Download Demonetization: New Beginning

Gurukul International Multidisciplinary
Research Journal (GIMRJ) with
International Impact Factor 2.254
ISSN No. 2394-8426
Dec – 2016
Issue – IV, Volume – VI
Demonetization: New Beginning
1st Author
Qualification
Designation
Institute
Email.
Contact No.
: Dr. Falguni Mitesh Thakkar
: M.Com, PhD
: Assistant Professor
: SDJ International College, Surat, Gujarat.
: [email protected]
: 07600016924
Abstract: The In 2016, the Indian government decided to demonetize the Rs.500 and Rs.1000 notes, the two
biggest denomination notes. These notes accounted for 86% of the country’s cash supply. The government’s 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 sums 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.
Keywords: Demonetization, Bitcoins , Counterfeit Currency.
Introduction
On November 8,2016 the Government of India announced its decision to discontinue the legal
tender status of Rs 500 and Rs 1000 notes. It resulted into Demonetization. Demonetization is a
process of withdrawal of a particular form of currency (notes or coins) from circulation. In other
words 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. The process of demonetization
involves either introducing new notes or coins of the same currency or completely replacing the
old currency with new currency.
In 2015, the Zimbabwean government demonetized the Zimbabwean dollar as a way to combat
the country’s hyperinflation that was recorded at 231,000,000%. The 3 month process involved
expunging the Zimbabwean dollar from the country’s financial system and solidifying the US
dollar, Botswana pula, and South African rand as the country’s 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 the euro was introduced, the old national
currencies were demonetized. However, the old currencies remained convertible into euro for a
while so that a smooth transition through demonetization would be assured.
Quarterly Journal
Indexed Journal
Page 204
Peer Reviewed Journal ISSN No. 2394-8426
Referred Journal
http://www.gurukuljournal.com/
Gurukul International Multidisciplinary
Research Journal (GIMRJ) with
International Impact Factor 2.254
ISSN No. 2394-8426
Dec – 2016
Issue – IV, Volume – VI
The Coinage Act of 1873 demonetized silver in favor of adopting the gold standard as the legal
tender of the United States. The withdrawal of silver from the economy resulted in a contraction
of the money supply, which subsequently led to a 5-year economic depression in the country. In
response to the dire situation and pressure from silver miners and farmers, the Bland-Allison Act
remonetized silver as legal tender in 1878.
Widely accepted currencies such as the U.S. dollar and euro are accepted as legal tender in many
nations, especially those where foreign currencies are in short supply. Countries with extensive
business and cultural ties may also accept each other's currencies as legal tender in limited
amounts. For example, some U.S. and Canadian merchants located close to the U.S.-Canada
border accept both Canadian dollars and U.S. dollars as payment for goods and services.
The popularity of cross-border and online shopping is increasing demand for more forms of legal
tender; however, given official objection to such alternatives, these may still be some years away.
In May 2013, the governor of Arizona vetoed a bill that would have made gold and silver coins
legal tender in the state, in addition to existing U.S. currency. Bitcoin, another popular payment
alternative, which can be used for online transactions between individuals but is not considered
legal tender.
Reasons For Demonetizing Currency
1. Combating Inflation
2. Combating Corruption
3. To tackle black money
Objectives of Demonetization
1. Eradicate Counterfeit Currency
2. Fight Tax Evasion
3. Eliminate black money gotten from laundering
4. Controlling terrorist and criminal financing activities
5. Enabling growth in bank credit
6. Turning India into a cashless economy
Impact of Demonetization
1. Boost deposit base and savings
Global agencies have pegged the size of the parallel economy in India at close to 23% as of
2007. Basis this, we estimate unaccounted cash in the economy to the tune of Rs. 4500
billion, of which a certain significant proportion will make its way to the banks. Thus
boosting deposit base as well as financial savings. The banks' deposit base is expected to
Quarterly Journal
Indexed Journal
Page 205
Peer Reviewed Journal ISSN No. 2394-8426
Referred Journal
http://www.gurukuljournal.com/
Gurukul International Multidisciplinary
Research Journal (GIMRJ) with
International Impact Factor 2.254
ISSN No. 2394-8426
Dec – 2016
Issue – IV, Volume – VI
receive a fillip of 0.5-1.4% of GDP. In turn, financing savings can be expected to rise by
close to this proportion due to switch from savings from unproductive physical assets to
financial assets.
