported to have received more than ₹300 billion (US$4.5 billion) in bank deposit in first two days after
demonetization.A spike in the usage of debit card and credit card post demonetization was also reported.

Between November 10 and November 27, banks reported exchange and deposits of demonetized banknotes
worth ₹8.45 trillion (US$130 billion) (exchange of ₹339.48 billion (US$5.0 billion) and deposits of ₹8.11
trillion (US$120 billion)). During this period, an amount of ₹2.16 lakh crore (US$32 billion) had been
withdrawn by people from their accounts. In Malda, a district believed to be a transit-point for fake Indian
currencies,a large sum of cash deposits in dormant accounts were also reported. According to The Economic
Times, more than 80 percent of fake currency in India originates from Malda district in West Bengal.

Business

By the second week after demonetization of ₹500 and ₹1,000 banknotes, cigarette sales across India witnessed
a fall of 30–40%,while E-commerce companies saw up to a 30% decline in cash on delivery (COD) orders.
Several e-commerce companies hailed the demonetization decision as an impetus to an increase in digital
payments. They believe that it would lead to a decline in COD returns which is expected to cut down their costs.
The demand for point of sales (POS) or card swipe machines has increased.E-payment options like PayTM and
Instamojo Payment Gateway, PayUMoney has also seen a rise. According to data of Pine Labs, the demand for
its POS machines doubled after the decision. Further it states that the debit card transactions rose by 108% and
credit card transactions by 60% on 9 November 2016.

Seizures of ₹2000 notes

Huge amounts of cash in the form of new notes were seized all over the country after the demonetization. As of
December 2016, over 4 crore in new banknotes of ₹2000 were seized from four persons in Bangalore, ₹33 lakh
in ₹2000 notes were recovered from Manish Sharma, an expelled BJP leader in West Bengal,and ₹1.5 crore
was seized in Goa.900 notes of the new ₹2000 notes were seized from a BJP leader in Tamil Nadu. Around ₹10
crore in new notes were seized in Chennai.
As of 10 December, ₹242 crore in new notes had been seized. It was noted in the media that while people were
dying in queues to obtain a few thousand rupees in cash, persons with the right connections were able to amass
crores of rupees in new notes, thus rendering the demonetization exercise futile.

It was announced by the government that the seized notes will be brought into the mainstream as soon as
possible to ease out the cash problem. Earlier, agencies kept all seized material, including cash seizures, in their
strong rooms as evidence till the case was adjudicated by the courts. The seized money was then deposited into
the Consolidated Fund of India. Sometimes, income tax cases took years to resolve, still all seized material was
kept in safe lockers of the tax department.

DEMONETIZATION IMPACT ON VARIOUS SECTORS

Economy Impact:

Demonetization torpedoed India’s economy just when it was getting into a cruise mode, fired by good
monsoon-led rural demand and Seventh Pay Commission- enabled urban buying. The 8% growth that looked
within grasp in FY17 is beyond horizon now. Only about a quarter of currency cancelled is back in circulation,
and that too is being stashed away for emergency. Lower denomination notes are not available to facilitate
transactions. The fall in demand will further dent already weak investments. The sharpest crash in services PMI
since November 2008 in the aftermath of the global financial crisis underscores the risks. Ambit sees growth
falling to a low of 3.5% in FY17. Others are not so pessimistic, pencilling in about 7%.

Jobs Impact:

Hiring experts say jobs at senior levels are not and won’t be impacted. But overall hiring is down right now, as
managers seek to protect revenue/profit targets. No job cut plans as of now. Variable pay/increment amounts
may be impacted. Job numbers are difficult to estimate, experts say, but sectors where hiring is most hit are
retail, consumer goods, real estate, infrastructure, logistics (for ecommerce especially), auto consumables, and
building products. Hiring by mobile wallet and fintech companies are up, though.

Consumer Spend Impact:

Consumption, a big GDP contributor, will take a hit for at least two quarters, say companies and analysts. Two
main problems: Low circulation of lower denomination notes, which may be temporary, and wealth erosion,
that is impacting big ticket purchases. FMCG sales dropped 20-30% in November. At store levels, impulse buys
like snacks, biscuits were hard hit, as were personal care items, Nielsen data shows. December can be worse
than November, since last month consumer spend in the beginning of the month was unaffected. Nine million
retailers who buy from wholesalers are worst hit, and will feel the pain for a while. Big, organized retail is doing
well. Annual growth rate is around 4.4%. Some big FMCG companies have cut production. Supply chains are
hit as cash fuels many transactions. Full impact will show up in a month’s time, and can be severe.

Real Estate Impact:

Insiders say there’s a 40%-plus drop in enquiries and sales across key markets of Mumbai, Delhi, Bengaluru
and Pune. Deals in secondary market have come to a standstill. In Bengaluru, drop in deal closings is as much as
60%. Most homebuyers are waiting for big price reductions. With fear of black money transactions and cash
crunch added to an already slumping real estate sector, near future is bleak.

E-Commerce Impact:
Mostly bad, some good. For the online retail market, gross merchandise value (GMV) of players fell by 40-50%
in first few weeks after demonetization, in the middle of their biggest quarter for sales. Things may remain bleak
till March. Even high- value items like expensive smartphones are selling less. Products returned are up by 50%.
And experts feel consumer sentiment won’t improve quickly. But the boost to digital payments (100% jump in
transactions) has led industry to hope for a bright medium term. Also, grocery and food delivery set-ups are
doing better since they sell essential items. Some saw new customer orders jump to 25%, from the usual 15-
16%.

Tourism Impact:

Peak tourism period of November-December badly hit. For tourist destinations beyond metros, business may be
down by as much as 40%. Tourism business in metros may go down by 10%. Cash shortage at airports and
hotels are a big problem. And many national monuments entry points don’t have card payments facilities.
Western countries have issued advisories on cash crunch in India.

