Demonetisation means withdrawing the legal
tender rights of any denomination of currency. Units of money have deprived the
status of legal tender. Demonetisation is an act of taking away the legal
tender rights of any currency. The units of currency will not be considered as
valid currency.
Demonetisation is the process of ceasing a
unit of money of its status as legal tender. Demonetisation is a necessary
condition for changing the old currency with the new units of money. It may
involve the introduction of new notes or coins of the same denomination or
completely new denomination.
The currency has been demonetised thrice in
India. The first demonetisation was on 12th January 1946 (Saturday), second on
16th January 1978 (Monday) and the third was on 8th November 2016 (Tuesday).
The government believe that this currency ban
is required for the four main reasons. To control inflation, to fight against
corruption, to remove counterfeit currency and to discourage the cash
transaction.
Developing country like India has to find the
solution to come out of the problems like this for the betterment of the
country. The government needed to keep the decision secret so that the tax
evaders would not be aware of this clean-up mission before the announcement of
demonetization takes place.
Why Demonetisation:
The demonetisation effort being led
by PM Modi in India is appreciable to an extent but follows positive as well as
negative aspects. The aim is to wash the stock of “black money” out of the
economy and get it into the banked and taxable part of the economy.
“Cleaning of the black money is a
very positive step. However, certain things will happen as a result of this.
Transactions will now begin to move to white economy through the banking system
which means there will be surge in bank deposits. Even savings in terms of
deposits will go up.”
Many renowned personalities like politicians,
businessman, and so on have huge reserves of black money either in India or
abroad. All the notes of are in high – value denominations.
Now with the news of demonetisation they will
be forced to deposit their black money into the banks, after submitting their
PAN or Aadhaar or Passport number, to get new currencies.
This will help the government to catch the
culprits and keep an eye on all the fraud people who are helping them in
converting their black money into white money.
Though this move causes some difficulties for
the common people because banks and post offices do not have sufficient amount
of cash. People are facing lot of problems with the old currencies.
They have to make long queues either to
deposit their money or to exchange them. Moreover, the ATMs are not updated
yet.
The shopkeepers and the others are refusing
to take 2000 rupee note because they don’t have sufficient amount of small
denomination currencies.
The government is taking necessary steps to
upgrade the ATMs and printing new currencies at a very high speed so that it
reaches the people without making any more chaos in the market.
The sudden stop in the availability of
currency has led to a liquidity shock to the people in the nation. Lack in
currency of Rs.500 and Rs.1000 has disturbed economic activities such as
consumption, investment, production, employment etc.
Reasons of Demonetisation:
1.
Black money:
Demonetisation was a bold and revolutionary
action taken by the government of India to curb black money and one that will
have the deep impact on the parallel economy in the country.
Pockets and persons with black money can be
identified with this move. A few businesses like property dealers, jewellers,
foreign currency dealers, private money lenders generally hold huge amounts of
unaccounted money in form of currency notes.
Such unaccounted money had created a parallel
economy in the country. Such illegal money has reached the bank accounts
through direct or indirect channels.
2.
To hit the fake currency rackets:
Fake Currency Notes have been wasted by the
demonetisation. Withdrawing highest currency notes out of the economy will have
a serious impact on the fake currency syndicates, thus putting an end to the
terror funding in Jammu and Kashmir, Naxalite hit states and North-eastern
states.
The fake currency with racketeers have been
left in vain, and new currency notes with high security; making a counterfeit
impossible. Demonetisation was a surgical attack on a fake currency circulating
in the economy. Demonetisation has converted those fake currency notes into a
mere piece of papers.
3.
Online transactions:
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 more in demand. Electronic mode of payment
like online transaction, payment through applications, E-wallets E-banking,
usage of debit and credit cards etc. will surely see the substantial increase
in demand.
4.
To hit Maoists:
This step actually made money with Maoists
worthless. As reported Maoists had hoarded over Rs.7000 cores with them at
Baster in Chhattisgarh. All such currency is now nothing but pieces of papers.
5.
Rise in GDP:
Though demonetisation has negatively impacted
sectors such as real estate and property, construction, and household
consumption in general, it is believed that long-term benefits for GDP growth
will outweigh the short-term transitional impact. We are now heading towards a
9% GDP growth by FY2018-19.
Issues and Challenges
of Demonetisation on Indian Economy:
Demonetisation technically is a liquidity
shock; a sudden stop in terms of currency availability. It creates a situation
where lack of currencies jams consumption, investment, production, employment
etc.
