Demonetization 2016: An Analysis of Impact on Indian Economy

This report provides a comprehensive analysis of the demonetization policy implemented in India in 2016. It begins by defining demonetization and its objectives, followed by a historical overview of demonetization in India, focusing on the 2016 initiative. The report identifies reasons behind the 2016 demonetization, including combating fake currency, promoting a cashless economy, and addressing black money. It then examines the impact of demonetization on common people, such as cash crunches and inflation, and discusses the benefits, including lower lending rates, a better economy, and digitalization. The report also highlights the pros and cons of the policy, such as its effect on GDP and flaws in implementation. Furthermore, it touches upon the financial innovations resulting from the demonetization, concluding that while it aimed to curb corruption and terrorist financing, its effectiveness remains debatable. The document is available on Desklib, a platform offering a wide range of study resources including past papers and solved assignments to aid students in their academic pursuits.

ECONOMICS

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Demonetization
Demonetization is an act of shedding the currency in the name of legal tender. It is a situation
when a country replaces the old currency with the new currency.
The main aim of demonetization is to combat inflation, corruption, and crime. Moreover, it will
also encourage a web dependent economy and international trade (Prateek, Knopf, and
Peterson, 2017).
History of Demonetization in India
On 8 Nov, 2016, the Indian government announced ban the use of 500 and 1000 notes and
replace them by issuing new notes of 500 and 2000 notes. The RBI (reserve bank of India) have
come out with the annual report of the situation that demonetization enacted 21 months ago
couldn’t bring whole sum of money as 10720 crore did not reach to RBI. The Prime minister
“Narendra Modi” laid down three main objectives to combat black money, terror funding and
corruption. The country lost its GDP growth by 1.5 percent (India today, 2019).
Other countries who have been successful in demonetization
Four countries who were successful after executing demonetization are European Union in
2002, Pakistan in 2016, Zimbabwe in 2015, United Kingdom in 1971, and Australia in 1996 (India
today, 2019).
Reason for 2016 demonization in India

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Some of the main reasons behind demonization are-
Fake currency- Pakistan started printing fake currency to sponsor terror activities in India. Fake
currency attacked the Indian economy and increase the flow of currency in the economy
leading to inflationary pressures.
Cashless economy- Huge amount of cash in the economy leaves no scope of manipulating the
cash transactions. Therefore, demonetization encouraged people to move on to digital
methods of paying such as imps, mobile wallet, neft, net banking and debit card.
Black money- As demonetization enforced that only a particular amount of old notes can be
exchanged at a time. These decisions claim that people holding black money will find it difficult
to disclose their money and moreover, they will not even be rendered. It placed the people in a
dilemma with high income and non-tax payers where a piece of paper is useless and has left the
notes with no purchasing power (Jain, and Pandiya, 2016).
Impact of 2016 demonization on common people
Demonization has led to many problems to a common man such as-
Cash crunch- demonetization had direct impact on few sectors that deal with cash such as
Autorishaws, daily wage earners, small traders, taxi drivers and taxi drivers. The economy was
very much dependent on cash and suddenly the government announced the demonetization.
Even the sectors such as real estate, and illegal cash transactions started facing losses. People

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started missing their office hours just to stand in huge queues outside the bank in order to
exchange their money which sometimes consumed the whole day.
Inflation- The supply of money has fallen that has exerting deflationary pressures which means
that general price level has become lower. The business operations became slower due to lack
of raw material.
Benefits-
Firstly, the employees who seek salaries in cash could not get it but finally employers
encourages them to get a bank account. As it was not very difficult in convincing the
employees’ during the crisis. People were not able to meet their daily obligations and
emergencies due to high denomination of currency notes (Jain, and Pandiya, 2016).
Pros and cons of 2016 demonization
Pros-
Lower lending rates- after demonetization, money moved to banks and other financial
institutions from the people. This enabled better circulation of money. Moreover, banks and
financial institution have lower cost that translated into lower lending rates (Toppr, 2017).
Better economy- demonetization persuades people to deposit the money in the banks that help
higher circulation of money. Government received more taxes and undertook development
projects. This resulted in a better performing economy (Dubey, 2017).