2.
Improve monetary transmission and reduce lending rates.
A rise in deposit base will allow banks to lower the blended cost of funds as higher CASACurrent Accounts, Savings Accounts) deposits help to replace the high cost of borrowing and
lower overall cost of funds. We expect banks to reduce deposit rates by ~125 bps over the
next six months. The new regime of MCLR -Marginal Cost of Funds based Lending Rate will
immediately take into account the lower cost and will thereby lead to a decline in lending
rates, which will boost economic activity in the medium term.
3. Create room for further monetary accommodation
With improved monetary transmission, economic efficiency and structural moderation in
currency in circulation, there is likely to be a greater room for the RBI to ease monetary
policy rate further. I am hopeful that the RBI will ease by another 100 bps in 2017-18 to a
repo rate of 4% by March 2018. The piecemeal liquidity support from OMO- Open
Market Operations, purchases will now to a larger extent be addressed by the structural
change in currency demand.
4. Financial inclusion via Jan Dhan
Over the last two years, while the number of Jan Dhan accounts has recorded a stellar
growth, the share of these accounts in total deposit base of the banking system has
remained under 1%. The demonetization drive of higher denominated notes should give a
push to cash deposits in Jan Dhan accounts, of which close to 43% so far have remained
dormant. In addition, the move will help to inculcate banking habits among the
large unbanked population in the country.
5. Support government finances
With some part of unaccounted money making way into the formal channel, the government
stands to benefit from higher income tax collections. This should help cushion the
government's FY17 fiscal deficit target, especially post the shortfall in anticipated spectrum
revenues.
The latest move will move the economy from the unorganized to organized sector,
dovetailing into the GST architecture that is expected to come on board next year. This is
likely to enhance the government's ability to tax commercial transactions resulting in a
structural improvement in tax to GDP ratio in the economy.
Quarterly Journal
Indexed Journal
Page 206
Peer Reviewed Journal ISSN No. 2394-8426
Referred Journal
http://www.gurukuljournal.com/
Gurukul International Multidisciplinary
Research Journal (GIMRJ) with
International Impact Factor 2.254
ISSN No. 2394-8426
Dec – 2016
Issue – IV, Volume – VI
6. Positive impacts from a bond market perspective
Improvement in bank deposit base leads to higher SLR -Statutory Liquidity Ratio demand.
On the supply side, with tax buoyancy seeing an improvement, supply of government
securities is likely to get more rationalized due to gradual reduction in fiscal deficit over time
as the impact of FRBMA (Fiscal Responsibility and Budget Management Act) is underway.
Anticipation of monetary easing to further support bonds.
7. Rise in GDP growth potential
While there are short-term implications for growth in cash-intensive sectors such as real
estate, construction, and discretionary household consumption in general, I believe that longterm benefits for GDP growth will outweigh the short term transitional impact. We are now
surely heading towards a 9% GDP growth by FY2018-19.
Conclusion
In a single master stroke, the government has attempted to tackle all three malaises currently
plaguing the economy—a parallel economy, counterfeit currency in circulation and terror
financing.
In addition, the Indian economy has been provided a new lease of life, a "reset" if you will—
with huge positive implications for liquidity, inflation, fiscal and external deficit in the short
term. Over the next two-three years, improvement in India's position on transparency and
corruption in the global stage will further add to its investor appeal. With GST- Goods and
Service Tax on the anvil, India is now on the cusp of higher growth in the medium term—to
be steered by the organized sectors including MSMEs – Ministry of Micro Small and
Medium Enterprise and the revival of the private sector capital expenditure cycle.
Resentences:
http://www.investopedia.com/terms/d/demonetization.asp#ixzz4SDHnSBFr
http://www.dailyo.in/politics/demonetisation-cashless-payment-digital-financialinclusion-black-money-mobile-finance/story
www.businessdictionary.com/definition
www.indianeconomy.net/.../what-are-the-impacts-of-demonetisation-on-indian-econo..
www.marketrealist.com/2016/11/can-demonetization-impact-indian-economy/
Quarterly Journal
Indexed Journal
Page 207
Peer Reviewed Journal ISSN No. 2394-8426
Referred Journal
http://www.gurukuljournal.com/