IMPACT OF DEMONETISATION BY
TITLE OF THE SUBJECT:
ECONOMICS
SUBMITTED BY
KARTIK GUPTA
(SM0121030)
SECOND YEAR, B.A.LLB (HONS.)
(THIRD SEMESTER)
FACULTY IN-CHARGE- Ms. Dipakshi Das
ASSISTANT PROFESSOR OF ECONOMICS
NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY , ASSAM
LITERATURE REVIEW 2
SCOPE 4
RESEARCH QUESTIONS 4
RESEARCH METHODOLOGY 4
INTRODUCTION 5
INTENTION OF GOVERNMENT BEHIND DEMONETISATION 5
HISTORY OF DEMONETISATION IN INDIA 6
IMPACT ON DIGITALISATION AND CASH FLOW 7
IMPACT ON FORMALISTION 8
IMPACT ON COUNTERFEIT CURRENCY 9
WAY FORWARD 9
CONCLUSION 11
BIBLIOGRAPHY 12
1
“What is growth if not to help ordinary people thrive?”
-Winnie Byanyima
LITERATURE REVIEW
1. Amartya Lahiri,THE GREAT INDIAN DEMONETIZATION,vol 34 “Journal Of
Economic Perspectives”55,55-74(2020)-
This great and well researched piece of work is authored by Amartya Lahiri .starting with the
paper Amartya gives an overview of what the demonetisation was, what was the objectives of
such an exercise and what were some other similar events that also took place in the great Indian
economy .the author places India’s demonetisation initiative by describing some intellectual
arguments and then by evaluating the same.the author also discusses the evidence with the logic
of the stated goals and considers some evidence on the effects of the demonetisation.the paper is
also supported by the data and graphs from the RESERVE BANK OF INDIA .moreover,towards
the end of the paper the author also acknowledges the fact that these are some early drawn
conclusions as the incident was relatively recent one.
2.Ms.Yashna samuel and Prof. Anoop K. Saxena, A Study On Demonetisation and Its
Impact On Indian Economy,volume 4,”International Journal of Innovative Research And
Advanced Studies”,287,288-289,(2017)-
The article is written by Ms.Yashna Samuel and prof. Anoop K.Saxena.This paper was mainly
done by using the methodology of desk research through secondary data and therefore it was
more Theoretical in nature.through this paper the authors tried to study the long term and short
term impacts of the demonetisation on the indian economy .the shortcomings of this paper was
that as the paper was based on a desk methodology and mainly dealt with theoretical part it fails
to supports its arguments in a strong manner .
2
3.V. Anantha Nageswaran and Gulzar Natarajan ,INDIA’S POST-DEMONETIZATION
POLICY AGENDA,1-32,(Carnegie Endowment for International Peace 2017 )
An immensely relevant read.This paper is authored by V. Anantha Nageswaran and Gulzar
Natarajan . this paper analysis the situation in a more holistic way.this research paper analysed
and then then tried to identify the follow up measures that are needed to address both informality
and its associated corruption so that price paid in terms of demonetisation is paid back in less
time and more effectively.this paper is so well researched that one get can an india only by
reading first few pages of the chapters provided . Throughout the read the authors have also cited
some other great economists and their viewpoints.
4.Swati Gupta, An Impact Analysis of Demonetization on Key Sectors of the Indian
Economy, 2 LIBERAL Stud. 69 (2017)
This research article has been authored by Swati Gupta .this is one of the article due to which this
article has been possible .the author in this article has tried to analyse the impact of
demonetisation on three key sectors of the Indian economy that namely -banking, auto and real
estate sector respectively.though this research paper was written quite early to analyse the impact
of impact of demonetisation but still it is a very relevant read to get a basic idea.
3
SCOPE
The scope of this research paper has been briefly narrowed down to discuss only important things
so that the quality of paper is not hampered. By using only secondary sources as a reference, the
author has tried to discuss what is demonetisation.What was the history and some past
experiences of our country with demonetisation? The author has tried to find out the impact of
demonetisation on the sectors that were in the government’s mind while going forward with the
demonetisation .Towards the end the paper talks about the way forward and conclusion.
