Social Relevance

Project on
Study on Impact and Implications of Demonetization on Society

Submitted in partial fulfillment for the award of the degree of Master of

Management Studies (MMS) (under University of Mumbai)

Submitted By
RIA NEVTIA
Roll No. B – 40

Under the Guidance of

Prof. NEHA SHARMA
2017 - 2019
H K Institute of Management Studies and Research,
Jogeshwari, Mumbai 400102

1
 DECLARATION

I hereby declare that this report submitted by me to

The __________________________ is a bonafide work undertaken by me and is
not submitted to any other University / Institution for the award of any Degree
Diploma / Certificate or published any time before.

Name:

Roll No:

2
 Certificate

This is to certify that project report titled Social Impact and Implications of
Demonetization on Society is successfully completed by Ms. RIA NEVTIA during
IV semester, in partial fulfillment of Master’s Degree in Management Studies
recognized by University of Mumbai for the academic year 2017 - 2019 through
_____________________________

This project work is original and no submitted earlier for the award of any degree,
diploma or associateship of any other University / Institution.

Name:

Date Signature of the Guide

3
 DECLARATION FORM

I hereby declare that the below mentioned projects are my original work and I have
not copied the content from any source.
General Management Project: Study on Supply Chain Management practices
adopted by Dinshaw’s Dairy Food Ltd

Specialization Project: Technical Analysis of Equity Shares

Social Relevance Project: Social impact and Implications of Demonetization on

society

Student Name:
Date:
Signature:

4
Index

5
 Abstract
India has amongst the highest level of currencies in circulation at 12.1% of GDP.
Cash on hand is an estimated at around 3.2% of household assets, higher than
investment in equities, or roughly around $ 220 billion Of this cash, 87% is in the
form of Rs 500 and Rs 1,000 notes or roughly Rs 14 lakh crore ($190 billion).
Demonetization is a process by which a series of currency will not be legal tender.
The series of currency will not be acceptable as valid currency. The demonetization
was done in Nov 2016 in as an effort to stop counterfeiting of the current currency
notes allegedly used for funding terrorism, as well as a crackdown on black money
in the country. Demonetization is a generations’ memorable experience and is going
to be one of the economic events of our time. Its impact is felt by every Indian
citizen. Demonetization affects the economy through the liquidity side. Its effect will
be a telling one because nearly 86% of currency value in circulation was withdrawn
without replacing bulk of it. As a result of the withdrawal of Rs 500 and Rs 1000
notes, there occurred huge gap in the currency composition as after Rs 100; Rs 2000
is the only denomination.

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 Introduction to Demonetization
Demonetization means discontinuity of particular currency from circulation and
replacing it with a new currency. It can also be considered as a withdrawal of
a specific currency from the market. After the announcement that 500 and 1,000
rupee notes were no longer legal tender; people were given 50 days to deposit them
in bank accounts or exchange them for new notes at banks and post offices, when
only half of Indian adults have bank accounts. By withdrawing 86 percent of
circulating currency when 70 to 80 percent of transactions are cash-based, the Indian
government has burned down its economic house in order to eradicate the pest of
corruption the announcement immediately triggered a mad scramble to unload the
expiring banknotes. Though people had time until the end of the year to deposit the
notes in bank accounts, doing so in large quantities could expose them to high taxes
and fines. So they rushed to gas pumps, banks, foreign-exchange counters, ATMs,
to jewelry shops, and to creditors to repay loans and several deaths were linked to
the inconveniences caused due to the rush to exchange cash. There was a spike in
donations in the form of the demonetized notes in temples in the form of defunct
notes. People started making 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. The Indian Railways authorities found 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. People used 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. Only 5
percent of Indian workers’ pay income tax, just 15 percent of the economy is inside
the tax net and India’s tax to GDP ratio at 17 percent is 5 points lower than
comparable countries. Because of high property taxes, buyers collude with sellers to
understate the sale value and split the tax difference. India’s wealthy, who are less
reliant on cash and are more likely to hold credit cards, park illicit wealth in Indian
and overseas real estate, shell companies, shares, gold and overseas bank accounts,
are relatively unaffected. The poor and the lower middle classes, however, rely on
cash for their daily activities, and thus are the main victims. Only 5 to 6 percent of
India’s illicit wealth is estimated to be held in cash components. The rich have
engaged “mules” to line up and exchange their currency for them while the “common
man” faces hardships in the daily purchases of food, medicine, bus and rail tickets,
and so forth.

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 Review of Literature
The demonetization of the old ₹ 500 & ₹ 1,000 notes has been a fascinating and
intriguing subject matter of numerous researches from various disciplines because
of its great significance and immediate impact on the state of the Indian economy as
a whole and particularly each and every sector of the country working with cash.
Being a recent move, there have been various researches on different aspects of the
initiative ranging from the economical to social and ethical dimensions. Some of
these researches retrieved through internet searches have been reviewed here.

Arpit Guru and Shruti Kahanijow (2010) researchers analyzed the black money
income? Need for amendment in DTAA & ITEA and analyzed that black money is
spread everywhere in India up to a large extent which continuously stashed
towards abroad in a very large amount. The researcher also identified how black
money had caused menaces in our economy and in what ways it is used

Veerakumar. K, (2017) in his paper analyzed demonetization is taken for several

measures such as tax evasion, counterfeit currency and funding of illegal activities.
Some people are depositing currency notes in excess of specified limits directly
into bank accounts and has showed the unaccounted income subject to higher tax
and other penalties. Alternative payment methods such as e-wallets, online
transactions using e-banking, debit and credit card usage have been increased and
this will shift an efficient cashless infrastructure.

