Term paper
On
Demonetisation in Modi’s Government
B.A. (H) POLITICAL SCIENCE
Amity institute of social science Amity
university Madhya Pradesh
APRIL -2020
Submitted to: submitted by:
Dr. Saleem Ahmad Nitin Singh Tomar
Assit Prof-II A61157419028
Dept. of pol.sc. AISS
CONTENTS
• ACKNOWLEDGEMENT
• INTRODUCTION
• MOTIVES OF DEMONETISATION
• BENEFITS OF DEMONETISATION
• DRAWBACK AND LOSSES FROM
DEMONETISATION
• CONCLUSION
• BIBLIOGRAPHY
• PLAGIARISM
ACKNOWLEDGEMENTS
I have taken efforts bin this project. However It would not have
been possible without the kind support and help of many
individuals and organization. I would like to extend my sincere
thanks to all of them
I am highly indebted to our Director( Dr. Iti Raw Choudhary )
and to the teacher in charge
(Dr. Saleem Ahmad) for their guidance and supervision as well
as for providing necessary information regarding the project
and also for their support in completing the project .
I would like to express my gratitude towards my parents for their
kind cooperation and encouragement which helped me in the
completion of this project.
My thanks and appreciation also goes to my classmates and
friends in developing the project and to the people who have
willingly helped me out with their abilities.
Nitin Singh Tomar
B.A. (HONS) POLITICAL SCIENCE
Introduction
Demonetisation is an act of cancelling the legal tender status of a currency unit in circulation. Anticipating
positive changes on the liquidity structure as a whole, nations often adopt Demonetisation policy as a
measure to counterbalance the current economic condition. Countries across the globe have used
Demonetisation at some or the other point to control situations such as inflation and to boost economy.
In November, Indian government banned the high denomination notes of Rs.1000 and Rs.500 as move to
curb counterfeiting and money laundering.
Effects of Demonetisation on various sections of Indian Economy
Demonetisation, which sent a shockwave through the Indian economy, completes a month after its
midnight declaration on November 9. Prime Minister Narendra Modi engineered this master plan
that has allegedly swept off a massive portion of India's monetary base to eliminate the problems
of corruption, black money and counterfeiting. This surgical strike on black money is expected to
also raise the country's cashless transactions and untie all the knots in tax collection. But on the
other hand, the abrupt monetary reform caused the worst hit to rural households and elderly people.
The decision to delete all the notes from Rs.1000 and Rs.500 made it to newspapers around the
world, drawing both supportive and negative feedback.
Demonetized currency and small savings schemes
Government has advised banks not to accept the discontinued currency notes in small saving
schemes for deposit. The responsible authority has, however, given no reasons for such a move.
Small savings schemes are one of the most viable investment choices with the low-risk aspect
offering greater returns. Some of the common savings schemes are Kisan Vikas Patra, Sukanya
Samridhi, Savings Schemes in Post Office, etc. Cash transactions are the only viable means for
those without access to banks to meet their regular requirements and for small-scale investments.
The argument also applies to the exclusion of Post Office accounts from the law on small savings
schemes.
Impact of Demonetisation on Indian economy
In a country where 85 percent of transactions occur by cash, several concerns arise about canceling
the legal tendering character of two high denomination banknotes. Since of demonetisation, the
service sector in the country that relies more on cash transactions would be hit badly. Not to
mention, India's market operation has come to a resounding halt. This downturn in economic
activity could continue for a few months and as a result, GDP could fall considerably from the
values of the previous year.
Even as the country faces the greatest financial crisis of all time, some experts expect the
stabilizing economic conditions in a few quarters. Deutsche Bank and Goldman Sachs predict that
by next fiscal year India will join the list of the fastest growing economies. An improved 2017
monsoon season will benefit the nation's agricultural economy, which in turn would contribute to
the overall financial recovery. Economists also expect that the decision to scrap high-value
currency bills would lead to 2 per cent GDP growth.
Effect of Demonetisation on bullion market
Invalidation of the higher denomination currency notes would affect the unorganized sector in
large part. However, the primary real estate market won't change much as property buyers make
transactions either in the form of cheques or by loans. Demonetisation's effect can be felt in
secondary markets where most of the real estate transactions happen by currency. The currency
reform is expected to produce positive results with increased transparency in dealings in the real
estate market. Debt lending, private equity, and FDIs may also be expected to deliver further
incentives.
Demonetisation impact on equity and mutual funds
Demonetisation's impact on equity funds is expected to be positive with more capital coming into
the structured financial transaction network. If cash flow is completely tracked around the country,
equities will increase dramatically, as more citizens can invest in equity-related savings schemes
to save on taxes.
