Unit- 4

DEMONETISATION

What Is Meaning of Demonetization?

Demonetization is the act of stripping a currency unit of its status as legal tender.
It occurs whenever there is a change in national currency . The current form is
pulled from circulation and retired, often to be replaced with new notes or coins.
Sometimes, a country completely replaces the old currency with a new currency.
In an attempt to rid India’s economy of black money and corruption, prime
minister Narendra Modi announce demonetization on 8 th November 2016 .

Definition of demonetization?
Demonetization, in layman’s terms, is the eviction of a particular currency/tender
present in the economy from circulation and thus replacing the same with a new
currency which may aim for several outcomes like the corruption-free economy,
black money removal, controlling inflation, stopping funding of illegal activity, etc.

What is the background of demonetization in India ?

Demonetization is not a new concept and has been carried out several times in
the past by different countries. Most recently, Zimbabwe demonetized ts
currency in 2015. India demonetized its currency twice before – first in 1946 and
then in 1978.

The background of demonetization in India can be traced back to the

announcement made by the Prime Minister of India, Narendra Modi, on 8 th
November 2016. The announcement was made with an intention to tackle the
issues of black money, corruption and fake currency notes in India initially, the
government had proposed to scrap the old 500 and 1000 rupee notes and replace
them with new 500 and 2000 rupee notes. However, later on, the government
decided to scrap the old 500 and 1000 rupee notes completely and introduce new
500 and 2000 rupee notes. The decision was taken after careful consideration and
consultations with various experts. The move was Criticized by many, who termed
it as a “draconian” measure. They argued that the move would not be able to
achieve its desired objectives and would instead lead to immense hardship for the
common man. However, the government defended the move, stating that it was
necessary to tackle the menace of black money. The move led to the withdrawal
of around 86% of the total currency in circulation. This led to a significant
shortage of cash in the economy and immense hardship for the common

History of Demonetization in India:

 The Demonetization of 1946:

The pre-independence government o denomination notes on 12 th f India

banned the much in circulation Rupees 1000 high January, 1946. The rationale
behind the exercise was unearth black money on account of tax evasion by
businesses which had made a killing by supplying materials to the allie d forces in
the just concluded second world war. Nonetheless, the then governor of RBI Sir
Chintaman Deshmukh went on record to observe his apprehensions on the sad
exercise. The Indian National Congress Party adopted a cautious approached
welcoming the move aimed at weeding out black money but at the same time
expressing its concern on the difficulties caused to the honest by the ban.
Nonetheless, an estimated value of 47 crores were collected from all over India.
Though there were incidents of distress, exercise did not inconvenience the
majority as it involved only a miniscule percentage of money in circulation.

 The Demonetization of 1978:

Demonetisation occurred in India earlier, in 1978, when the Janata Party coalition
agreed to eliminate the 10,000-, 1000-, and 500-rupee notes in order to combat
black money in the economy. Surprisingly, IG Patel, the RBI governor at the time,
was opposed to the move because it was thought to be aimed at corrupt
preceding government leaders. A week was provided to anyone to swap any high-
denomination bills. Higher currency denominations made up such a small
percentage of the total money stock that they had no discernible effect on the
money supply or the pricing of essentials.

 The Demonetization of 2016 :

On 8th November 2016, the Prime Minister of India Mr. Narendra Modi has
announced that Rs.500/- and Rs. 1000/- will not be a legal tender and has given
certain time fold for people to exchange the currencies in their possession to new
currencies which are issued. The demonetization announced by the Prime
Minister is in the unlimited legal tender of Rs. 500/- and 1000/-. These currencies
are withdrawn and the Public is requested to deposit same either in post offices
or in banks. While doing so, the depositors have been asked to produce their
identity through Aadhar or Pan card. This will enable the government to trace the
persons who have exchanged illegally the unlimited legal tender

