* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Demonetization: New Beginning
Survey
Document related concepts
Real bills doctrine wikipedia , lookup
Virtual economy wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Monetary policy wikipedia , lookup
Balance of payments wikipedia , lookup
Fear of floating wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
United States Note wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Currency war wikipedia , lookup
Money supply wikipedia , lookup
Non-monetary economy wikipedia , lookup
Transcript
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/