Tax Research Team (2016) of the National Institute of Public Finance and Policy
published their study called Demonetization: Impact on the economy, the main
objective is to analyze the impact of demonetization on Indian economy and it shows
the impact of such a move on the availability of credit, spending level of activity and
government finances. They concluded the study by the opinion as, the
demonetization undertaken by the government is large shock to the economy. The
impact of the shock in the medium term is 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. While the facts are not
available to anybody, it would be foolhardy to argue that this is the only possibility.
As argued above, it is possible that these cash balances were used as a medium of
exchange. In other words, while the cash was mediating in legitimate economic
8
activity, if this currency is extinguished there would be a contraction of economic
182 activity in the economy and that is a cost that needs to be factored in while
assessing the impact of the demonetization on the economy and its agents.

Sukanta Sarkar (2010) conducted a study on the parallel economy in India: Causes,
impacts and government initiatives in which the researcher focused on the existence
of causes and impacts of black money in India. According to the study, the main
reason behind the generation of black money is the Indian Political System that is
the Indian government just focused on making committees rather than to implement
it. The study concludes that laws should be implemented properly to control
black money in our economy

Geeta Rani (2016) in her study shows that initially the demonetization effects on
market were painful but this investigate the shopkeepers and consumers to adopt
cashless means such as PayTM, debit card use, internet banking to buy goods. By
adopting the cashless means economy will be sound in coming time and Indian
Economy will get benefits of early and hassle free transactions.

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 Rationale
 The need of the study was to gain knowledge about the whole demonetization
policy
 To understand the changes in government policies to promote digital modes
of payment.
 To understand the preferences and opinions of general public over
demonetization.

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 Objective
 To study the Impact and Implication of demonetization on society

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 HISTORY OF DEMONETISATION IN INDIA

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.

Second Demonetization - On 16 Jan 1978, the ordinance was announced 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

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.

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 PURPOSE OF DEMONETIZATION:

After the PM Modi’s announcement of demonetization, Urjit Patel the

Governor of the Reserve Bank of India and Shaktikanta Das the
Economic Affairs Secretary held a press conference and explained the
purpose of demonetizing the ₹ 500 and ₹ 1,000 banknotes was as follows:

 To tackle the problem of Black Money in India.

 To stop terror financing.

 To get India free from corruption

 To make the corrupt lose their money.

 To get everyone to have bank account.

 To mainline the parallel economy to formal economy.

 Encourage deposit base and Savings

 For cashless society

 For cracking down the fake currency notes (counterfeit notes)

 To give boost to white economy.

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 PROCEDURE OF DEMONETIZATION:

The Reserve Bank of India set forth a period of 50 days until December
302016 to deposit the demonetized notes as a credit in their respective
bank accounts.

EXCHANGE OF DEMONETIZED NOTES

Citizens were given provision to exchange the demonetized ₹ 500 and
₹ 1,000banknotes with the new ₹500 and ₹ 2,000 banknotes over the cash
counter of banks and their branches up to a limit which assorted over the
period of time of 50 days.

 Initially, from 8th to 13 th November, the exchange limit was fixed

at4000 Rupees per day per person.

 From 14 th to 17 th November, the exchange limit increased up to

4500Rupees per day per person.

 After 17 th November, the exchange limit was reduced to 2000

Rupees per day per person.

 From 25 th November, all exchange of demonetized notes was

suddenly stopped.

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 CASH WITHDRAWAL FROM BANKS AND ATMs

 From 10th to 13th November, withdrawals of cash from bank

accounts was limited and restricted to 10,000 Rupees per day per
account &20,000 Rupees per week per account.

 Later on per week cash withdrawal limits were increased to

24,000Rupees from 14th November, 2016.

 Cash withdrawal limit from Automated Teller Machine (ATM) was also
inflicted to 2,000 Rupees per day per Debit / Credit card till 14th November
and it was increased to 2,500 Rupees per day per Debit /Credit card till 31st
December, 2016.

 From 1st January, 2017 the cash withdrawal limit was increased to4, 500
Rupees per day and from 16th January it was again raised to 10,000 Rupees
per day per card.

 The RBI’s notification circular about Cash withdrawal limit was varied on
the basis of type of bank account i.e. Current accounts / Cash Credit accounts
/ Overdraft accounts.

 Inspite of the different notifications & guidelines from the Reserve Bank,
Different banks and their branches were having their own operating limits
and cash withdrawal limits. Banks were providing cash to the customers as
per the availability of new currency of ₹ 500 and ₹ 2,000 banknotes.

However, under the revised guidelines of the Reserve Bank of India issued on17 th
November 2016, Families were allowed to withdrawal up to 2,50,000 Rupees for
wedding expenses from one account the money can be withdrawn only from the
credit balance shown in the account on the day when demonetization of high
denomination notes was declared. The guidelines states that the cash to be
withdrawn for wedding purpose should be used only to make payments to those
persons who do not have bank accounts and the names and other details of such
recipients should be mentioned while applying for withdrawal of the cash. It was
mandatory that the application for withdrawal should also provide names of bride
and groom along with their identify proofs, addresses and venue & date of marriage.
Withdrawals can only be made by either the person who is getting married or their

15
parents. The amount can be withdrawn only if the date of marriage is on or before
30th December 2016.RBI issued other guidelines which states that rules were also
changed for farmers who are permitted to withdraw 25,000 Rupees per week from
their accounts against crop loans. However, Banks were dispensing notes as per their
convenience and availability of cash with them.