Advantages of Demonetisation:
 Getting fake currency out of circulation: Demonetisation can also be used
to get fake currency out of circulation in a country’s economy since such
currencies cannot be deposited in banks and other financial institutions.
 Controlling inflation: Demonetisation is usually cited as having one key
advantage: this is that it can control inflation. Taking certain notes out of
circulation can help the government to control public spending.
 Tax Collection: Money deposited in the bank during demonetisation can be
taxed especially if the affected parties were trying to evade taxation by
keeping hard cash.
 The move to digital currency: Some commentators argue that in the
future, we will all be using digital currency, such as bitcoins. If this is true,
then one advantage of demonetisation is that it will help to propel us into
the future. .
  Improved deposits and savings in financial institutions: Parallel
economies make it difficult for banks and other financial institutions to
raise deposits. Demonetisation reduces the size of the parallel economy
and boosts savings and deposits. .
 Stopping fraudsters: When a new currency is introduced, this can also be a
great opportunity to halt the activities of fraudsters who had been making
money illegally by counterfeiting coins and notes. .
 Growth in a country’s GDP: Due to low lending rates, improved revenue
collection, and growth in savings and deposits, a country that has
demonetised is likely to see an improvement in the growth of its GDP.
 A measure of good governance practices: Some experts claim that
demonetisation policies improve the ease of doing business and is also a
measure of good governance. Good income management habits: People
will opt to invest their money in properties such as real estate or deposit
cash in banks to safeguard against some negative effects of
demonetisation. Reduction of lending rates: Availability of cheap deposits
in financial institutions means that people can borrow money at low
interest rates.

Disadvantages of Demonetisation:
 little cash in circulation: Cash crunch is a major disadvantage of
demonetisation due to the unavailability of small currency
denominations, an issue which makes it difficult to make small
purchases.
 Inconvenience and annoyance to the public: Sometimes,
demonetisation can be very inconvenient. For example, sometimes the
government will remove certain denominations of bank notes from
circulation but keep others. It can be annoying when smaller coins are
removed from circulation and you do not have enough change.
 Slowdown in Economic Growth: Economic growth will experience a
period of lull due to business disruptions, at least in the short term.
  Panic: Not everyone understands the essence of demonetisation and,
therefore, such an exercise is likely to result in panic among a section of
the population.
 An avenue for fraud and corruption: Some people are likely to take
advantage of lapses in the financial system to engage in fraud and
corruption when exchanging currencies.  Disruption of Trade: The
normal trading activities may be disrupted by this process since it takes
time for consumers and suppliers to adjust to the new monetary policy.
 Loss of tradition: People can feel attached to their old bank notes and
coins as they can feel that they constituted part of their tradition .
 Problems with paying bills: If someone has sent some bank notes in the
post in order to pay a bill, or if there is any substantial delay in processing
a bill payment, and demonetisation hits in the mean time, the money set
aside to pay the bill can become invalid.
 ATMs have to be re-calibrated: ATM machines have to be recalibrated to
accommodate the new currencies. It will result in additional costs for
banks and also inconvenience customers.  Confusing: Demonetisation
can be confusing and annoying – especially for people who are not able
to get rid of their old notes in time.

What Is Black Money?

Black money includes all funds earned through illegal activity and otherwise
legal income that is not recorded for tax purposes. Black money proceeds are
usually received in cash from underground economic activity and, as such, are not
taxed. Recipients of black money must hide it, spend it only in the underground
economy, or attempt to give it the appearance of legitimacy through money
laundering.

How is black money generated?

Black money is generated by any of the following three ways

  Illegitimate activities: The illegal activities that can lead to black money
generation are: 1. Crime 2. Corruption 3. Non-compliance with tax
requirements 4. Complex procedural regulations 5. Money laundering 6.
 Smuggling Tax evasion: This is where an entity wilfully does not pay taxes
that are due to the government.
 Tax avoidance :This is where an entity takes advantage of the existing
loopholes in the system and avoids paying taxes. This is not illegal though.

What is Fake Money?

Counterfeiting is the oldest technique used by fraudsters to cheat unsuspecting

individuals of their money. Here, the fraudster may handover an imitation
currency in exchange for real bank notes under various pretexts like making
change or offering help

What you can do to avoid being a victim of counterfeit notes: Rs 2000.