Tax to GDP ratio
India's tax-to-GDP ratio was found to be at 16.6 per cent, which is comparatively small compared
to emerging markets around the world, in an economic survey conducted last year. But the tax-to-
GDP ratio is expected to rise significantly with deposits drifting away from unorganized zones and
being channelized to banks. Analysts also expect a significant rise in the percentage of tax
collection, as all financial transactions will be under the microscope. Government can also reduce
tax rates, for the same reasons.
Jan Dhan accounts
At present, in the overall banking domain, the contribution of Jan Dhan accounts as regards
deposits has been significantly low. But those idle accounts witness a steep surge in deposits after
demonetisation. Another positive side of the demonetisation is that a significant number of people
— including those from rural areas — opting for bank-based transactions would gain traction with
the government's financial inclusion program.
E-wallets getting a major push
Since the cancelation of the currency notes Rs.500 and Rs.1000, e-wallet companies such as
Paytm, PayU India, Mobikwik, etc. are seeing a sudden rise in their daily transactions.
Demonetisation would also impact certain companies' recruiting needs and other business
functions. And app-based cab firms introduce their advertising materials to encourage cashless
transactions.
Pre-owned vehicles sector In the used vehicle sector, sales activities are expected to decline after
the demonetisation shift. This can have a degree of adverse impact on the original suppliers, as
prospective customers may not find it convenient to abandon their old vehicles and go for a new
one.
Effect of Demonetisation on interest rates
RBI is likely to cut interest rates on fixed deposits, revolving deposits and the like as a result of
increased liquidity. Since banks are likely to raise large deposits in the months that follow, the
Banks' borrowing costs will be reduced. This benefit in the form of lower interest rates on loan
products would be applied to consumers.
Cement and steel industry
In the cement and steel sectors which are closely related to real estate, a temporary decline in sales
may be observed. A closer look at the situation shows major effects of demonetisation on the
building sector – the worst sufferers are the daily wage earners. Yet with a increase in bank deposits
complementing the savings rate, the short-term difficulties will soon be resolved.
Short-term effect on GDP
Reduced market demands due to dulled cash flow would cause a substantial drop in GDP figures
for a few quarters. The effect of demonetisation will be reflected in GDP on the aforementioned
sectors such as manufacturing, gold, and other secondary markets. But, once cash flow is
normalized in these areas of business, the situation will be under control.
Motives of Demonetisation were:
1. To remove circulation of the counterfeit currency from the economy.
2. To finish the black money from the economy
3. To create fear among the tax evaders and corrupt officials
Benefits of Demonetisation:
1.Increase in the number of Digital Transactions: In a note, the Ministry of Finance
said that between October 2016 and May 2017, the number of digital transactions increased by 56
per cent to 1.1 billion. The greatest advantage of rising the number of digital transactions would
be that the Reserve Bank would have to print smaller quantities of new notes. This will save the
Government's printing costs. To increasing the number of digital transactions, Government has
now introduced the BHIM App and UPI App.
2. Increase in Government Income: Increasing digitalisation in the economy would make
the economy more transparent, which will reduce the incidence of tax evasion. It will increase the
government's tax revenue as it would tax more and more people.
Advance personal income tax collections (i.e. other than corporate tax) as of August 5, 2017
showed an rise of around 41.79 percent over the same period in the previous financial year.
3. Help in Controlling Black Money: One of the key reasons behind the demonetisation
was to monitor the black money. Now the whole house buying and selling cycle has to be done by
online transaction. Now it is mandatory to only make all transactions in digital mode amount to
more than 3 lacs. That start will that the economy's black money generation.
4. Abatement in Corruption: The money the corrupt officials received was plunged into
demonetisation. And the corrupt officials aren't going to be too interested in taking the bribe as
government will ask them to provide proof of income. Following the demonetisation, the central
government provided notice to more than 18 lac citizens who have deposited money in their
accounts beyond a cap.
5. Decrease in the number of counterfeit Notes: That is one of the key reasons behind
demonetisation thinking. Those who run the country's parallel economy and have an enormous
amount of falsified currency; after demonetization their currency instantly loses the value.
6. Cheaper Loans: Because of demonetisation; huge amount of rupee returned to Indian banking
system. Now banks are offering customers cheaper personal loans, vehicle loans and house loans.
The personal loan that used to penalize at a cost of 18 to 20 per cent is now available at just 12 per
cent.