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 GLITCHES IN THE IMPLEMENTATION

The way in which demonetization was implemented suggests that the

announcement of demonetization seems to have been made without adequate
preparation and without detailed considerations of its consequences for the people
and the economy. Ideally the RBI should have got the new notes printed in adequate
quantity before the announcement of the decision. But no such preparation seems to
have been made in advance. Consequently people had to wait for hours in long
queues before bank windows. Over 100 old and sick persons even died while
Demonetization: Rationale and Impact Singh  89 standing in the queue. The pain
was borne mainly by the middle classes and the poor. The rich could hire people to
stand in queues on their behalf. The new Rs. 2000 notes which were issued to the
public were of little use for meeting their day to day expenditure in the absence of
low denomination notes. In fact, they made stashing of black money easier. The
ATM machines were not calibrated to dispense Rs. 2000 notes which differed in size
from the earlier currency. As a result ATMs went dry for days together putting
people to great inconvenience. This caused shortage of cash in the hands of the
people. Marriage and social ceremonies had to be postponed. The RBI and the
government responded to the emerging situation in a knee jerk manner. As many as
62 amendments were issued in less than two months regarding the payment of cash
by the banks. All this caused immense and avoidable confusion and inconvenience
to the public. The timing of demonetization was also ill-conceived. Demonetization
was announced in the beginning of November which is a busy season for agriculture
and the economy. It is noteworthy that the earlier two decisions to demonetize in
1946 and 1978 were announced in the month of January, after the end of the busy
season. The process of demonetization was also painfully slow. Even after one
month of demonetization the RBI was able to pump into the system only Rs. 4.61
lakh crore, that is, less than one third of the demonetized currency. Currency with
the public declined by almost 50 per cent during the months of November and
December 2016. It was only after April 2017 that the cash crunch could ease
somewhat, with over three-fourth of the currency back in circulation. But it took
nearly a year to reach the level of currency with public in November 2016.

17
 SUPPORT OF DEMONETIZATION:

 The President of the Union of India, Shri Pranab Mukherjee supported the
demonetization and welcomed the bold step of the Government of India
which will help unearth unaccounted money & counterfeit currency said in a
statement from Rashtrapati Bhavan.

 Bankers like Arundhati Bhattacharya (Chairperson of State Bank of India) &

Chanda Kochhar (MD & CEO of ICICI Bank) appreciated the
demonetization move in the sense that it will help in curbing black money.

 Businessmen Anand Mahindra (Mahindra Group), Sajjan Jindal

(JSWGroup), Kunal Bahl (Snapdeal and FreeCharge) also supported
themove adding that it would also accelerate e-commerce.

 Infosys founder N. R. Narayana Murthy praised the move.

Finance Minister Arun Jaitley said that demonetization would be cleaning up

the whole economic system with the increase in the size of economy and the
base of revenue. He mentioned the demonetization along with the upcoming
Goods and Services Tax (GST) as "an attempt to change the spending habit
and lifestyle of the citizens”.

 The Indian National Congress spokesperson Randeep Surjewala welcomed

the move but remained doubtful on the after effect &consequences that would
follow.

 The demonetisation also got support from Chief Minister of Andhra Pradesh
Nara Chandrababu Naidu & Chief Minister of Bihar Nitish Kumar.

 Former Chief Election Commissioner of India S. Y. Quraishi said with the

hopes that demonetization could lead to long term electoral reforms as most
of the unaccounted money is used in elections.

 Social activist Anna Hazare hailed demonetization as a revolutionary step by

the Modi Government.

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 Effects of Demonetization

Soon after the announcement of demonetization, all banks and ATMs across the
country were paralyzed because of cash shortages. The cash shortages had many
disadvantageous effects on every small business, agriculture, and also on
transportation, with people wanting to exchange their old banned notes having
lengthy waits in long queues, and several deaths were reported to be linked to the
difficulty in exchanging cash. The shortage of cash due to demonetization Process
resulted in disorder and chaos, and mostly the people holding old currency notes
faced difficulties in having them exchanged because of the endless queues outside
banks and ATM machines across India. They also ran out of cash only after a few
hours of being operational, and about half of the ATMs in the country were not
functional. Several deaths were reported standing in queues for long hours at the
banks and ATMs to exchange their old banknotes. Deaths were also accounted for
the lack of medical facilities or preparations due to denial of old currency notes by
the hospitals. In turn as a collective effect because of the demonetization and US
presidential election, the Indian stock exchange indices fell to a six-month low in the
week which followed the pronouncement. On the very next day after the
demonetization announcement, BSE SENSEX Lost nearly 1,689 points and NIFTY
by over 541 points. At the close of the intraday trading as on 15 November 2016, the
BSE SENSEX index was low by over 565 points and the NIFTY 50 index was below
8100 on intraday. The first four days after the demonetization witnessed about Rs. 3
trillion (US$45 billion) in the form of old currency notes of Rs. 500 and Rs. 1,000
being deposited in the banking system and an amount of Rs. 500 billion (US$7.4
billion) had been distributed through withdrawals from the deposited bank accounts,
ATMs and exchanges over.
The bank counters. In just four days, the Indian banking system handled almost 180
million transactions. The State Bank of India reported to have received ab out Rs.
300 billion (US$4.5 billion) as deposits after just two days of demonetization. A
sudden hike in the online transactions with the usage of debit and credit cards was
also reported. Evading techniques like Gold purchases, Donations, Multiple bank
transactions, depositing in the Jan Dhan Scheme bank Accounts, Railway bookings,
Municipal and local tax payments, Backdated accounting were also reported to have
happened. According to an information by the Union Minister of State for Finance
Arjun Ram Meghwal, as stated in Rajya Sabha1,716.5 crore pieces of Rs 500
denomination notes and 685.8 crore pieces of Rs 1,000 notes were in circulation on
the November 8th 2016, the date on which demonetization was pronounced. It
actually sums up in a value which comes close to Rs 15.44 lakh crore.