RESEARCH QUESTIONS
● What is demonetisation?
● What is the history of demonetisation in India ? and its analysis
● What was the intention of the government behind demonetisation?
● What was the impact of demonetisation?
RESEARCH METHODOLOGY
This research is of descriptive nature so all the required and relevant data have been taken up
from various journals, magazines for published papers and websites. Books have also been
referred to for theoretical information on the topic as required. Online blogs and opinions of some
eminent personalities were also given consideration.
The method of research used in this research paper is based on secondary data that means it is
based on some pre-existing information which is known as primary data. In secondary data, the
primary data is amalgamated and integrated with various data and combined to give a result to a
4
new data that is called secondary data.
INTRODUCTION
This year on November 8, 2022, we marked six years of demonetisation in India. Demonetisation
is the act of stripping a currency of its legal tender.in demonetisation, an old currency is pulled
back from circulation and a new currency is often introduced which can be in the form of coins or
notes. demonetisation occurs when there is a change in the currency. On November 8, 2016, the
prime minister of India in his televised address at 8 pm, took the nation by surprise by
announcing that the government has decided to go with the decision to demonetise 500 and 1000
rupees currency notes that were in circulation .and as we all know that India is a high cash-based
economy this demonetisation amounted to be 86 per cent of the currency that was there in the
circulation. holders of the demonetised money were given a deadline of 31st December 2016 to
change their old currency notes with the new currency notes that were announced in the
denominations of 500 and 2000 rupees respectively.1 There were two ways in which the Indian
public could exchange the demonetized cash: they could either swap the old currency for new
currency (subject to daily limits), or they could deposit the old cash in their bank accounts. Given
the mammoth scale and extraordinary nature of the exercise, it was almost an obligation on the
government’s part to reap a wide range of economic benefits from it and not just treat it as an
exercise in raising tax revenues.2
INTENTION OF GOVERNMENT BEHIND DEMONETISATION
The Modi government gave 2 main reasons behind such a great move: first, that this move would
allow the state to capture the undeclared wealth that has been accumulated by the individuals
over time. Thereby, it was supposed to be a decisive blow against corruption. Secondly, to
remove counterfeit currency from circulation. The second motive though it can be said to be
1
Amartya Lahiri,THE GREAT INDIAN DEMONETIZATION,vol 34 “Journal Of Economic
Perspectives”55,55-74(2020).
2
V. Anantha Nageswaran and Gulzar Natarajan ,INDIA’S POST-DEMONETIZATION POLICY
AGENDA,1-32,(Carnegie Endowment for International Peace 2017 ).
5
laudable can be criticised at the same time as its target audience was very small. From the
estimates of the Indian Statistical Institute, the counterfeit currency in circulation was just 0.025
per cent of the total currency.
Third, to move the country towards digitalisation and fourth, to expand the formal sector by
induction of the informal sector.
HISTORY OF DEMONETISATION IN INDIA
The demonisation of 2016 was not the first instance in India when the currency in circulation was
being called back .It has happened previously 2 times during the post cold war era, one in 1946
and the other one in 1978. The highest ever denomination note printed by RESERVE BANK was
of rs 10,000 that was printed in the year 1938 and again in the year 1954. However, These notes
were later demonetized in January 1946 and once again in January 1978.3
In 1946 a year and a half before India got independence from the British raj, 500 rupees currency
notes were demonetised and the justification for the same was to prevent tax evasion and to fight
the black market. This move was termed as a “death blow” to the black marketers. At that time
also the officials were very sceptical over the success of the move and their stance was later also
strengthened by the data that 94 per cent of the demonetised money came back to RBI and also
the higher denomination currency was also reintroduced in the year 1954. The second instance
happened in the year 1978 .In 1977 Janta party had come to a coalition and the leader Morarji
Desai was very bullish about cracking down on black money and counterfeit currency. This time
also the justification from the government was the same. And the result was also only marginally
better than the last time as almost 86 per cent of the demonised currency was exchanged for the
lower denomination currency. By both these instances, it was visible that the objective for the
exercise remains mostly unfulfilled and it was only the public that suffered. A small instance of
demonetisation also happened in the year 2011 when the RESERVE BANK OF INDIA decided
to demonetise 25 paise and any other lower denomination currency in circulation.