Autos Impact:

Post-demonetization, there was some cushion at wholesale level for Maruti Suzuki, Toyota Kirloskar Motor and
Tata Motors from dealer demand for new models or new variants like Baleno, Brezza, Fortuner, Innova and
Tiago. Hyundai India, Honda Cars India and Mahindra & Mahindra have seen some short-term impact on sales.
At the retail level, sales for cars without waiting period is down 30-50%. Two-wheeler and commercial vehicles
have been hit harder. Sixty to 65% of entry level motorcycle sales happen in rural markets where cash is king.
Two-wheeler sales may have gone down by 5% last month. Tata Motors posted a 17% decline in commercial
vehicle sales in November.

Aviation Impact:

In world’s fastest growing aviation market, passenger traffic growth will fall below 20% from an average 23-
24% growth recorded in previous years. Flight bookings dropped drastically in days after demonetization.
Recovered somewhat later. Offline travel agents, who took cash, badly hit. Flights to small towns, where cash
payments are the norm, are also badly hit, may post negative growth.

Telecom Impact:

Mobile phone shipments fell by 26% in November, compared to the previous month. Smartphone shipments are
down by 23%. Inventory pile up with retailers. Big sellers who do card and online transactions less badly hit.
IDC analysts expect sales for feature phones to drop by 25% in the quarter, and smartphones to fall by 17.5%.
Gold Impact: Scared by government warnings, sale of gold against old currency notes fell drastically. NRI
customers have fled. Sales are down sharply, and it was already a bad year for gold.

Agriculture Impact:

Interestingly, villages have adapted in some ways better than cities. GoI allowing tax free deposits of any
amounts for farmers have led to many of them getting 20% premium from traders when transacting. Informal
credit for daily purchases and use of old notes for key inputs and selling produce have kept rural economy
going. Crop planting increased 20- 35% every week after demonetization and remained higher than last year in
all weeks after November 8. But a lot depends on cash supply improving quickly in the new year.

Metals Impact:
Real estate slowdown has hit steel, and may hit further. Aluminum, copper, zinc also hit since they are raw
materials in building industry products. If auto sales are hit badly, metals business will do worse.

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Demonetization M.com Project

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 AAQIL MOHAMMED 10 uploads

Published on Mar 16, 2018

This is viva project done by me on the topic "Impact of demonetization on middle and

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Demonetization M.com Project

1. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 1 CHAPTER-1 INTRODUCTION 1.1INTRODUCTION TO
FINANCE In our present day of economy, finance is referred as the provision of money at the time when it is
required. Every enterprise whether big, small or medium needs finance to carry on its operation and achieve its
targets. In fact, finance is so indispensable that it is rightly said to be the “Life blood of an enterprise”. Without
adequate finance, an enterprise cannot think of its existence. The study of principles, practices, procedures and
problems concerning financial management of profit making organization engaged in the fields of industry,
trade and commerce is undertaken under the discipline of “BUSINESS FINANCE”. 1.1.1 BUSINESS
FINANCE Literally speaking, the term ‘business finance’ connotes finance of business activities. The term
business finance is composed of two words business and finance. Thus it is essential to understand the meaning
of these two words, which is the starting point to develop the whole concept of finance. 1.1.2 MEANING OF
BUSINESS The word business may be interpreted in one way as “State of being busy”. All human creative
activities relating to the production and distribution of goods and services for satisfying human needs are known
as business. It also includes all those activities which indirectly help in production and exchange of goods such
as transport, insurance, banking etc. 1.1.3 MEANING OF FINANCE Finance is referred to as the provision of
money at a time when it is required. Finance refers to the management of flow of money through an
organization. It concerns with the application of skills in the manipulation, use and control of money. Having
studied the meaning of business and finance, we can develop the meaning of the term business finance as an
activity, which is concerned, with the acquisitions of funds, use of

2. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 2 funds and distribution of profits by a business firm. Thus
business finance deals with the acquisition, application, allocation of funds and financial control. 1.1.4
DEFINITION OF BUSINESS FINANCE In simple words, business finance can be defined as the process of
rising, providing and administering of all money/ funds to be used in corporate (business) enterprise. According
to Guttmann and Doug all, business can be broadly defined as the activity concerned with planning, raising,
controlling and administering the funds used in the business Wheeler defines business finance as “that business
activity, which is concerned with the acquisition and conservation of capital funds in meeting the financial
needs and overall objectives of business enterprise”. According to Prather and wert “business finance deals with
primarily with raising, administrating and disbursing funds by privately owned business units operating in non-
financial fields of industry. 1.2 INTRODUCTION TO DEMONITIZATION
3. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 3 On 8 November 2016, the Government of India announced
the demonetization of all ₹500 (US$7.40) and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series. The
government claimed that the action would curtail the shadow economy and crack down on the use of illicit and
counterfeit cash to fund illegal activity and terrorism. The sudden nature of the announcement—and the
prolonged cash shortages in the weeks that followed—created significant disruption throughout the economy,
threatening economic output. The move was heavily criticized as poorly planned and unfair, and was met with
protests, litigation, and strikes. Prime Minister of India Narendra Modi announced the demonetization in an
unscheduled live televised address at 20:00 Indian Standard Time (IST) on 8 November. In the announcement,
Modi declared that use of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series would be invalid past
midnight, and announced the issuance of new ₹500 and ₹2000 banknotes of the Mahatma Gandhi New Series
in exchange for the old banknotes. The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the
very next day after the announcement. In the days following the demonetization, the country faced severe cash
shortages with severe detrimental effects across the economy. People seeking to exchange their bank notes had
to stand in lengthy queues, and several deaths were linked to the inconveniences caused due to the rush to
exchange cash. Initially, the move received support from several bankers as well as from some international
commentators. It was heavily criticized by members of the opposition parties, leading to debates in both houses
of parliament and triggering organized protests against the government in several places across India. The move
is considered to have reduced the country's GDP and industrial production. As the cash shortages grew in the
weeks following the move, the demonetization was heavily criticized by prominent economists and by world
media. In India’s case, the move has been taken to curb the menace of black money and fake notes by reducing
the amount of cash available in the system. It is also interesting to note that this was not the first time the
Government of India has gone for the demonetization of high-value currency. It was first implemented in 1946
when the Reserve Bank of India demonetized the then circulated Rs 1,000 and Rs 10,000 notes. The
government then introduced higher denomination

4. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 4 banknotes in Rs 1000, Rs 5000 and Rs 10000 in a fresh
avatar eight years later in 1954 before the Morarji Desai government demonetized these notes in 1978. 1.2.1
MEANING Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is
necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced
with a new currency unit. The opposite of demonetization is remonetization where a form of payment is restored
as legal tender. Demonetization is a radical monetary step in which a currency unit’s status as a legal tender is
declared invalid. This is usually done whenever there is a change of national currency, replacing the old unit
with a new one. Such a step, for example, was taken when the European Monetary Union nations decided to
adopt Euro as their currency. However, the old currencies were allowed to convert into Euros for a period of
time in order to ensure a smooth transition through demonetization. Zimbabwe, Fiji, Singapore and Philippines
were other countries to have opted for currency demonetization. Denomination is a proper description of a
currency amount, usually for coins or banknotes. Denominations may also be used with other means of payment
like gift cards. For example, five euros is the denomination of a five euro note. 1.2.2 DEFFINITION
Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as a
official mode of payment. According to Investopedia, demonetization is the act of stripping a currency unit of
its status as legal tender. Ending something (e.g. gold or silver) as no longer the legal tender of a country.

5. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 5 Process of removing a currency from general usage, or
circulation. Gold was demonetized in this way when it ceased to be used as an everyday currency. 1.2.3
BACKGROUND There are multiple reasons why nations demonetize their local units of currency. Some
reasons include to combat inflation, to combat corruption, and to discourage a cash system. The process of
demonetization involves either introducing new notes or coins of the same currency or completely replacing the
old currency with new currency. The Indian government had demonetized bank notes on two prior occasions—
once in 1946 and then again in 1978—and in both cases, the goal was to combat tax evasion by "black money"
held outside the formal economic system. In 1946, the pre-independence government hoped demonetization
would penalize Indian businesses that were concealing the fortunes amassed supplying the Allies in World War
II. In 1978, the Janata Party coalition government demonetized banknotes of 1000, 5000 and 10,000 rupees,
again in the hopes of curbing counterfeit money and black money. In 2012, the Central Board of Direct Taxes
had recommended against demonetization, saying in a report that "demonetization may not be a solution for
tackling black money or economy, which is largely held in the form of benami properties, bullion and
jewellery." According to data from income tax probes, black money holders kept only 6% or less of their wealth
as cash, suggesting that targeting this cash would not be a successful strategy. On 28 October 2016 the total
banknotes in circulation in India was ₹17.77 trillion (US$260 billion). In terms of value, the annual report of
Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to ₹16.42
trillion (US$240 billion) of which nearly 86% (around ₹14.18 trillion (US$210 billion)) were ₹500 and ₹1,000
banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90266 million
banknotes were in circulation. In the past, the Bharatiya Janata Party (BJP) had opposed demonetization. BJP
spokesperson MeenakshiLekhi had said in 2014 that "The aamaurats and the aadmis (general

6. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 6 population), those who are illiterate and have no access to
banking facilities, will be the ones to be hit by such diversionary measures." In June, the Government of India
had devised the Income Declaration Scheme, that lasted till 30 September 2016, providing an opportunity to
citizens holding black money and undeclared assets to avoid litigation and come clean by declaring their assets,
paying the tax on them and a penalty of 45% thereafter. In 2016, the Indian government decided to demonetize
the 500- and 1000- rupee notes, the two biggest denomination notes. These notes accounted for 86% of the
country’s cash supply. The government’s goal was to eradicate counterfeit currency, fight tax evasion, eliminate
black money gotten from money laundering and terrorist financing activities, and promote a cashless economy.
By making the larger denomination notes worthless, individuals and entities with huge sums of black money
gotten from parallel cash systems were forced to convert the money at a bank which is by law required to
acquire tax information from the entity. If the entity could not provide proof of making any tax payments on the
cash, a tax penalty of 200% of the tax owed was imposed. In 2015, the Zimbabwean government demonetized
the Zimbabwean dollar as a way to combat the country’s hyperinflation that was recorded at 231,000,000%. The
3-month process involved expunging the Zimbabwean dollar from the country’s financial system and
solidifying the US dollar, Botswana pula, and South African rand as the country’s legal tender in a bid to
stabilize the economy. Another example of demonetization occurred when the nations of the European
Monetary Union adopted the euro in 2002. In order to switch to the euro, authorities first fixed exchange rates
for the varied national currencies into euros. When the euro was introduced, the old national currencies were
demonetized. However, the old currencies remained convertible into euros for a while so that a smooth
transition through demonetization would be assured. The Coinage Act of 1873 demonetized silver in favor of
adopting the gold standard as the legal tender of the United States. The withdrawal of silver from the economy
resulted in a contraction of the money supply, which subsequently led to a 5-year economic depression in the

7. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 7 country. In response to the dire situation and pressure from
silver miners and farmers, the Bland- Allison Act remonetized silver as legal tender in 1878. 1.2.4
OBJECTIVES 1) Removing black money from country: India has a huge parallel black economy which the
government can’t tax and which forms an island away from the main economy. Nobody knows the exact figure
but it has been estimated to be in the range tens of thousands of crores of Rupees in the past to lakhs of crores
today. You can be sure that a good chunk of this will come into the main economy. It is a Herculean task to
merge the two streams of white and black money and a great beginning has already taken place. 2) Stopping of
corruption: by removing the currency notes from circulation, it will have a direct impact on corruption. People
who have this notes will now be left with nothing. 3) Stopping terror funds: because of demonetization, the
people or organizations who used to fund terror groups will be now sitting without any works, they will
naturally die and that too with starvation. 4) Curbing fake notes: demonetization will also stop the circulation of
fake notes in the economy (although the amount of fake notes revolving in the economy was around 400
crores). 5) Stopping illegal dabba trading: due to demonetization, the illegal share trading and dabba trading will
cease to exist. This will ensure stability in share markets,especially at these 'times of turbulence' 6) The Uttar-
Pradesh elections: it is generally seen that, there is ample liquidity in the states, where elections are to happen,
this thing is considered as vote bank and politicians buy votes of people by offering them money, if they vote
for them. now because of demonetization, vote bank system will not be in existence (the proof here is currency
notes, which were found from river ganga). as an ultimate result, we would see transparent elections.
8. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 8 7) The betting on US presidential election results: it seems
that Modiji is well aware of the fact that Indians are a master in betting at anything like pro!!!! Because of his
address to nation at 8:00 pm, there will be no betting done on the us presidential election results, or at least its
quantum would be less than, what it should be have earlier.. 8) To send a clear message that this government is
well inclined towards working for the development of nation: because of his bold step, it will send a clear
message that this government is well inclined towards development of nation. it will also send a message to the
international community, that the government is doing constant efforts to make India a better place to invest and
a better place to do business. 1.2.5 POSITIVE AND NEGATIVE IMPACTS OF DEMONETIZATION ON
THE INDIAN ECONOMY At the stroke of the hour on midnight of 9th November 2016, India lost 86% of its
monetary base. The print, electronic and social media has been praising Prime Minister’s masterstroke by which
he has reportedly destroyed the base of corruption in India. In this single move, the Government has attempted
to tackle all the three issues affecting the economy i.e. a parallel economy, counterfeit currency in circulation
and terror financing. There is no doubt that Prime Minister has pulled out a major coop and substantially
enhanced his reputation as a strong leader. The idea of demonetization is good but it has to be taken into
consideration that most of the black money is kept in the form of land, buildings or gold or kept abroad. What is
in cash constitutes only 4% of the total amount of black money on which taxes are not being paid. Out of this, a
lot of money is in circulation in everyday transaction like if someone is building a house; the bill is not paid
through banks for sand, bricks etc. This money goes into the other systems though it has been drawn from bank.
These things will come under control with this step. Small farmers, sellers, merchants, daily wage laborers and
traders are suffering because of lack of proper planning, intelligence and foresight such as recalibration of ATM
machines. There was need to pile up enough 100 Rupee notes and other smaller denomination notes in the
market before taking this step. It is being said by critics that this step was taken only to bolster the image of the
Prime Minister as he has been unable to deliver on GDP growth, inflation and bringing the black money from
abroad. Demonetization is an established practice in monetary policy to tackle

9. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,

SCIENCE AND COMMERCE COLLEGE Page 9 black money. The Prime Minister has explained why this is
a financial surgical strike. It was meant to be suddenly implemented. In the past, demonetization has taken place
twice but it fails because the idea is to tackle the black money existing in circulation. This is not tackle
corruption per se or the Government is not saying that 100% corruption will be tackled. If announcement and
time would have been given, this step might not have been successful in controlling black money and
counterfeit currency in circulation coming from Pakistan, Nepal or other countries. People are facing problems
because the limit of withdrawal has not been kept at a higher level. If this would have been kept at a higher
level, there were chances that the recycling of black money might begin. The ideal money in circulation has to
come to the banking channels. It is also being said that what is being attempted is replacement of currency and
not demonetization itself which was unnecessary. This is a terrible setback for the international standing of the
Indian economy. At this time, the economy is struggling with slowdown. There is demand sluggishness in the
economy leading to practically no private sector investment and stagnant industrial growth. If we look at the
farm sector, this is the harvest time. Farmers generally deal in cash and India is also largely a cash economy.
The cash transactions in this economy are far more than the total number of electronic transactions done on a
daily basis. In the tribal heartland of the country, the poor people through middlemen are getting their currencies
exchanged for Rs.300 or Rs.400 because of lack of proper information which is hitting them. The stock of the
black economy constitutes a major part of the GDP is significant. Even if 50% of this amount is withdrawn, the
kind of relief that RBI will get on its liabilities and the sort of deposits commercial banks will get will lead to a
rise in the deposit and later on there will be decrease in lending rates plus fiscal deficit. The black money in
circulation is like a steroid in the economy which keeps the demand going gives a feeling that everything is
working well. The problem is that investment is not taking place in the economy and the rate of growth of
capital formation is down. The only way to bring this up is to divert more funds into investments which will
happen when the cost of capital comes down. 1.2.6 POSITIVE EFFECT Human trafficking

10. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 10 Nobel laureate Kailash Satyarthi and others working to
fight human trafficking said that the note ban had led to a huge fall in sex trafficking. Satyarthi said the
demonetization would be effective in combating exploitation of children as well as corruption and would be a
great obstacle to traffickers. However, 2 months later he expressed his disappointment on Rs 2000 notes being
pushed into human trafficking in absence of other concrete steps. Radical groups The Demonetization has badly
hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetization is
announced. It is said that the money these organizations have collected over the years have left with no value
and it has caused them to reach to this decision. The move also reportedly crippled Communist guerrilla groups
(Naxalites) financing through money laundering. On 10 November the police arrested a petrol pump owner at
Ranchi when he reportedly tried to deposit ₹2.5 billion, belonging to a person affiliated with the banned
Communist Party of India (Maoist). According to Chhattisgarh Police demonetization has affected the Naxalite
activities. It is reported that insurgents have stashed more than ₹70 billion in the Bastar region. While Manohar
Parrikar claimed that the move has also helped in reducing the incidents of stone-pelting in the Kashmir valley,
his claim has been disputed. Hawala Mumbai Police reported a setback to Hawala operations. Hawala dealers in
Kerala were also affected. The Jammu and Kashmir Police reported the effect of demonetization on hawala
transactions of separatists. Railways As of November 2016, Indian Railways did not have the option to make
payment with cards at the counters. After the demonetization move, the government announced to make card
payment options available at railway counters in the country.The railways placed an order for 10,000 card
reader machines in January 2017. 1.2.7 NEGATIVE EFFECT

11. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 11 Cash shortage The scarcity of cash due to demonetization
led to chaos, and most people holding old banknotes faced difficulties exchanging them due to endless lines
outside banks and ATMs across India, which became a daily routine for millions of people waiting to deposit or
exchange the ₹500 and ₹1000 banknotes since 9 November.ATMs were running out of cash after a few hours
of being functional, and around half the ATMs in the country were non- functional. Sporadic violence was
reported in New Delhi, but there were no reports of any grievous injury, people attacked bank premises and
ATMs, and a ration shop was looted in Madhya Pradesh after the shop owner refused to accept ₹500 banknotes.
The CMD of Punjab National Bank said that panic after demonetization started fading on 19 November 2016.
As of 18 December 2016, there were still long queues at banks and ATMs. Three months after the withdrawal
of banknotes, a quarter of the ATMs were still short of cash. Deaths Several people were reported to have died
from standing in queues for hours to exchange their old banknotes. Deaths were also attributed to lack of
medical help due to refusal of old banknotes by hospitals. As of 15 November 2016, the attributed death toll was
25. and 33 deaths as of 18 November. In an interview, Chief Minister of Delhi Arvind Kejriwal lashed out at a
BBC reporter who asked him to justify his 19 November claim that 55 deaths were linked to demonetization. By
the end of the year, opposition leaders claimed that over 100 people had died due to demonetization. Stock
market crash As a combined effect of demonetization and US presidential election, the stock market indices
dropped to an around six-month low in the week following the announcement. The day after the demonetization
announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the
end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and
the NIFTY 50 index was below 8100 intraday.

12. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 12 Transportation halts After the demonetization was
announced, about 800,000 truck drivers were affected with scarcity of cash, with around 400,000 trucks
stranded at major highways across India were reported. While major highway toll junctions on the Gujarat and
Delhi-Mumbai highways also saw long queues as toll plaza operators refused the old banknotes. Nitin Gadkari,
the Minister of Transport, subsequently announced a suspension of toll collections on all national highways
across India until midnight of 11 November, later extended until 14 November and again until midnight of 18
November, and yet again till 2 December. Agriculture Transactions in the Indian agriculture sector are heavily
dependent on cash and were adversely affected by the demonetization of ₹500 and ₹1,000 banknotes. Due to
scarcity of the new banknotes, many farmers have insufficient cash to purchase seeds, fertilizers and pesticides
needed for the plantation of rabi crops usually sown around mid-November. Farmers and their unions conducted
protest rallies in Gujarat, Amritsar and Muzaffarnagar against the demonetization as well as against restrictions
imposed by the Reserve Bank of India on district cooperative central banks which were ordered not to accept or
exchange the demonetized banknotes. Dumping of agricultural produce The demonetization led to
unavailability of cash to pay for food products. The reduction in demand that arose in turn led to a crash in the
prices of crops. Farmers were unable to recover even the costs of transportation from their fields to the market
from the low prices offered.The prices dropped as low as 50 paise per kilo for tomatoes and onions. This forced
the farmers across the country to dump their products in desperation. Some farmers resorted to burying unsold
vegetables. Agricultural produce such as vegetables, foodgrains, sugarcane, milk and eggs were dumped on
roads. Some farmers dumped their produce in protest against the government.

13. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 13 Banking In the first four days after the announcement of
the step, about ₹3 trillion (US$45 billion) in the form of old ₹500 and ₹1,000 banknotes had been deposited in
the banking system and about ₹500 billion (US$7.4 billion) had been dispensed via withdrawals from bank
accounts, ATMs as well as exchanges over the bank counters. Within these four days, the banking system has
handled About 180 million transactions. The State Bank of India reported to have received more than ₹300
billion (US$4.5 billion) in bank deposit in first two days after demonetization.A spike in the usage of debit card
and credit card post demonetization was also reported. Between November 10 and November 27, banks
reported exchange and deposits of demonetized banknotes worth ₹8.45 trillion (US$130 billion) (exchange of
₹339.48 billion (US$5.0 billion) and deposits of ₹8.11 trillion (US$120 billion)). During this period, an amount
of ₹2.16 lakh crore (US$32 billion) had been withdrawn by people from their accounts. In Malda, a district
believed to be a transit-point for fake Indian currencies,a large sum of cash deposits in dormant accounts were
also reported. According to The Economic Times, more than 80 percent of fake currency in India originates
from Malda district in West Bengal. Business By the second week after demonetization of ₹500 and ₹1,000
banknotes, cigarette sales across India witnessed a fall of 30–40%,while E-commerce companies saw up to a
30% decline in cash on delivery (COD) orders. Several e-commerce companies hailed the demonetization
decision as an impetus to an increase in digital payments. They believe that it would lead to a decline in COD
returns which is expected to cut down their costs. The demand for point of sales (POS) or card swipe machines
has increased.E-payment options like PayTM and Instamojo Payment Gateway, PayUMoney has also seen a
rise. According to data of Pine Labs, the demand for its POS machines doubled after the decision. Further it
states that the debit card transactions rose by 108% and credit card transactions by 60% on 9 November 2016.

14. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 14 Forecast of GDP growth rate Global analysts cut their
forecasts of India's GDP growth rate due to demonetization. India's GDP in 2016 is estimated to be US$2.25
trillion, hence, each 1 per cent reduction in growth rate represents a shortfall of US$22.5 billion (Rs. 1.54 lakh
crores) for the Indian economy. According to SocieteGenerale, India's quarterly GDP growth rates would drop
below 7% for an entire year at a stretch for the first time since June 2011. Drop in industrial output There was a
reduction in industrial output as industries were hit by the cash crisis. The Purchasing Managers' Index (PMI)
fell to 46.7 in November from 54.5 in October, recording its sharpest reduction in three years. A reading above
50 indicates growth and a reading below shows contraction. This indicates a slowdown in both, manufacturing
and services industries.The PMI report showed also showed that the reduction in inflation in November was due
to shortage in money supply. The growth in eight core sectors such as cement, steel and refinery products,
which constitute 38% of the Index of Industrial Production (IIP), was only to 4.9 percent in November as
compared with 6.6 percent in October. Income tax raids and cash seizures The Finance Ministry instructed all
revenue intelligence agencies to join the crackdown on forex traders, hawala operators and jewellers besides
tracking movement of demonetized currency notesIt was reported that the Prime Minister's Office (PMO) and
the Prime Minister Modi himself were directly coordinating the raids conducted by the Income Tax,
Enforcement Directorate (ED) and other agencies. As of 23 December, PMO received around 700 calls giving
information about black money and it directly forwarded the information to various law enforcement agencies
for further action. Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai,
Chandigarh, Ludhiana and other cities that traded with demonetized currency.The Enforcement Directorate
issued several FEMA notices to forex and gold traders. Large sum of cash in defunct notes were seized in
different parts of the country.In Chhattisgarh liquid cash worth of ₹4.4 million (US$65,000) was seized.

15. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 15 As of December 28, official sources said that the Income
Tax department detected over ₹4,172 crore of un-disclosed income and seized new notes worth ₹105 crore as
part of its country-wide operations. The department carried out a total of 983 search, survey and enquiry
operations under the provisions of the Income Tax Act and has issued 5,027 notices to various entities on
charges of tax evasion and hawala-like dealings. The department also seized cash and jewellery worth over
₹549 crore out of which the new currency seized (majority of them ₹2000 notes) is valued at about ₹105 crore.
The department also referred a total of 477 cases to other agencies like the CBI and the Enforcement Directorate
(ED) to probe other financial crimes like money laundering, disproportionate assets and corruption. Seizures of
₹2000 notes Huge amounts of cash in the form of new notes were seized all over the country after the
demonetization. As of December 2016, over 4 crore in new banknotes of ₹2000 were seized from four persons
in Bangalore, ₹33 lakh in ₹2000 notes were recovered from Manish Sharma, an expelled BJP leader in West
Bengal,and ₹1.5 crore was seized in Goa.900 notes of the new ₹2000 notes were seized from a BJP leader in
Tamil Nadu. Around ₹10 crore in new notes were seized in Chennai. As of 10 December, ₹242 crore in new
notes had been seized. It was noted in the media that while people were dying in queues to obtain a few
thousand rupees in cash, persons with the right connections were able to amass crores of rupees in new notes,
thus rendering the demonetization exercise futile. It was announced by the government that the seized notes will
be brought into the mainstream as soon as possible to ease out the cash problem. Earlier, agencies kept all seized
material, including cash seizures, in their strong rooms as evidence till the case was adjudicated by the courts.
The seized money was then deposited into the Consolidated Fund of India. Sometimes, income tax cases took
years to resolve, still all seized material was kept in safe lockers of the tax department. Job losses There was a
loss of jobs due to demonetization, particularly in the unorganised and informal sector and in small enterprises.

16. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 16 1.2.8 EVASION ATTEMPTS Gold purchases In Gujarat,
Delhi and many other major cities, sales of gold increased on 9 November, with an increased 20 to 30%
premium surging the price as much as ₹45,000 (US$670) from the ruling price of ₹31,900 (US$470) per 10
grams (0.35 oz). Income Tax officials raided multiple branches of Axis Bank and found bank officials involved
in money laundering acts, exchanging old notes for gold. Donations in temples In India, the cash deposited into
hundis, or cash collection boxes in temples and gurudwaras are exempted from inquiry by the tax department.
This exemption is sometimes misused to launder money. After the note ban, there was a spike in donations in
the form of the demonetized notes in temples. Authorities of Sri Jalakanteswarar temple at Vellore discovered
cash worth ₹4.4 million (US$65,000) from the temple hundi in the form of defunct notes. Multiple bank
transactions There have been reports of people circumventing the restrictions imposed on exchange transactions
by conducting multiple transactions at different bank branches and also sending hired people, employees and
followers in groups to exchange large amounts of banned currency at banks. In response, the government
announced that it would start marking customers with indelible ink. This was in addition to other measures
proposed to ensure that the exchange transactions are carried out only once by each person. Railway bookings
As soon as the demonetization was announced, it was observed by the Indian Railways authorities that a large
number of people started booking tickets particularly in classes 1A and 2A for the longest distance possible, to
get rid of unaccounted cash. A senior official said, "On November 13, 42.7 million passengers were nationally
booked across all classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is a sharp dip from the number of
passengers booked on November 9, when 27,237 passengers had booked tickets in 1A and 69,950 in 2A."

17. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 17 The Railways Ministry and the Railway Board responded
swiftly and decided that cancellation and refund of tickets of value ₹10,000 and above will not be allowed by
any means involving cash. The payment can only be through cheque/electronic payment. Tickets above
₹10,000 can be refunded by filing ticket deposit receipt only on surrendering the original ticket. A copy of the
PAN card must be submitted for any cash transaction above ₹50,000. The railway claimed that since the
Railway Board on 10 November imposed a number of restrictions to book and cancel tickets, the number of
people booking 1A and 2A tickets came down. Municipal and local tax payments As the use of the demonetized
notes had been allowed by the government for the payment of municipal and local body taxes, it led to people
using the demonetized ₹500 and ₹1,000 notes to pay large amounts of outstanding and advance taxes. As a
result, revenue collections of the local civic bodies jumped. The Greater Hyderabad Municipal Corporation
reported collecting about ₹1.6 billion (US$24 million) in cash payments of outstanding and advance taxes,
within 4 days. The tax collection by local bodies have surged over 260% and more than 15000 crore mare after
14 days of demonetization. The total indirect tax collection rose to 14.2% only in the month of December
according to Finance Minister Arun Jaitley. Backdated accounting The Enforcement Directorate raided several
forex establishments making back dated entries. Money laundering using backdated accounting was carried out
by co-operative banks, jewelers, sellers of iPhones,and several other businesses. 1.2.9 REASONS FOR
DEMONETIZATION The reasoning given by the Indian Prime Minister Narendra Modi was: 1) To tackle
black money in the economy. 2) To lower the cash circulation in the country which "is directly related to
corruption in our country," according to PM Modi.

18. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 18 3) To eliminate fake currency and dodgy funds which have
been used by terror groups to fund terrorism in India. 4) The move is estimated to scoop out more than Rs 5 lakh
crore black money from the economy, according to Baba Ramdev, a staunch Modi supporter. 1.2.10
ADVANTAGES OF DEMONETIZATION 1. A major advantage is that demonetization helped the
government track black money. Large sums of black money was kept hidden by tax evaders. Demonetization
helped government uncover huge amount of unaccounted cash. According to estimates made by RBI, people
have deposited more than rupees 3 lakh crores worth of black money in the bank accounts. This has helped the
government in slowing down the plague of parallel economy. 2. A major reason behind demonetization was that
a big part of black money was being used for funding terrorism, gambling, in inflating the price of major assets
classes like real estate, gold and other social evils. Demonetization is acting as an effective countermeasure
against such activities. Now all such activities will get reduced for some time and also it will take years for
people to generate that amount of black money again and hence in a way it helps in putting an end this circle of
people doing illegal activities to earn black money and using that black money to do more illegal activities. 3.
Another benefit is that due to people disclosing their income by depositing money in their bank accounts
government gets a good amount of tax revenue which can be used by the government towards the betterment of
society by providing good infrastructure, hospitals, educational institutions, roads and many facilities for poor
and needy sections of society. 1.2.11 DISADVANTAGES OF DEMONETIZATION 1. The biggest
disadvantage of demonetization has been the chaos and frenzy it created among common people initially.
Everyone was rushing to get rid of demonetized notes while inadequate supply of new notes affected the day to
day budgets of citizens. Banks and ATMs witnessed long queues while small businesses suffered temporary
financial losses. The situation was even worse in rural India where people struggled to

19. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 19 exchange and withdraw cash due to lack of enough number
of banks and ATMs in their vicinity. 2. Another disadvantage is that destruction of old currency units and
printing of new currency units involve costs which has to be borne by the government and if the costs are higher
than benefits then there is no use of demonetization. 3. Another problem is that this move was targeted towards
black money but many people who had not kept cash as their black money and rotated or used that money in
other asset classes like real estate, gold and so on were not affected by demonetization. 1.3
DEMONETIZATION IMPACT ON VARIOUS SECTORS Economy Impact: Demonetization torpedoed
India’s economy just when it was getting into a cruise mode, fired by good monsoon-led rural demand and
Seventh Pay Commission- enabled urban buying. The 8% growth that looked within grasp in FY17 is beyond
horizon now. Only about a quarter of currency cancelled is back in circulation, and that too is being stashed
away for emergency. Lower denomination notes are not available to facilitate transactions. The fall in demand
will further dent already weak investments. The sharpest crash in services PMI since November 2008 in the
aftermath of the global financial crisis underscores the risks. Ambit sees growth falling to a low of 3.5% in
FY17. Others are not so pessimistic, pencilling in about 7%. Jobs Impact: Hiring experts say jobs at senior
levels are not and won’t be impacted. But overall hiring is down right now, as managers seek to protect
revenue/profit targets. No job cut plans as of now. Variable pay/increment amounts may be impacted. Job
numbers are difficult to estimate, experts say, but sectors where hiring is most hit are retail, consumer goods,
real estate, infrastructure, logistics (for ecommerce especially), auto consumables, and building products. Hiring
by mobile wallet and fintech companies are up, though. Consumer Spend Impact: Consumption, a big GDP
contributor, will take a hit for at least two quarters, say companies and analysts. Two main problems: Low
circulation of lower denomination notes, which may be temporary, and wealth erosion, that is impacting big
ticket purchases. FMCG sales dropped 20-30% in November. At store levels, impulse buys like snacks, biscuits
were hard hit, as were personal care items, Nielsen data shows. December can be worse

20. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 20 than November, since last month consumer spend in the
beginning of the month was unaffected. Nine million retailers who buy from wholesalers are worst hit, and will
feel the pain for a while. Big, organized retail is doing well. Annual growth rate is around 4.4%. Some big
FMCG companies have cut production. Supply chains are hit as cash fuels many transactions. Full impact will
show up in a month’s time, and can be severe. Real Estate Impact: Insiders say there’s a 40%-plus drop in
enquiries and sales across key markets of Mumbai, Delhi, Bengaluru and Pune. Deals in secondary market have
come to a standstill. In Bengaluru, drop in deal closings is as much as 60%. Most homebuyers are waiting for
big price reductions. With fear of black money transactions and cash crunch added to an already slumping real
estate sector, near future is bleak. E-Commerce Impact: Mostly bad, some good. For the online retail market,
gross merchandise value (GMV) of players fell by 40-50% in first few weeks after demonetization, in the
middle of their biggest quarter for sales. Things may remain bleak till March. Even high- value items like
expensive smartphones are selling less. Products returned are up by 50%. And experts feel consumer sentiment
won’t improve quickly. But the boost to digital payments (100% jump in transactions) has led industry to hope
for a bright medium term. Also, grocery and food delivery set-ups are doing better since they sell essential
items. Some saw new customer orders jump to 25%, from the usual 15-16%. Tourism Impact: Peak tourism
period of November-December badly hit. For tourist destinations beyond metros, business may be down by as
much as 40%. Tourism business in metros may go down by 10%. Cash shortage at airports and hotels are a big
problem. And many national monuments entry points don’t have card payments facilities. Western countries
have issued advisories on cash crunch in India. Autos Impact: Post-demonetization, there was some cushion at
wholesale level for Maruti Suzuki, Toyota Kirloskar Motor and Tata Motors from dealer demand for new
models or new variants like Baleno, Brezza, Fortuner, Innova and Tiago. Hyundai India, Honda Cars India and
Mahindra & Mahindra have seen some short-term impact on sales. At the retail level, sales for cars without
waiting period is down 30-50%. Two-wheeler and commercial vehicles have been hit harder. Sixty to 65% of
entry level motorcycle sales happen in rural markets where cash

21. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 21 is king. Two-wheeler sales may have gone down by 5%
last month. Tata Motors posted a 17% decline in commercial vehicle sales in November. Aviation Impact: In
world’s fastest growing aviation market, passenger traffic growth will fall below 20% from an average 23-24%
growth recorded in previous years. Flight bookings dropped drastically in days after demonetization. Recovered
somewhat later. Offline travel agents, who took cash, badly hit. Flights to small towns, where cash payments are
the norm, are also badly hit, may post negative growth. Telecom Impact: Mobile phone shipments fell by 26%
in November, compared to the previous month. Smartphone shipments are down by 23%. Inventory pile up
with retailers. Big sellers who do card and online transactions less badly hit. IDC analysts expect sales for
feature phones to drop by 25% in the quarter, and smartphones to fall by 17.5%. Gold Impact: Scared by
government warnings, sale of gold against old currency notes fell drastically. NRI customers have fled. Sales
are down sharply, and it was already a bad year for gold. Agriculture Impact: Interestingly, villages have
adapted in some ways better than cities. GoI allowing tax free deposits of any amounts for farmers have led to
many of them getting 20% premium from traders when transacting. Informal credit for daily purchases and use
of old notes for key inputs and selling produce have kept rural economy going. Crop planting increased 20- 35%
every week after demonetization and remained higher than last year in all weeks after November 8. But a lot
depends on cash supply improving quickly in the new year. Metals Impact: Real estate slowdown has hit steel,
and may hit further. Aluminum, copper, zinc also hit since they are raw materials in building industry products.
If auto sales are hit badly, metals business will do worse. 1.4 IMPACT OF DEMONETIZATION ON
COMMON MAN Cash crunch The 500 and 1,000 rupee notes were the largest denomination of money, which
made up for 14 lakh crores in circulation. Demonetization has a direct impact on sectors dealing with cash—
vendors, auto rickshawwallahs, taxi drivers, daily wage earners and small traders. The

22. IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP AL-AMEEN ARTS,
SCIENCE AND COMMERCE COLLEGE Page 22 Indian system mainly functions on cash, and so, less cash
means disruption in the flow. Even sectors like real estate, which deal with illegal cash transactions, will go
through a rough patch leading to fall in profits. Interest rates When money is deposited in the bank, one earns
interest for the same. After the announcement of note ban, there have been huge cash deposits in banks. In fact,
some of the leading public and private banks have reduced the interest rates on deposits. Depositors might get
lesser interest on their deposits, but the good news is that it will have a long-term positive effect on the economy
as the lending rate (interest rate on loan) will fall. This will boost credit and investment, to recover the slumping
economy. Inflation Total cash available, and by this we mean the supply of money, has fallen, which may lead
to deflationary pressures (general price level becomes lower). In effect, it implies less cash compared to the
supply of goods. But as the price levels in India have been high due to high inflation, fall in money supply can
actually help in bringing down inflation. With unaccounted money being wiped out, we can expect lesser
pressure on demand. Fall in inflation will help the common man, because goods will now become cheaper. On
the other hand, due to the slowing economy, if production falls more than the fall in the supply of money, then
the demand for goods will overshoot the supply of goods, which in turn will lead to higher inflation. It all
depends upon the effect on production and economic activity in the nation. The tax effect Deposits above Rs 2.5
lakh that have not been justified or declared to the income tax department will be penalized and taxed 200 per
cent. This can help bring black money into the white money fold, making it legal. This can also provide
revenues for government, which can be used to pay the deficit in the budget estimation. If economic activity is
slow, then the indirect taxes (tax on goods and services) will be lesser than estimation. It all comes down to
which is more, collection of penalties and taxes, or the fall in indirect taxes. Demonetization could be the

IMPACT OF DEMONITIZATION ON MIDDLE AND LOWER INCOME GROUP :

The study reveals that there was a huge impact of demonetization on middle and lower income groups. The
people had to forego their personal opportunities pertaining to career or personal life due to the currency
shortage during demonetization and not only that but people had to stand in a queues for hours to withdraw their
own money that too not as much as they want. The promise was made to the people of the nation that they will
get 15 lakh in each ones account after the move and which has not fulfilled.

However, the move was very necessary in order to put a control over many illegal activities that were happening
in the country and the move will ultimately bring benefit in a long run for the nation.