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 SHIFT TOWARDS CASHLESS ECONOMY

Stung by the failure of demonetization, the government started justifying the move
on other grounds as an afterthought. It was emphasized that the aim of the move was
to expand the formalization of the economy and shift towards a cashless economy.
It was argued that this would reduce the scope for generating black money, expand
the tax base and increase tax revenue of the government in the long run. There has
indeed been a move towards greater use of digital payment after demonetization.
According to the Economic Survey 2017 Vol. 2 even though the immediate post-
demonetization surge has moderated in some cases, the level and pace of
digitalization are still substantially greater than before demonetization. The ratio of
cash to GDP has declined by about 1.6 percentage points down from 11.3 percent of
GDP to 9.7 percent. According to a recent report in Times of India (Lucknow
November 4, 2017) number of monthly digital transfers which stood at 102 crores
in November 2016 went up sharply to 156 crores in March 2017, but
Demonetization: Rationale and Impact Singh  95 have come down to 138 crores in
August 2018. The value of digital transaction had shot up from Rs. 607 crore in
2015-16 to Rs. 1076 crore in 2016-17 and is expected to touch the level of Rs. 1800
crore in 2017-18 (Das & Verma, 2017). There are some serious considerations
associated with digital transfers which have not been fully taken into account. These
include the large numbers of illiterate people in the country, the limited availability
of power and Wi-Fi connections especially in the rural areas, the charges connected
with digital transactions, the increasing threat of frauds and so on. The immediate
beneficiaries of the service charges for electronic transactions are the foreign MNC
based in USA and China. PAYTM the largest gainer in terms of digital payments is
backed by Ali Baba of China. There is no basis to argue that digital transfers are a
better mode of transaction and the use of cash in transactions is something
undesirable. Cash is a convenient, anonymous and safe method of payment. It is
universally accepted, reliable and does not involve any cost to the payer. It also
exercises control on spending and does not encourage profligate expenditure through
credit card, which has ruined many people (Payments Advisory Group 2010). Many
of the arguments advanced for promoting a cashless economy do not hold water.
There is no evidence to show that use of cash encourages illegal activities. There are
multiple channels through which money laundering and terrorism are financed. The
use of cash does not necessarily promote shadow economy as the experience of
Germany and Japan shows (Crane Payment Systems 2010). There is no necessary
link between cash and bribery which takes various forms. Nor can one argue that use
of cash is inefficient and costly as compared to digital payments. The use of digital
payment depends upon a number of factors like spread of digital technology and
infrastructure, state of development of the economy, habits and preferences of the
20
people, etc. Nearly 90 per cent of transactions in the world are still in the form of
cash. Table 2 shows the use of cashless payment in selected countries. In countries
like Netherlands, France, Sweden and Canada cashless transactions constitute
around 80 per cent of total transactions. This proportion is 52% in United Kingdom
and 45% in USA. In Australia and Germany about one third of transactions are
cashless. In Japan, a highly developed country, cashless transactions are as low as
14%. The corresponding figures for China and India are 10% and 2% respectively.
The coefficient of variation is as high as 57.2%. The use of cash is far from vanishing
even in the developed countries. In fact, the volume of currency has been increasing
in these countries. According to a working paper of Crane Payment Systems the US
currency in circulation has steadily increased since the post-war era of the 1940’s.
In fact the increase in the currency in circulation has actually accelerated in the
1990’s and over the last decade despite the number of recessions. Similarly Euro
banknotes usage is increasing and that 96  International Journal of Social Science
and Development Policy Vol. 3, No. 2, July–December 2017, ISSN: 2454–5732
Europeans are becoming increasingly comfortable with having €100 and €50
banknotes in their wallets. British banknotes in circulation grew from less than £20
Billion in 1993 to more than £45 Billion in 2009. In times of financial crisis the use
of cash for transactions goes up in these countries as people lose faith in the banking
system.

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 IMPACT OF DEMONETISATION ON INDIAN ECONOMY

India’s previously booming economy has now ground to a halt. All indicators sales,
traders’ incomes, production, and employment are down. Small producers, lacking
capital to stay afloat, are already shutting down. India’s huge number of daily wage
workers can’t find employers with the cash to pay them. Local industries have
suspended work for lack of money. Cash stringency will compel firms to reduce
labor cost and thus reduces income to the poor working class. The informal financial
sector which conducts 40% of India’s total lending, largely in rural areas has all but
collapsed. The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the
very next day. In the days following the demonetization, the country faced severe
cash shortages with severe detrimental effects across the economy. It reduced the
country's GDP and industrial production. Some sectors of the economy continue
struggling with the lack of readily available cash, grassroots businesses are still
being revolutionized with electronic payment capabilities, and masses of people
continue transitioning towards new ways of paying for basic goods and services. The
banks didn’t have enough of the newly designed banknotes on-hand to distribute in
exchange for the canceled notes. It caused a sudden breakdown in India’s
commercial ecosystem. Trade across all facets of the economy was disrupted.
Consumer goods sales are reported to have dropped by one-third. Trucks are at a
standstill. Demonetization will act as a liquidity shock that disturbs economic
activities. Liquidity shock means people are not able to get sufficient volume of
popular denomination especially Rs 500. It creates a situation where lack of
currencies jams consumption, investment, production, employment etc. The
intensity of demonetization effects clearly depends upon the duration of the liquidity
shocks. Liquidity crunch is a short term effect. Higher the time required to resupply
Rs 500 notes, higher will be the duration of the liquidity crunch. When liquidity
shortage strikes, consumption gets adversely affected. Consumption ↓→ Production
↓→ Employment ↓→ Growth ↓→ Tax revenue ↓ 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. The combined effect of above
would lead to a wider impact on the economy namely deflation. Sectors like real
estate, construction material and unorganized trade will see significant pain in the
near term

22
MAJOR IMPACTS

A. Domestic/Household Sector: - The logic behind this demonetization is to curb

the use of these high value notes in the black money market. Now almost everyone
has Rs1000/500 notes so now it would become difficult for the common people to
do their business/ household works easily.

