The Impact of Demonetization on Small

Business Enterprises in India

Tushar Bansal
219408001

Economics
EO2001

Under the Guidance of

Thakur Dev Pandey
Department of Mechanical
Faculty of Engineering
Semester – 4
2021-2025
Abstract

The demonetization of high value currency notes on November 8, 2016, and the replacement
of those notes with new notes at Rs. 500 and Rs. 2000, marked a turning point for the Indian
economy. The government made this decision to eradicate black money from the market,
promote the digital economy, and lessen the tendency of some people to pay in cash in order
to evade taxes. Several Indians' lives were altered by the decision made in an instant. In order
to get money, thousands of people stood in line in front of banks and ATMs. People all
throughout the country lost focus on their entire social lives.

Demonetization has damaged small and medium-sized businesses, which has had a
detrimental impact on job growth (SMEs). Demonetization is the process of removing a
monetary unit's legal tender status. It is the procedure for eliminating a currency from a
nation's overall usage or circulation of money. Demonetization is the act of retiring one kind
of currency and replacing it with another. It may also be regarded as the removal of a certain
currency from the market. The paper's foundation is secondary information gathered from a
variety of print and internet sources that are cited in the paper's references. India's once-
booming economy has now come to a grinding halt. Sales, trader incomes, output, and
employment are all declining. Small producers are already closing their doors because they
lack the funds to stay alive. Many daily wage workers in India are unable to find employers
who have the funds to compensate them.

Introduction

Demonetization is the process through which a certain denomination of currency note is no

longer accepted as legal money. But it would be more acceptable to refer to the action as
"scrapping" as our government is replacing the outdated Rs. 500 notes with modern ones and
doing rid of the Rs. 1,000 notes.

The Central Government's action has had a significant impact on Indian society and the
economy. The first effect will be a decrease in people's purchasing power. They won't be able
to afford expensive items with it. No extravagant expenses shall be made for weddings or
other festivities. As a result, society will become less materialistic and its citizens more
responsible. The destruction of phony currency will cause the Indian economy to greatly
expand, and the previously growing real estate market would collapse.

As the cash-dependent economy unexpectedly ran out of cash to conduct economic activities,
the recent demonetization's initial phase was marked by a great deal of bewilderment. To
exchange their old currency for new currency, people had to wait in long, snake-like lineups
outside banks and ATMs. The issue was made worse by the ATM industry's failure to adapt
to the new Rs. 2000 and Rs. 500 banknotes, which rendered a significant number of ATMs
inactive. Also, the government had put limits on the amount of cash that customers could
withdraw from ATMs and banks, and most of these facilities were experiencing a cash
shortage.

The items will be less expensive. The worldwide market must respect Indian currency. There
will be a strong check on funding for terrorism and therefore on terrorist actions. Once people
stop tending to a mass money through unethical means, corruption will decrease significantly.
It will help close the gap between those who have and those who don't. For a few months,
there might be some challenges, though. But this inconvenience will only last a short while.

Objective

- To research how demonetization will affect the SME market.

- To highlight how demonetization has affected the expansion of the SME sector.
- To expose the government's demonization of the SME sector.
- To understand how the SME sector's technological advancement is impacted by
demonetization.

Literature Review

G.Ganesan et.al.(2017) conducted a study on the impact of demonetization on Indian

Economy. This study
depicts that there is a positive effect of demonetization in long run. It also states that
agricultural sectors, real estate sectors
are affected by this move in the short run but there must be a positive growth in the long run.

Geeta Rani(2016) researched on the effect of demonetization on retail outlets. This study
states that at initial stage
shopkeepers faced huge problems and the markets were very much affected by the cash
crunch but this move also compelled the shopkeepers and consumers to adopt cashless
means which will create a sound or hassle free transaction process in the future.

Ashok K.Nag(2016) revealed in his paper „Lost due to demonetization‟ how this vacuum
cleaning of money supply affects negatively the businessmen, wage earners, self-employers
as well as GDP of the country.

IMPACT OF DEMONETIZATION ON SME

A significant portion of the economy is made up of small and medium-sized businesses
(SME), which account for 8% of the GDP and employ more than 80 million people annually.
Most SMEs are historically controlled by families. There are primarily two types of
competitors in this market category. One is the companies that were established because its
founders recognized the potential before anybody else and went on to do well in business.

While the negative effects of demonetization on the general populace have received a lot of
attention, the abrupt invalidation of 86% of Indian currency could have a devastating short- to
medium-term effect on small enterprises. It is impossible to overestimate the significance of
Micro, Small, and Medium-Sized Businesses (MSMEs). The sector creates approximately 46
million units and almost 100 million employments, according to estimates from the Ministry
of MSME.