1. See through Register

2. Latent image

3. Denominational numeral in Devnagari

4. Mahatma Gandhi portrait

5. Micro letters “RBI” & “2000”

6. Security thread with inscription “Bharat”

7. Guarantee clause

8. Portrait and electrotype watermark

9. Number panel

10. Denomination in numerals

11. Ashoka pillar emblem

12. Intaglio printing

13. Intaglio printing on the lines for visually impaired.

Cashless Economy –

Types of Cashless Modes and Payments There are various cashless payment
modes and these are mentioned below

 Mobile wallet: It is basically a virtual wallet available on your mobile

phone. You can store cash in your mobile to make online or offline
payments. Various service providers offer these wallets via mobile apps,
which is to be downloaded on the phone. You can transfer the money into
these wallets online using credit/debit card or Net banking. This means that
every time you pay a bill or make a purchase online via the wallet, you
won’t have to furnish your card details. You can use these to pay bills and
make online purchases

 Plastic money: It includes credit, debit and prepaid cards. The latter can be
issued by banks or non-banks and it can be physical or virtual. These can be
bought and recharged online via Net banking and can be used to make
online or point-of-sale (PoS) purchases, even given as gift cards. Cards are
used for three primary purposes – for withdrawing money from ATMs,
making online payments and swiping for purchases or payments at PoS
terminals at merchant outlets like shops, restaurants, fuel pumps etc.

 Net banking: It does not involve any wallet and is simply a method of
online transfer of funds from one bank account to another bank account,
credit card, or a third party. You can do it through a computer or mobile
phone. Log in to your bank account on the internet and transfer money via
national electronic funds transfer (NEFT), real-time gross settlement (RTGS)
or immediate payment service (IMPS), all of which come at a nominal
transaction cost. The cashless economy in India is being promoted through
various platforms and applications which provide easy methods of funds
transfer and payments.
What Is a Digital Transaction?

A digital transaction is a seamless system involving one or more participants,

where transactions are effected without the need for cash.

KEY TAKEAWAYS :-

 A digital transaction is a process by which transactions take place without the

use of cash.

 A digital transaction involves the collaboration of several parties including large

financial firms and a number of sectors within the economy.

 Examples include swiping a debit card at a store, paying for a purchase online,
or transferring money from an app to your bank account.

 These kinds of transactions have become increasingly prevalent and necessary

as consumers move from a cash-powered economy to a digital one.

Benefits of Digital Financial Services(DFS):-

 Accessible everywhere

 Very Easy and efficient

 Save lots of time and resources- no more waiting in queues for affecting fund
transfer

 Every transaction is updated on real-time

 Ease of decision making

 Seamless integration of all digital platforms

 Eco-friendly

 Increase in customer base with tech support.

Importance of Digital Finance Transformation:-

The word digital becomes so obvious in this smart technology epoch. The
importance or the need for digital transformation in the banking industry is that
to overcome the time consuming complex financial process with simple digital
solutions. The digital revolution in financial technology gives people the utmost
freedom to control their accounts. Every individual could affect any kind of
transaction without seeking the help of their home branch or bank staff. The
digital finance is so robust and user-friendly that it focuses the customer
satisfaction. Digital transformation does not only simplifies the existing system,
but it also facilitates the evolution of new financial products and tools that
increase the productivity and efficacy of any task. The best example of
digitalization and digitization is FASTag. The toll collection system now made
simple. You could save more time and resource Importance of Digital Finance
Transformation:- go paperless, could be more productive with a secure
transaction system. This is the power and importance of digital finance
transformation. Digitalization transforms the existing banking industry not just by
recording the transaction but to derive complete understandings of customer
behavior and market approach. The banking procedure has evolved as an insight-
driven functional system. It establishes high standards, faster processing,
complete automatic execution with the utmost customer and employee
satisfaction.