B. Reduce Government Liability: - It will reduce the risk and cost of cash handling
as soft money is safer than hard money. It will also reduce government liability.
Since every note is a liability for the government, the old currency will become
worthless for those people, who choose not to disclose their income. Thus, this will
extinguish government's liability to that extent. It is expected approximately Rs 5
lakh crore may come to the government in the form of extinguished RBI liability,
taxes and penalties. It will reduce tax avoidance. Whatever money will be deposited
or exchanged, authorities will keep a track of it and they will be extra cautious in
this period. Importantly, in the longer run, tax and interest rates on loans are expected
to come down as higher income tax collections arising from better compliance would
offer scope to reduce rates over the long term. This, in turn, will drive up disposable
income. This can give a positive impact on consumption demand in long term.

C. Farming and fishing industry: - Farmers generally deal in cash. The poor people
through middlemen are getting their currencies exchanged for Rs.300 or Rs.400.
Farmers have difficulty buying seeds and fertilizer and selling crops and perishable
products. 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. This forced the farmers across the country
to dump their products in desperation. Some farmers resorted to burying unsold
vegetables. Agricultural products such as vegetables, food grains, sugarcane, milk
and eggs were dumped on roads. The fishing industry which depends on cash sales
of freshly caught fish is close to collapse.

D. Business: - 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. The goods and services
23
tax (GST), whose objective is to replace all taxes levied by the federal government
and the states with one central tax

E. Drop in industrial output: - There was a reduction in industrial output as

industries were hit by the cash crisis. The growth in eight core sectors such as
cement, steel and refinery products, which constitute 38% of the Index of Industrial
Production (IIP), decreased. The construction industry has been badly hit with
significant wage implications for its casual workforce. Traders are losing perishable
stocks

F. Black Money Hoarders: - 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
demonetization depend upon the amount of black money held in the form of cash
and it will be smaller than expected. On the other hand, black money holders either
have to show their income source from which they earned their black money to the
department or to burn the stashed income. However people declaring their income
in excess of threshold limit will be subjected to scrutiny.

G. Impact on counterfeit currency:-The real impact will be on counterfeit/fake

currency as its circulation will be checked after this exercise. It was previously
estimated that 250 out of every million Indian bank notes were fakes. The new 500
and 2,000 rupee notes are less vulnerable to counterfeiting, having advanced security
features with one report claiming that it will be “impossible” for Pakistan to fake
them. The Demonetization has badly hit Maoist and Naxalites as well. The surrender
rate has reached its highest since the demonetization is announced. The move also
reportedly crippled Communist guerrilla groups (Naxalites) financing through
money laundering. The smuggling of arms and dealing with the terrorist will not
sustain further as all of the money will be on record now.

H. Hawala: - The brightest spot is the end of Hawala racket and rising property
prices. Hawala is the way of transferring money from a different country to India in
Indian denominations. Although illegal, the people in this racket make their money
white through this process in different countries. To attract more people to remit
through this form, they pay a premium over the existing exchange rates mostly for
remitters from African based nations. Come 8th November, 2016, the government
scrapped all high denominations making the notes lying with the Hawala traders null
and void.

24
I. Impact on bank deposits: - Bank deposits will increase by a huge margin and this
will increase their lending activities. The banking system will improve as it will
slowly head towards a cashless society. Cashless society will increase credit access
and financial inclusion. The existing white money of people will be known to the
government and it will remain with banks so that it can be put on loan, and interest
can be generated from it with a corresponding fall in Inflation. However, it needs to
be seen how much money actually remains in the system, once the cash withdrawal
limits are eased. 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.
The new savings with banks is only transitory or short-term deposit. It may be
uncashed by the savers at the appropriate time. It is not necessary that
demonetization will produce big savings in the banking system in the medium term.

J. Jewelry and Real Estate Business: - The liquidity squeeze caused by

demonetization will be negative across sectors with high level of cash transactions.
Real estate, jewellery, retailing, restaurants, logistics, consumer durables and luxury
brands, cement and some segments in retail/SME lending space will be facing short
term instability. Those companies with high level of debt will face more pressure
and can face loan defaults.

K. Impact on IT Industry: - This step can bring grey market commodities / illegal
money lending / money laundering etc., under control which is otherwise
unmanageable. The IT industries prefer purchase and sales through banking system
only. It won’t curb grey channel market but will surely have an adverse effect on the
products which are promoted by grey channel. This move will help brands to grow
and helps in curbing the fake, grey market, and Chinese import cash sales. New-age
payments like PayTM, Instamojo Payment Gateway, Pay Money and Mobikwik,
online banking and e-commerce platforms will see an increased demand in the near
future as people will show willingness to move away from cash. This particularly
will benefit IT startups and Fintech domains that work on online payments that
enable technology processes for such companies. This also could create key
requirements for technology processes for tracing financial information, eKYC form
Income Tax departments. Government initiatives such as Aadhaar, Jandhan will
nudge a lot of Fintech companies to enable financial institutions and banks to adopt
these facilities. On the other hand sales at all major electronic and computer
hardware retailers have hit rock bottom. Unable to compete with the massive
discounts and low taxation offered by online giants, like Flipkart, Snapdeal and
Amazon, computer retailers are forced to decrease their margins and
Offer freebies to walk-in customers. Currently, retailers profit from a 3%-5% margin
on laptops, desktop computers and accessories. The adoption of cashless transactions
25
through debit cards or credit cards eats into this margin as the retailer has to pay
1.8%-2% bank commission on each transaction. This has already resulted in
significant slowdown of demand across PC, tablet PC and Mobile devices.