7.Pending payments Received: Just to spend old currency notes; pending power, water and
telephone bills were charged by consumers / companies etc.
8. Abatement in Sponsored Terrorism: It is observed that so many young boys are
involved in terrorist activities in Jammu & Kashmir and Paksitan only because of income. When
Indian government banned its papers, the terror activities in the Jammu & Kashmir and other parts
of India were unexpectedly abated.
Drawbacks and losses from Demonetisation:
The number of 500 rupee notes in the economy was 17165 million before demonetisation and the
number of 1000 rupee notes was 6858 million, the combined market value of these notes was 15.44
lakh crore. Following the demonetisation, the RBI said in June 2017 that in the form of white
money, people deposited 15.28 crores (99 per cent of total circulation currency). So only Rs.
16,000 crores did not go back to the financial system or in other words the government just got
Rs.16,000 crore as black money.
1. Expected result not found :
Reserve Bank has said that the sum of Rs. 16,000 crore did not return to the banks after the ban,
which can be regarded as the government's benefit. But the government was spending Rs. 7,965
crores on new note printing. And if we subtract that number from the 16000 cr then the
government's net income is reduced to just Rs. 8035 crore.
2. No Abatement in the Corruption:
The government says the demonetisation has reduced the country's corruption which isn't true. A
recent report published by Transparency International said India is Asia's most corrupt country.
More than half (69 percent) respondents were expected to pay a bribe in five of the six public
institutions — schools, hospitals, ID records, police, and utility services.
3. The Logic of lack of Terrorism:
Some people believe the demonetisation has reduced terror activities in the J&K and the rest of
the country, but this is only true for a short period of time. Now the incidents of encounters with
the security forces in j&K are still reported daily.
4. Note Printing Cost:
The cost of printing notes increased to Rs 7,965 crore in FY17, which was Rs. 3,421 crore in FY16,
according to figures released by Reserve Bank of India. Demonetisation thus increased the cost of
printing money notes in the Kashmir country.stone pelters
5. No reduction in fake Notes:
The number of fake notes in the banking system jumped from the previous year by 20.4 per cent
to 7.62.072 in 2016-17. 6.32 lakh fake currency notes were found during the time 2015-16. Apart
from that, we've heard the reports of fake notes coming from ATM nationwide.
6. Fall in Employment:
India's population rose from 401 million in April 2016 to 406.5 million in December 2016,
dropping to 405 million in 2017 between January and April. There are 73 percent of manufacturers
who did not employ Indian notes for 3 months after demonetization.
7. Decrease in GDP growth:
Throughout the demonetisation, many companies were unable to continue their manufacturing
operations, which is why the country's growth rate decreased to 5.7 per cent in June 2017, which
was 7.5 per cent in September 2016. It means the demonetisation caused a 1.5 percent reduction
in the Indian GDP.unemployment rate in India 2017 It is worth noting that India is spending almost
1.5 percent of its GDP on the defense sector.
One of the main factors behind the demonetisation's reduced efficacy is Jan Dhan account
openings. 2.2 crore Jan Dhan Accounts were opened within the four months of the demonetisation.
These accounts had deposited a significant sum of black money.
The rich people once again used the poor for their advantage, depositing their black money into
their accounts and taking this money back as white.
Jan Dhan Yojana was in itself a very good and progressive scheme but it was used by dishonest
people to their benefit.
Conclusion
• Demonetization was move take by the Modi government and the RBI to curb the black
money practices and this was due to prevent the people form hoarding of the cash and to
prevent the counter fitting of the currency and to fight against the terrorist groups that
operate in India.
• The demonetization impacted the economy by creating a short term pain but a long term
profit for the economy as the change was felt by all the segments of the economy the
decline in the productive capacity and decline of the cash-based transaction that made the
nation cashless and thereby benefiting the firm and consumer levels.
• This move stopped the black and illegal trade of goods and services and possesses a
challenge for the future currency markets and thus has a profitable outcome in the long run
when the economy will bounce back to the high growth without black or illegal capital.
BIBLIOGRAPHY
➢ http://indiabudget.nic.in/es2016-17/echap03.pdf(7/3/2017)
➢ http://www.nipfp.org.in/media/medialibrary/2016/11/WP_2016_182.pdf(7/3/2017)
➢ http://thearcmag.com/indias-demonetistion
➢ http://www.fairobserver.com
➢ Economistimes.Indiatimes.com/topic/demonetisation
➢ http://www.studydhaba.com
➢ www.dnaindia.com/topic/
➢ www.careratings.com