Remonetization : Demonetization is followed by remonetization to replace the

old discontinued currency with a new currency in the economy. Remonetization
after demonetization is an uphill task initiated by Government to make India
Digital. The Digital India programme is a leading programme of the Government
of India with a vision to transform India into a digitally empowered society and
knowledge economy. “Faceless, Paperless, Cashless” is one of stated role of
Digital India. As a part of promoting cashless transactions and converting India
into less-cash society, various modes of digital payments are available such as
Banking cards, USSD (the Unstructured Supplementary Service Data), AEPS
(Aadhaar Enabled Payment System), UPI, Mobile wallets, Banks Pre-paid Cards,
Points of Sale, Internet Banking, Mobile Banking and Micro ATMs.
 It can be easily concluded that the year 2017 is an important milestone for
India and would mark transition from a largely cash economy to a less cash
and a more digital economy. Migrating from a cash economy to a digital
economy requires a big behavioral and social shift, and a recast of the
whole mindset. Making gadgets available to the society will not help
unless we bring about a social and behavioral transformation. The
demonetisation undertaken by the government was a large shock to the
economy. The impact of the shock in the medium term was a function of
how much of the currency will be replaced at the end of the replacement
process and the extent to which currency in circulation is extinguished.
While it has been argued 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, this argument is based
on impressions rather than on facts. A surge in non-cash transactions
through digital options such as mobile wallets and debit cards is a clear
sign that India is gradually embracing the cashless economy, but it remains
to be seen if this will continue when new currency notes come into
circulation. However, one of the major concerns would be digital security.
It may be noted that to have a smooth transition to a digital economy, the
government needs to have a policy of digital security. A strong digital
security and low risk will enhance the spread of digital/cashless economy.

Role of RBI in Demonitation and remonitization :

 As a first role the central bank had urged people to create 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.
 The Second role that the central bank initiated was a tax declaration of the
income and had given October 30,2016: deadline for this purpose. .
 Government was able to mop up a huge amount of undeclared income. .
 This might lead to a further increase in shortage of currency. .
 There are about four printing presses for currency in india and depending
upon the value and number of pieces of Rs.500 and Rs.2000 to be printed.
 Might take long taking into account the large scale of withdrawal of the
monetary base. .
 The bank’s deposit base is expected to receive fillip of 0.5-1.4 per centage
of GDP. .
 In turn financing saving can be expected to raise by close to this
proportion due to switch from saving from unproductive physical asset to
financial assets. .
 A ride in deposit base will allow bank to lower the blended cost of fund as
highest CASA(current account, saving account) deposit help to replace the
high cost of borrowing and lower overall cost of fund. .
 Create for further Mone accommodation within improve monetary
transaction economic efficiency and structural moderation in currency in
circulation there is likely to be a greater room for the Rbi to ease
Monetary policy rate further .I am hopeful that the Rbi will ease by
another 100bps in 2017-2018 to a repo rate of 4percentage by
March ,,2018. .
 Support government finances with some part of accounted money-making
way into the formal channel the government stand to benefit from higher
income tax collection.this should help cushion the government Fy17 fiscal
Deficit Targets Especially Post The Short fall in anticipated spectrum
revenues.Poistive impact from a bond market perspective improvement in
Bank deposit base lead to higher SlR(stationory liquidity ratio ) demand.
Anticapation of monetary easing to further support bond.

The National Payments Corporation of India (NPCI) i s an

initiative taken by the Reserve Bank of India (RBI) and Indian Bank’s
Association (IBA) to operate the retail payments and settlement systems in
India. This organisation was founded in the year 2008 under the Payment and
Settlement Systems Act, 2007. NPCI has been incorporated as a ‘not for
profit’ company under section 8 of Companies Act 2013.
What is NPCI?
The National Payments Corporation of India (NPCI) serves as an umbrella
body for the operation of retail payment in India. This organization was
established by the Reserve Bank of India along with the Indian Bank’s
Association. NPCI was incorporated in December 2008 and was centrally
promoted by the Reserve Bank of India. The Certificate of Commencement of
Business was issued in April 2009.

Presently, NPCI is promoted by ten major promoter banks:

 State Bank of India
 Punjab National Bank
 Canara Bank
 Bank of Baroda
 Union Bank of India
 Bank of India
 ICICI Bank
 HDFC Bank
 Citibank
 HSBC