RAILWAY TICKET BOOKINGS:

As of November 2016, Indian Railways did not have the option to makepayment
with cards at the counters. After the demonetization move, the government
announced to make card payment options available at railway counters in the
country. In a statement from the Railway Ministry states, “With a view to facilitate
convenient booking of reserved and unreserved tickets by passengers through
cashless modes of payment at the ticket booking counters, it has been decided to
install 10,000 POS (Point of Sale) (Swipe)machines at the PRS (Passenger
Reservation System) and UTS counters(including suburban stations).”Railways
have more than 13,000 ticket booking counters across the country. In the long term,
their plan is to equip all its ticket counters with POSmachines. It is also planning to
accept payments through mobile wallets. But as the Indian Railways on Monday said
it will accept old demonetized bank notes of ₹500 and ₹1,000, for buying tickets and
for onboard catering
A senior railways official reportedly said that 4.27 crore passengers werenationally
booked across all classes.
After a very short time, The Railways Ministry and the Railway Boardresponded
and decided that ticket cancellation and refund of tickets of value ₹ 10,000 and above
will not be allowed to given in cash by any means. 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. For any cash transaction
above ₹50,000 a copy of the PAN card must be submitted.

26
 Implications of Demonetization

1. Effect on parallel economy The removal of these 500 and 1000 notes and
replacement of the same with new 500 and 2000 Rupee Notes is expected to:
2. Remove black money from the economy as they will be blocked since the
owners will not be in a position to deposit the same in the banks
3. Temporarily stall the circulation of large volume of counterfeit currency and
4. Curb the funding for anti-social elements like smuggling, terrorism,
espionage, etc.

2. Effect on Money Supply: With the older 500 and 1000 Rupees notes being
scrapped, until the new 500 and 2000 Rupees notes get widely circulated in the
market, money supply is expected to reduce in the short run. To the extent that black
money (which is not counterfeit) does not re-enter the system, reserve money and
hence money supply will decrease permanently. However gradually as the new notes
get circulated in the market and the mismatch gets corrected, money supply will pick
up.

3. Effect on Demand: The overall demand is expected to be affected to an extent.

The demand in following areas is to be impacted particularly; the nature, frequency
and amounts of the commercial transactions involved with these sections of the
economy necessitate cash transactions on more frequent basis. Thus, these segments
are expected to have the most significant impact post this demonetization process
and the introduction of new notes in circulation.
· Consumer goods
· Real Estate and Property
· Gold and luxury goods
· Automobiles (only to a certain limit)
All these mentioned sectors are expected to face certain moderation in demand from
the consumer side, owing to the significant amount of cash transactions involved in
these sectors.

4. Effect on Prices: Price level is expected to be lowered due to moderation from

demand side. This demand driven fall in prices could be understood as follows:
· Consumer goods: Prices are expected to fall only marginally due to moderation
in demand as use of cards and cheques would compensate for some purchases.
Real Estate and Property: Prices in this sector are largely expected to fall, especially
for sales of properties where major part of the transaction is cash based, rather than
based on banks transfer or cheque transactions. In the medium term, however the

27
prices in this sector could regain some levels as developers rebalance their prices
(probably charging more on cheque payment).

5. Effect on various economic entities: With cash transaction lowering in the

short run, until the new notes are spread widely into circulation, certain sections of
the society could face short term disruptions in facilitation of their transactions.
These sections are:
· Agriculture and related sector
· Small traders
· SME
· Services Sector
· Households
· Political Parties
· Professionals like doctor, carpenter, utility service providers, etc.
· Retail outlets

6. Effect on GDP: The GDP formation could be impacted by this measure, with
reduction in the consumption demand. However with the recent rise in festival
demand is expected to offset this fall in overall impact. Moreover, this expected
impact on GDP may not be significant as some of this demand will only be deferred
and re-enter the stream once the cash situation becomes normal.

28
 Advantages of Demonetization

 Demonetization policy will help India to become corruption free.

 The ban on high value currency will also curb the menace of money
laundering.

 This move has generated interest among those people who had opened Jan
Dhan accounts under the prime minister’s Jan dhan Yojana.

 The demonetization policy will force people to pay income tax returns.

 Most of the people who have been hiding their income are now forced to come
forward to declare their income and pay tax on the same.

 Attack on black money holder.( People who passes huge amount of black

 money in hard cash are at complete loss now

 Transparency

29
 Disadvantages

 It has deeply affected businesses. Due to the cash crunch the entire economy
has been made to come to stand still.

 Many poor daily wage workers are left with no job and their daily income has
stopped because employers are unable to pay their daily wage.

 The government is finding it hard to implement this policy. It has to bear the
cost of printing the new currency notes. It is also difficult to put new currency
into circulation.