Demonetisation is not a big disaster like
global banking sector crisis of 2007; but at the same time, it will act as a
liquidity shock that disturbs economic activities. Following are the main
impacts:
1.
Welfare loss for the currency using
population:
Most active segments of the population who
constitute the “base of the pyramid‟ uses currency to meet their transactions.
The daily wage earners, other labourers, small traders etc. who reside out of
the formal economy uses cash frequently.
These sections will lose income in the
absence of liquid cash. Cash stringency will compel firms to reduce labour cost
and thus reduces income to the poor working class. There will be a trickle up
effect of the liquidity chaos to the higher income people with time.
2.
Consumption will be hit:
When liquidity shortage strikes, it is
consumption that is going to be adversely affected first.
Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue ↓
3.
Loss of Growth momentum:
India risks its position of being the fastest
growing largest economy: reduced consumption, income, investment etc. may
reduce India’s GDP growth as the liquidity impact itself may last three -four
months.
4.
Impact on bank deposits and interest rate:
Deposit in the short term may rise, but in
the long term, its effect will come down. The savings with the banks are
actually liquid cash people stored. It is difficult to assume that such ready
cash once stored in their hands will be put into savings for a long term.
They saved this money into banks just to
convert the old notes into new notes. These are not voluntary savings aimed to
get interest. It will be converted into active liquidity by the savers when
full-fledged new currency supply take place.
5.
Impact on black money:
Only a small portion of black money is
actually stored in the form of cash. Usually, black income is kept in the form
of physical assets like gold, land, buildings etc.
Hence the amount of black money countered by
demonetisation depend upon the amount of black money held in the form of cash
and it will be smaller than expected. But more than anything else, demonetisation
has a big propaganda effect.
People are now much convinced about the need
to fight black income. such a nationwide awareness and urge will encourage
government to come out with even strong measures.
Positive Impacts of Demonetisation
on Indian Economy:
In what could be termed as the mother of all
reforms, Prime Minister Modi’s demonetisation move will have far reaching
implications. This is not to dispute that the transformative step has brought
some hardship for the citizens, but those are temporary and will blow over
soon.
For the larger benefit of the nation, we the
citizens can bear such hiccups with a smile. After all, this is how we as
citizens can contribute in policy making and nation building. While bank
employees are working overtime to make Modi‟s ambitious demonetisation drive a
success. Let’s discuss its many-fold impacts:
1.
Black money:
At one stroke the Prime Minister has choked
the supply of black money stacked inside the country. Of the Rs 17 lakh crore
of total currency in circulation in the country, black money is estimated at
mind-boggling Rs 3 lakh crore.
Black money is nothing but a plunder of the
nation. Black money operators run a parallel economy which shakes the very
foundation of the Indian economy. With Modi’s demonetisation move, all domestic
black money will either be deposited into the banks with heavy penalty or be
simply destroyed.
2.
Economy:
Demonetisation will have a huge resultant
effect on the Indian economy. The clean-up of illegal cash will help turn
around the economy. First, it will bring more borrowings to the exchequer,
improve inflation outlook and increase India’s gross domestic product (GDP).
Second, it will revive investment
opportunities and give a fillip to infrastructure and the manufacturing sector.
Third, it will help reduce interest rates and lower income tax rate.
3.
Note bank politics:
In the run up to the crucial assembly
elections in Uttar Pradesh, Punjab, Goa and Uttarakhand, Prime Minister Modi’s
demonetisation announcement has come as a shock and awe for the political
parties and politicians for whom black money is a lifeline.
The pulling out of the old Rs 500 and Rs
1,000 currency notes will help make the election process clean and transparent.
But it has brought tough times for the political parties and politicians who
believe in the idea of purchasing votes in exchange for notes.
That is precisely the reason a rainbow
coalition of a galaxy of regional parties and the Congress is building up
against Modi, because their political interests are badly hurt.
4.
Real estate cleansing:
It is said that real estate is an industry built
on black money. The extent of black money floating around in the sector is
huge. According to an estimate at least 40 per cent of real estate transactions
in Delhi-NCR are in black.
Modi’s demonetisation move will curtail the
flow of black money into the real estate sector. This will help in making the
much needed correction in the sector. The impact: An unexpected dip in land and
property prices.
Conclusion:
If the money disappears, as some hoarders
would not like to be seen with their cash pile, the economy will not benefit.
On the other hand, if the money finds its way in the economy it could have a
meaningful impact.
However, experiences from different countries
shows that the move was one of the series that failed to fix a debt burdened
and inflation-ridden economy.
Written by – Sakshi Chauhan
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