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Digitalization- Running out of money forced the people to use mobile apps for their
transactions. When currency notes of 500 and 1000 were demonetized then people started
depositing their cash in the bank and replaced the physical store of currency at home. This
helped the common to save more and it also reduced the counterfeit of currency notes and use
the digital apps to a great extent (Goswami, 2016).
Preventing the economy from the various anti-social activities- Anti-social elements such as
terrorists and smugglers use only cash as a mode of transacting. When Indian government
decided to curb the existing 500 and 1000 notes, it restricted the operations of terrorists by
denominating the notes in economy. This enabled the government to get an opportunity in
order to control the unaccounted money in the nation and control anti-social activities (Kumar,
2016).
Cons-
As demonetization was ever major structural change of the economy that led to disruption of
demand and supply of overall economy.
Below poverty families affected by demonetization- As small industries shut down and limited
their activities, many people below BPL lost their jobs and stuck into problems. Lack of bank
accounts and limited resources have affected poor people in India (Prateek, Knopf, and
Peterson, 2017).

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Effect on GDP- GDP growth has slowed because of implementation of new taxation system and
demonetization. Small business and industries find it difficult to regulate their operations and
earn profits. The consumption level of customers fell down and the demand for products
sharply fell down. Along with demonetization, implementation of GST is also the main reason of
falling GDP (Dasgupta, 2016).
Flaws in implementing demonetization- some of major flaws include exchanging of money at
the bank branches and their counters. Black money holders use the opportunity to get their
money exchanged with labors and poor people. Although, id proofs were asked who exchanged
money but it was not practically possible to calculate how much a person had exchanged
(Masiero, 2017).
Financial innovation of 2016 demonetization
The main innovation in operating the business is related to digitalization while transacting even
in small businesses. Further, the implementation of GST has changed the business operation.
For example- in textile industry, there was not tax imposed on manufacturing but now 5
percent GST is imposed on it that enforced the industry to maximize its production so that
paying taxes on huge production will be atleast worth (India today, 2019).
Conclusion

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From the above discussion on demonetization of 500 and 1000 notes, it can be seen that India
was able to search for black money holders and terrorist and if they were not able to find them.
Demonetization was able to curb corruption and terroristic money.

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References
Dasgupta, D., 2016. Theoretical Analysis of ‘Demonetisation’. Economic and Political weekly, 51(51),
pp.67-71.
Dubey, P. (2017) Demonetization in India - Positives and Negatives. Available on:
https://www.ssbinterviewtips.in/demonetisation-in-india-positives-and-negatives/789
[Accessed on: 13/02/19]
Goswami, R. (2016) Demonetisation And The Common People in India. Available on:
https://countercurrents.org/2016/11/16/demonetisation-and-the-common-people/ [Accessed
on: 13/02/19]
India today, (2019) Demonetisation: What India gained, and lost. Available on:
https://www.indiatoday.in/india/story/demonetisation-what-india-gained-and-lost-1327502-
2018-08-30 [Accessed on: 13/02/19]
Jain, K. and Pandiya, S., 2016. India: Currency Demonetisation and the Way Ahead.
Management Insight-The Journal of Incisive Analysers, 12(02).
Kumar, A.P., 2016. Demonetisation and the Rule of Law. Economic & Political Weekly, 51(50),
pp.19-21.
Masiero, S., 2017. New routes to cashlessness? ICTs, demonetisation, and the Indian informal
economy.

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Prateek, G., Knopf, R. and Peterson, B.C., 2017. Demonetisation: Wefts and warps of the
common man. Economic and Political Weekly, 52(47), pp.38-43.
Toppr, (2017) Demonetization. Available on: https://www.toppr.com/guides/business-
economics-cs/overview-of-indian-economy/demonetization/ [Accessed on: 13/02/19]