30
 CRITICISMS

More than three months has passed since the 8 November announcement by Prime
Minister Narendra Modi that high-denomination currency notes would be scrapped
and remonetisation would occur through replacement of new notes and deposits of
old notes in bank accounts. Often termed demonetization this policy has created
considerable confusion among commentators, some ill-informed, some politically
motivated. A number of fallacies continue to persist concerning the value of
unreturned versus returned money, the existing stocks versus future flows of black
and counterfeit money, the short versus the long-term impact on black money, and
the expansionary versus contractionary effects of the policy reform allowing
opponents of the policy to claim, prematurely, and without evidence, that it is a
failure. First, it is frequently asserted that the return into the formal monetary and
banking system of a large percentage, perhaps 80% or more, of the old notes
represents a failure of the policy. This is a fallacy which results from the
misunderstanding that unaccounted money that is deposited into bank accounts has
been converted successfully without penalty from black into white which, actually,
is not the case. The current rules dictate that deposits of unaccounted money will be
taxed at 50% with a further 25% taken by the government (into the Pradhan Mantri
Garib Kalyan Yojana) as an interest-free loan for a period of four years. Thus, the
return of money to the formal banking system, when taxed, will generate a fiscal
gain to the system. Interestingly, money that is not returned to banks is implicitly
taxed at 100% from the perspective of the owner of that money, and this too could
result in a fiscal gain under certain circumstances. The first requirement for any
possible fiscal gain from that portion of the old stock of demonetized notes that are
not returned is that such notes be de jure DE notified, rather than merely de facto
demonetized. This would allow the Reserve Bank of India (RBI) to cancel the
liabilities associated with the issued currency. Second, assuming that de jure DE
notification were to occur, any putative fiscal bonanza for the government would
require one specific mechanism through which the resulting mismatch between the
assets and liabilities of the central bank are rectified, which would be that the RBI,
in effect, creates new money of equivalent value and turns that over to the
government to do with as it pleases. This, however, is not the only mechanism to
correct the asset-liability mismatch. Another possibility would be for the RBI to
offset the drop in liabilities by, for example, writing off an equivalent value of non-
performing assets, thereby squaring its balance sheet. Yet another would be to effect
a helicopter drop indirectly into the hands of the public, thereby creating new
liabilities equivalent in value to the extinguished liabilities. While Page 33 of 44
neither represents a direct fiscal gain for the treasury, it yields an outcome which is
similar to what would have happened if the treasury had used its own resources for
31
the same purposes. What does all this add up to? Since there are gains to be had on
black money, when it is returned to banks and also when it is not, the quantum of
unreturned money is not a good indicator of the success or failure of policy. How
then can we assess policy success? Clearly, at least from the perspective of its
effectiveness in dealing with the black money issue, success has to be measured by
the sum of tax revenue generated and black money destroyed. Suppose we accept
the estimate that one third of the approximately Rs15 trillion in demonetized notes
is black money. Roughly speaking, the revenue that would have been generated had
that income been taxed in the first place is 30% of that (so, Rs5 trillion times 0.3 =
Rs1.5 trillion). Perfect detection of black money should now yield 50% as tax
revenue (so Rs5 trillion times 0.5 = Rs2.5 trillion), if all black money is returned and
identified as such. Of course, perfection is rarely achieved in practice. Allowing for
slippages, we should neither expect all the black money to be returned, nor that will
all the black money that is returned be perfectly identified and taxed. If we assume
that by 30 December, Rs1 trillion is unreturned, as is believed, and we further assume
that only half of the remaining Rs4 trillion of black money that is returned falls
within the tax net, the net gain works out to Rs1 trillion of black money destroyed
and 50% times 2 trillion = Rs1 trillion in tax revenue. When compared with the
approximately Rs2.5 trillion in income taxes collected annually, the government
could reasonably claim this as a successful outcome. A second major fallacy
concerns another stated goal of the demonetisation drive: counterfeit currency. Will
demonetisation penalize those who have introduced counterfeit currency into the
system to address this question, one needs to clarify the distinction between stocks
and flows Thus, the stock of counterfeit money already in circulation, which has
changed hands many times and, for better or worse, was already in use in the Indian
economy on 8 November, will not be affected by the demonetisation exercise. At
best, to the extent that the security features introduced into new notes limit
immediate counterfeiting, the policy may minimize the future flows of counterfeit
notes for some time. Thus, demonetisation addresses future flows, but not the current
stock, of counterfeit money. A third fallacy relates to the expectation of some that
demonetisation will put an end to black money generation. This is because compared
to the impact of demonetisation on counterfeit money, exactly the opposite is true
for black money: demonetisation, by invalidating existing high denomination notes,
deals with the stock of black

32
 Research Methodology

The project has been written on the basis of secondary data.

The secondary data were collected from published books, journals, research
papers, magazines, daily newspaper and internet.

The study is qualitative in nature.

33
 Questionnaire

Q1) Do you think black money still exist in India?

From the above diagram of chart, it can be seen that 92% of the total respondents
agreed that Black money exists in India and the rest 8% have opinion that the
country is free from black money.

34
Q2) Did demonetization cause inconvenience to you?

As interpreting from the answers of the respondents, 10% didn’t had any
Inconvenience from the demonetization and 34% agreed that demonetization caused
inconvenience to them and 56% answered that they felt Inconvenience but they don’t
mind it as they think that demonetization was necessary to fight against various anti-
economy agents.

35
Q3) How much time you spent at ATMs/Banks to withdraw OR exchange
Money during fifty days of demonetization?

The above pie chart gives answer of the respondents that how much time they spent
to exchange or to deposit or to withdraw cash and 23% of the total sample spent less
than 1 hour only, 17% people spent 1 to 3 hours, 10% people spent 3 to 8 hours and
only 50% people have to stand in the queue for more than 8 hours

36
Q4) Have you faced any personal/professional crisis due to severe cash shortage?

The above chart concludes that 33% i.e. 33 people of the 100 respondents faced
personal or professional cash crises due to shortage and unavailability of cash in the
market. 67% people didn’t face any crises due to less cash

37
Q5) How did you manage the cash shortage?

The above shows that 67% respondents used debit/credit card during demonetization
and 10% used e-wallets and 7% accepted to use Internet banking facility. 16% of the
total respondents agreed that they didn’t use any of the cashless
Option due to unavailability or lack of knowledge to above preferred mode of
payments

38
Q6) Are you finding it difficult to use 2000 Rs note?

The above diagram shows that 29% of total respondents are finding new note
of 2000 rupees difficult to be use or to get its change. 43% respondents didn’t
Find it difficult and 28% respondent answered they maybe or may not be facing
any problem

39
Q7) What was the impact to your purchasing power?

From the above pie chart, it can be seen that 48% of the total respondents’
Purchasing power during demonetization was unchanged and 34% people admitted
that their purchasing power decreased during the move was in implementation phase.
However, 18% people found increment in their purchasing power

40
Q8) Do you think the currency ban by Modi govt was the right decision to fight
against black money?

When it asked about their opinion over the objective of demonetization to fight
against black money. 38% respondents agreed about the demonetization as a right
decision by government and 61% people agreed but suggested to take and implement
the decision with better planning. However, 1% of the total respondents said No to
the government’s decision of demonetization to fight against black money

41
Q9) Demonetization will improve the quality of life of a common man in India?

From the above diagram it can be analyzed that 62% respondents agreed that
demonetization will improve quality of life of a common man in the country,
10% respondents disagreed that it won’t make any difference in common man’s
quality of life. Still 28% of the respondents didn’t have any positive of negative
opinion over the question.