Because that MSMEs are more dependent on hard currency than the rest of the economy, it
may be assumed that their impact will be bigger than that of the rest of the economy, where
the predicted 50 basis points to 300 basis points GDP growth moderation due to
demonetization. Their virtually entirely cash-based spending base is where their virtuous cash
cycle starts. This therefore encourages the company to generate cash revenue as well.
Demonetization is carpet bombing, not a surgical strike. Everyone is affected. While
everyone wants to safeguard their freshly acquired currency to protect them from the
uncertain future, replacement not only takes time but also slows down the spending process.
Since the availability of unexplained currency has decreased, most SMEs will be uncertain
about consumer payments for some time. Small businesses will safeguard their assets if
customers don't pay, which will result in lower production and lower purchases. Less
production will result in shortages, which will drive up the price of what is already available
and further slowdown for those who provide them with raw materials.

We anticipate that incentives-based reforms will take place soon. I have no doubt that the
administration is conscious of the first point and will take action to get the money wheel
turning once more in the market. This might take several different shapes, including the early
announcement of GST and BTT, the abolition or sharp reduction of Service Tax and VAT, or
something else. By addressing taxes, which are currently viewed as systematic "theft" with
little to no returns, people will be encouraged to spend money without being afraid of paying
taxes.

Streamlining of government processes and monitor oversight. This will take place as a
precaution against the creation of black money using the new currency. Government
procedures will be redesigned to make it simple to get licenses and approvals and outdated
unnecessary regulations will be dropped. Monitoring of tax and other compliance officers is
necessary to prevent the resurgence of the "under-the-table settlement" culture in policing.

Effective usage of funds deposited in banks towards the construction of infrastructure that
promptly benefits the populace. The crucial word here is "quick". Money will be put towards
things that benefit all classes quickly. The current transformation has the potential for
immediate pain and long-term gain, but we must keep in mind that many members of our
society will first require the immediate benefits in order to survive.

While unaccounted money is now included in the books and is taxable, SMEs will spend in
self-development and improvement in terms of technology, infrastructure, and training to
self-utilize the improved profitability. SMEs and enterprises now have two choices by design.
Paying taxes or investing more money in expanding will have a domino effect on the
economy's overall growth.
The current decision has a lot of both positive and negative effects. No one can currently
predict the future with certainty, and this ambiguous situation is undoubtedly bad. Results in
uncertain situations depend on the mindset, and while people are currently responding
positively, they are also beginning to see potential hazards if the appropriate steps are not
taken at the appropriate time. The key to ensuring stability will be effective communication.
And although I am impressed by the prime minister's brave move, I am equally worried about
the enormous challenge that lies ahead of him to make this a success because, in my opinion,
the war against black money has not even begun. Demonetization is only a battle cry
signaling the beginning of a war

Finding

- Participants in the parallel economy will need to completely rethink their strategies in
the wake of demonetization. Companies should consider first joining the banking
system, then digitizing, and finally full declaration. Due to the timing of this
relocation, which occurs just months before the scheduled implementation of GST,
significant changes in habits and mindsets will be required.
- Pricing lower than necessary in cash transactions to undercut reputable, competing
firms will probably stop or at least lessen. This will raise MSMEs' general level of
competitiveness. Businesses with well-organized systems and planning procedures
will migrate more quickly, providing themselves a real edge and increasing their
already significant contribution of 38% to GDP or more.
- Before to demonetization, many MSMEs had trouble getting their credit evaluated
because of the significant amount of unexplained transactions. Businesses will be able
to access credit markets more effectively and at better pricing once the first setback
phase is over and they have streamlined their operations and accounting, which will
cut their cost of funding.
- There could be some long-term pain related to labor. Smaller companies rely on
migrant labor, which commonly travels around India. Many of these employees lack
proper identification or have identification that is invalid in the state where they work.
They would be forced to leave because of the absence of money in the immediate
 wake of demonetization, which will harm business continuity and raise hiring and
training costs.

Conclusion

The government's decision to implement demonetization has had a significant impact on the
economy. The amount of currency that will be replaced at the conclusion of the replacement
procedure and the degree to which currency in circulation is extinguished determine the
shock's influence over the medium term. Although it has been suggested that the money that
would be destroyed would be "black money" and that it should therefore be destroyed in
order to correct the economy's unjust incentive structure, this argument is founded more on
opinions than on facts.

The economy won't gain if the money vanishes, as some hoarders don't want to be associated
with their cash hoard. On the other hand, if the money enters the economy, it might have a
significant effect. Yet, evidence from several nations demonstrates that the decision was one
in a long line that fell short of reviving an inflation- and debt-ridden economy.

The impact of demonetization has already been experienced by micro, small, and medium-
sized businesses. Since most transactions in this industry are cash-based, a shortage of
liquidity will probably result in a slowdown in economic activity. Nevertheless, there is cause
for hope over the long and medium terms. Lower interest rates should be possible due to the
influx of deposits, encouraging investment in this industry. Additionally, the move towards
cashless transactions will encourage such businesses to register and enable them to take
advantage of national and state incentives and programmed. If there is a large transition to a
digital and cashless economy, the availability of low-cost capital should also increase.
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