EFFECTS OF DEMONETIZATION ON

E-COMMERCE AND INDIAN ECONOMY

By: SHIVANI TRIPATHI
ID:714048
 WHAT IS
DEMONETIZATION ?
Demonetization is the act of stripping a currency unit of its
status as legal tender. Demonetization is necessary
whenever there is a change of national currency. The old
unit of currency must be retired and replaced with a new
currency unit. There are multiple reasons why nations
demonetize their local units of currency. Some reasons
include to combat inflation, to combat corruption, and to
discourage a cash system. The process of demonetization
involves either introducing a new note or coins of the same
currency or completely replacing the old currency with new
currency. The opposite of demonetization is remonetization
where a form of payment is restored as legal tender.
 HISTORY OF
DEMONETIZATION
In 8 November, 2016, the Indian government decided to
demonetize the 500 and 1000 rupee notes, the two
biggest demonetization notes. These notes accounted
for 86% of the countrys cash supply. The government
goal was to eradicate counterfeit currency, fight tax
evasion, eliminate black money gotten from money
laundering and terrorist financing activities, and promote
a cashless economy. By making the larger denomination
notes worthless, individuals and entities with huge
amount of black money gotten from parallel cash
systems were forced to convert the money at a bank
which is by law required to acquire tax information from
the entity. If the entity could not provide proof of making
any tax payments on the cash, a tax penalty of 200% of
the tax owned was imposed.
 In 2015, the Zimbabwean government
demonetized the Zimbabwean dollar as a way to
combat the countrys hyperinflation that was
recorded at 231,000,000%.The three-month
process involved expunging the Zimbabwean
dollar from the countrys financial system and
solidifying the US dollar, Botswana pula, and
South African rand as the countrys legal tender
in a bid to stabilize the economy.
 Another example of demonetization occurred
when the nations of the European Monetary
Union adopted the Euro in 2002. In order to
switch to the Euro, authorities first fixed
exchange rates for the varied national
currencies into Euros. When Euro was
introduced, the old currencies remained
convertible into euros while so that a smooth
transition through demonetization would be
assured.
 DEMONETIZATION IN
INDIA
The announcement was made by the Prime Minister of
India Narendra Modi in an unscheduled live televised
address at 20:00 IST (Indian Standard Time) on 8
November,2016. In the announcement, PM declared that
use of all Rs.500 and Rs,1000 banknotes of the
Mahatma Gandhi Series would be invalid after midnight
of that day, and announced the issuance of new Rs.500
and Rs.2000 banknotes in exchange for the old
banknotes. The government claimed that the
demonetization was an effort to stop counterfeiting of the
current banknotes allegedly used for funding terrorism,
as well as a crack down on black money in the country.
The move was also described as an effort to reduce
corruption, the use of drugs and smuggling.
 However in the days following the demonetization, banks
and ATMs across the country faced severe cash
shortages with sever detrimental effects on a number of
small businesses, agriculture, and transportation. People
seeking to exchange their notes had to stand in lengthy
queues, and several deaths were linked to the
inconveniences caused due to the rush to exchange
cash. Also, following the announcement, the BSE
SENSEX and NIFTY 50 stock indices crashed for the
next two days. This moved have caused several
negative on certain fields like E-commerce, Real estate,
Economy etc, which have been elaborated below-
E-COMMERCE
With the ban of Rs.500 and Rs.1000 currency
notes, eCommerce players were forced to stop
cash-on-delivery payment modes on their site.
Certain eCommerce players like Flipkart and
Snapdeal made restrictions on the order
purchase value to below Rs.1000. While
Amazon India stopped CoD orders from
Wednesday, a day after the big announcement.
These eCommerce companies also stopped
receiving old denomination notes of Rs.500 and
Rs.1000 notes and paid more emphasis on
other means of digital payments. The
demonetization move has hurt the eCommerce
conversions of various companies from Flipkart
to Zomato.
 With the fall of CoD payment modes,
people would be forced to move towards
online payments. With the scarcity of cash,
it is definitely taking a toll on the
conversion rate optimization practices and
eCommerce sales are eventually dropping
REAL ESTATE
It is one of the business segment that is
hard hit with this current financial crunch.
The hard cash offers an effective working
capital for builders and thus this financial
constraint can be a severe blow to this
aspiring business sector. The
demonetization move could hurt the
customer demands for home and could
force builders to decrease the price of their
real estate properties.
 This real estate fall is mainly attributed to
the cash paying tendency of the
customers. Apart from this housing finance
are also witnessing pressure on their
credit quality as well as growth. All this has
been happening due to the loan against
property (LAP) business.
ECONOMY
The demonetization of the 500 rupee
notes and the 1,000 rupee notes- the two
highest currency denominations available
in India, will likely hit economy hard in the
short term. The surprise move is expected
to grind the consumption activity in the
Indian economy to a virtual halt. The
service sector, which dominates economic
activity and involves sizable chunk of cash
transactions, will likely be hit the hardest.
 Growth in the Indian economy remained solid in
the quarter from April to June 2016. This
mentioned quarter is the first quarter of the fiscal
2016-17. During that period, the GDP (Gross
Domestic Product) rose to 7.3%. The
relationship between the GDP and GVA is:
GDP=GVA + taxes on products-subsidies on
products
The base year for calculating the GVA is 2011-
12.
The fall in economic activity due to
demonetization could last from two to three
quarters. As a result, GDP and GVA growth in
the quarters from September to December 2016
and January to March 2017 could be
significantly lower than previous years.
 WHY DONT I SUPPORT THE
RS.500/1000 DEMONETIZATION MOVE ?
Damages done:
All small traders/shopkeepers work deteriorated.
Daily wage workers like laborers lost their jobs.
Inconveniences due to heavy cash exchange caused many deaths.
Shortages of cash.
Because in a country where every year the huge population passes
out of colleges/universities and adds into the working force, we need
the GDP to rise at a crazy level to employ all of them. The expected
GDP fall because of the way this demonetization has happened will
reduce the GDP of India.
All well known economists have criticized this move.
Manmohan Singh: GDP will decrease by 2%
Jean Dreze: Demonetization in a booming economy is
like shooting at the tires of a racing car
 About the black money curbing, first of all
according to all studies the black money kept in
currency cash is only 6-10% of the total black
money, since 8th November around 50k crore
worth of gold has been sold and one doesnt
need to show PAN buying gold for less than 2
lakh. Rupee falling is an indication that there are
other dubious accounting methods used to
allocate cash, one year salary being paid in
advance to workers, government does not have
enough manpower to check all 100 crore
accounts so in the end whatever the government
gets back will be 2-3% of all the black money.
THANK YOU