42
Q10) What do you think about implementation of whole demonetization policy?

When the respondents were asked to provide their view on the experience of
implementation of the whole move of demonetization, 34% people found that
implementation of demonetization was good experience for them and 44%people
emphasized that process and implementation of demonetization could improve and
12% of the total respondents consider it as a bad experience for them. And 8
% respondents didn’t have any opinion over it. 2% respondent answered it needed a
proper framework

43
Q11) Is it good idea to go cashless?

In the above diagram out of 100% 85% Respondent responded it is a good idea to
go cashless and rest 15% responded it is a bad idea.

44
Q12) Are you in the favor of crubbing black money through demonetization?

In the above pie chart 71% people are in the favor of crubbing black money, 8% are
not in the favor of crubbing black money and 21% people don’t have an idea about
what they should say.

45
Q13) According to the economic survey 2017, what percentage of cash in circulation
was rendered invalid due to the demonetisation action?

In the above diagram 40%people responded for 70, 13% people responded for 90,
45% people responded for 86 and remaining 2% responded for all cash was restored.

46
 Findings

 Findings of the primary data research is that almost every person agrees that
there are people in India who are the holder of black money that is
unaccounted money and money earned by illegal means which is obviously
unrecorded and unaccounted.

 Demonetization is just a part of process of tackling and removing the black

money in the form of currency and to hit the roots of fake currency. Almost
every person was facing cash crunch and inconvenience during the phase of
those 50 days of demonetization but many of them accepted the fact of
demonetization was necessary to fight against the determinants which were
impacting negatively on the Indian economy.

 People were ready to stand in lines before banks and ATMs to deposit and
exchange their old notes for the withdrawal of new currency notes. No matter
how long they have to stand, they had the feeling to contribute to in the
surgical strike against the black money, corruption, inflation and counterfeit
notes for the betterment of India.

 Digitalization has ignited them to opt for the digital payment modes and make
cashless society.

 Still there is a threat of fake currency in the new currency notes as well as the
most of the people are not aware about the security features of the new notes,
there are chances of the use of new fake currency notes with the person who
is not fully aware about the new note.

 Most of the respondents agreed and admired the demonetization move of the
Modi government as a risk taking move but considering the risks aside, the
move was much needed for the fight against money laundering, terror funding,
parallel economy, hyperinflation, though in the long run, but resulting into
betterment of the each individual citizen of the nation.

47
 Limitations of the Study

 The major limitation of the study was that it didn’t include the detailed
Impact of demonetization on the micro economic agents of the Indian
economy.

 The study doesn’t include the impact of demonetization on the

Financial markets such as Stock Market, Mutual Funds, Derivative markets.

 The impact of demonetization on the foreign trade as in Import-Export of the

country is not studied in this project report.

 The data interpreted was based on the sample size of 61 respondents of

Mumbai city only. So the view of them cannot be generalized or considered
as the opinions of the whole population who got affected by demonetization.

48
 Suggestion

 Educate everyone about the use of e-wallet and Debit & Credit Cards. Proper classes
about the use of e-wallet and cards should be taken at each & every office,
organization, companies etc. whether private or government. Camps can be held at
village levels & city levels at each & every corners. Social workers, panchayat
members, municipal corporation members & staff should come forward in
explaining the use of digital media for buying commodities in the market.

 Give every businessman, who has current account with banks, swipe machine at the
earliest possible. Tragedy is many bank branches still do not provide facility of
giving swipe machines to its clients. Immediate steps to be taken by the concerned
authorities to equip banks with these machines so that it can be distributed to the
traders. Also proper training should be given to traders about its use.

49
 Conclusion

The move will hence "short-term pain" but growth gains in the long term; it is
beneficial for both Indian economy and common man. Boost for savings and
consumption, New Employment opportunities .It may not control the amount of
black money in the nation directly, but nonetheless, it is beneficial for the Indian
economy in the future. This process would also forcibly bring in huge amount of
money from the informal sector, which was unaccounted for. This will help in the
growth and therefore GDP would not face a negative impact. Lesser TAX Liability,
Boost for savings and consumption, New Employment opportunities. The impact of
demonetization was felt more in the social sector and the worst affected was also the
poor and the common people. Salaried class is not still able to withdraw their salaries
from the banks and ATMs as a result of cash deficit. Prime Minister Modi has
encouraged doing financial transactions using mobile and other electronic means. It
is clearly evident that India is moving towards cash less economy. This will curb the
black money to a great extent but educating the masses on the mobile based money
transaction is a huge challenge. Finally as a relief to poor people, GOI has announced
that black money retrieved from the demonetization measure will be deposited for
four years without interest on Kalyan Yojana to benefit the poor in marriage. This
will create a positive impact on the social sector in the long run.

50
 Bibliography

https://rbi.org.in/scripts/PublicationsView.aspx?Id=17447#ANC

https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2016

https://www.studydhaba.com/demonetization-pdf/

The

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