After some time, when the air was clear the RESERVE BANK OF INDIA (RBI) after due
processing and verification announced that almost 99 per cent of the demonised notes came back
3
Swati Gupta, An Impact Analysis of Demonetization on Key Sectors of the Indian Economy, 2 LIBERAL Stud. 69
(2017).
6
to banks .out of Rs 15.41 lakh crore in circulation before November 8,2016,15.3 lakh crore came
back to the banks. Notes worth 11 thousand crores were still missing from the systems.
Also, the demonetised currency came back to its predomination levels within a year.
IMPACT ON DIGITALISATION AND CASH FLOW
Demonetisation’s motto was to encourage the cashless/digital economy. More and more cash-less
or less-cash transactions will lead to more disclosure of income which will increase the direct tax
collections. With a reduction in cash transactions, alternative forms of payment will be more in
demand. And from the data, this motto seems to be getting fulfilled as the digital payments are
nearly three times larger in comparison to what they were in the financial year 2018. The Reserve
Bank Of India’s digital payment index, which in 2018 was set as 100 as 2018 was taken as the
base year, has now risen to 270 points. This index also captures the spread of digital, taking into
account growth in the payments infrastructure.
But at the same time, it is not mutually aligned with the cash flow in the economy. covid has also
played a major role in this. This post-pandemic increase in the flow of currency often termed as
the ‘dash to cash’ is extremely uncertain.Reserve Bank of India data reveals that the currency
amount with the public stood at the record high of Rs.28.30 lakh crores for the fortnight ending
october 8,2022. This can be understood but the graphical chart attached below compares the cash
in circulation with the cash as a percent of the GDP.
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IMPACT ON FORMALISTION
One of the main attributes behind the demonetisation was to expand the base of formal
economy.But this task is not very easy as it sounds.one can get an idea by the basic fact that in
India more than 15 crore people do not have a bank account.And because of this they are highly
dependant on the cash flow in the economy.
But people are not to be solely blamed for the informality in the sector as there are many tax
compliance barriers that are involved .The report of ease of doing business published by the
World Bank also provides us with an idea as, India was placed at 63rd position which is far
behind many great economies of the world.
When demonetisation was announced it affected the informal sector the most as we stated that it
is highly dependent on the cash flow and suddenly after it there was a major cash crunch in the
country.For initial days it was like that the informal sector had suddenly came to a halt.
Demonetization may have raised the cost of informality, but the government should bring down
the cost of formality. If the underlying reasons for staying informal are not addressed, over time
the fear factor that encourages compliance will fade, and business activities will return to the
informal sector.
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IMPACT ON COUNTERFEIT CURRENCY
Demonetisation was a mighty blow to the counterfeit Indian currency. Currency with syndicate
operators operating both inside and outside the country has been wasted. Counterfeit currency is
one of the main reasons behind the devaluation of the real worth of Indian currency. Indian
Statistical Institute reported that at any given point of time fake currency notes amounting to Rs
400 crore were in circulation in the economy and around Rs 70 crore fake currency notes are
pushed into the country every year. But the real number could be much larger. Prime Minister
Modi’s demonetisation decision to ban old currency notes of Rs 500 and Rs 1,000 notes and
replacing them with new one completely sucked the circulation of fake currency.4 As new
currency notes have come with highly advanced security features which are barely possible to
replicate. With less number of counterfeit notes, the scope of terror financing and financing the
left -wing extremism groups,is reduced drastically.
WAY FORWARD
As nothing turns out to be perfect in this bitter world and as everything has some shortcomings
,demonetisation also came with some loopholes of its own. But there are some things that we can
still do to put things in a better place. Demonetization may have been meant as a one-off exercise
in mopping up the stock of black money held in cash, discouraging future tax evasion, and
curbing it through the digitization of most transactions. These endeavours are necessary and
important.
There is an immediate need to control the largest contributors of black money to the Indian
economy that are real states and politics. as these areas also deal a huge amount of unaccounted
wealth it will not be easy to deal with them with a short term goal. moreover, India needs to
expand its size of the formal sector to directly increase the tax base .this can be most easily done
with the help of digital inclusion in day to day transactions so that volume and no. of the
transaction will be recorded which in turn will help policymakers to come out with a more
4
Himanshu Kushwaha,Ashawani Kumar and Zainab Abbas, Impact Of Demonetisation On Indian Economy: A
Critical Study,vol.V(“International Journal On Management Studies”)24,26-28(2018).
9
effective scheme. merely making the informal sector turn formal will do no more good than
harm. What the government can do is that they can talk to the different stakeholders of the areas
concerned so that it can gain a more holistic view of the same and this will also help the
government to work on key aspects which are needed in the sector. The government needs to
promote digital transactions. all these measures should be implemented vigorously and
complemented with measures to deal with the shortcoming more effectively. If the government
wants to do something big they can do so by the legislative process.
10
CONCLUSION
Estimating the true effects of demonetisation is difficult at this particular moment as the event is
still relatively a recent one and time series data for the aggregate value are not long enough.
Demonetisation did created a stir in the Indian economy and Indian financial market but as
pointed out by many economists and industrialists, the true picture will only become more clear
in the long run.
We can not completely say that the cash component has been removed from the Indian economy
to a great extent. But The goal of eradicating black wealth and corruption by demonetizing
currency was problematic from the start, given the widespread acknowledgement of the fact that
undeclared income is seldom held for long periods in terms of cash.5 However, they have become
a far less influential factor driving the market trends like in the case of property purchases.
Recently a pilot survey was also conducted by the Reserve Bank on retail payment habits of the
individual in six cities whose results showed that cash remains the preferred mode of payment
and for receiving money for regular expenses. It also the case that we can not say that the move
of demonetisation was a wasteful exercise as during past few months covid pandemic has also a
very major role to play in this game .after the pandemic struck our country last year there was a
sudden need for groceries and other stuff that is required to sustain oneself in the pandemic and
majority of people tend to buy the items from the local grocery stores that are near to our home or
at the walking distance. As for the majority of times these local shops deal in cash only there was
a sudden increase of money that is held by the public. And Arguably, the disruptive effects of
demonetization would have been more limited if the government had demonetized just the
1,000-rupee bills. Governments contemplating such moves in the future may be better advised to
demonetize large denomination bills rather than those that are heavily used for daily transactions.
5
Amartya Lahiri,THE GREAT INDIAN DEMONETIZATION,vol 34 “Journal Of Economic
Perspectives”55,55-74(2020).
11
BIBLIOGRAPHY
● Amartya Lahiri,THE GREAT INDIAN DEMONETIZATION,vol 34 “Journal Of
Economic Perspectives”55,55-74(2020)
● Himanshu Kushwaha,Ashawani Kumar and Zainab Abbas, Impact Of Demonetisation On
Indian Economy: A Critical Study,vol.V(“International Journal On Management
Studies”)24,26-28(2018)
● Ms.Yashna samuel and Prof. Anoop K. Saxena, A Study On Demonetisation and Its Impact
On Indian Economy,volume 4,”International Journal of Innovative Research And
Advanced Studies”,287,288-289,(2017)
● Shiv Kumar Dogra & Navdeep Saxena, Impact of Demonetization on Terror Funding in
India: An Overview, 8 INDIAN J.L. & Just. 76 (2017).
● Swati Gupta, An Impact Analysis of Demonetization on Key Sectors of the Indian
Economy, 2 LIBERAL Stud. 69 (2017).
● V. Anantha Nageswaran and Gulzar Natarajan ,INDIA’S POST-DEMONETIZATION
POLICY AGENDA,1-32,(Carnegie Endowment for International Peace 2017 )
12
