Impact of Demonetisation on Indian Economy

Withdrawing units of money from circulation is demonetization. Demonetisation is defined as a process

by which currency units will not remain legal tender. The currency notes will not be taken as valid
currency. The currency has been demonetised thrice in India. The first demonetisation was on 12th
January 1946 (Saturday), second on 16th January 1978 (Monday) and the third was on 8th November
2016 (Tuesday).The government believe that this currency ban is required for the four main reasons. To
control inflation, to fight against corruption, to remove counterfeit currency and to discourage the cash
transaction.
Developing country like India has to find the solution to come out of the problems like this for the
betterment of the country. The government needed to keep the decision secret so that the tax evaders
would not be aware of this clean-up mission before the announcement of demonetization took place

Reasons of Demonetisation:
1. Black money: Demonetisation was a bold and revolutionary action taken by the government of
India to curb black money and one that will have the deep impact on the parallel economy in
the country. Pockets and persons with black money can be identified with this move. A few
businesses like property dealers, jewellers, foreign currency dealers, private money lenders
generally hold huge amounts of unaccounted money in form of currency notes. Such
unaccounted money had created a parallel economy in the country. Such illegal money has
reached the bank accounts through direct or indirect channels.
2. To hit the fake currency rackets: Fake Currency Notes have been wasted by the demonetisation.
Withdrawing highest currency notes out of the economy will have a serious impact on the fake
currency syndicates, thus putting an end to the terror funding in Jammu and Kashmir, Naxalite
hit states and North-eastern states. The fake currency with racketeers have been left in vain,
and new currency notes with high security; making a counterfeit impossible. Demonetisation
was a surgical attack on a fake currency circulating in the economy. Demonetization has
converted those fake currency notes into a mere piece of papers.
3. Online transactions: Demonetization's motto was to encourage the cashless/digital economy.
More and more cash-less or less-cash transactions will lead to more disclosure of income which
will increase the direct tax collections. With a reduction in cash transactions, alternative forms
of payment will more in demand. Electronic mode of payment like online transaction, payment
through applications, E-wallets E-banking, usage of debit and credit cards etc. will surely see the
substantial increase in demand
4. To hit Maoists: This step actually made money with Maoists worthless. As reported Maoists had
hoarded over Rs.7000 cores with them at Baster in Chhattisgarh. All such currency is now
nothing but pieces of papers
5. Rise in GDP: Though demonetisation has negatively impacted sectors such as real estate and
property, construction, and household consumption in general, it is believed that long-term
benefits for GDP growth will outweigh the short-term transitional impact. We are now heading
towards a 9% GDP growth by FY2018-19.
a. Sector-wise impact of demonetisation:
i. Real estate and Property: This sector would be one of the most affected sectors
by note ban. Demonetization has finished the businesses of the majority of the
builders as a major portion of their transaction depends on cash rather than
based on banks transfer or cheque transactions. As other sectors, marginal
builders are adversely impacted reason being the high involvement of cash
component in payment in this sector. Unorganised builders have been most
 affected. Builders will face a cash crunch due to the unexpected drop in sales, in
order to attract buyers; builders are required to introduce lucrative offers &
other benefits. Demonetisation will have a direct impact on resale and land
segment as cash plays a major role in these transactions. Most of the accounted
cash have been pulled out by demonetisation from the system.
ii. Gems & Jewellery: The substantial portion of the payment by customers
involves cash for purchasing jewellery so the impact of demonetisation in this
sector is quite high. Demonetisation made people with less cash available in
their hands for fulfilling their daily needs let alone purchasing jewellery. Smaller
retailers in the unorganised sector were the most to be impacted which reduce
the demand for jewellery. Many jewellers started selling gold at more than their
market price to take advantage of banned notes which resulted in income tax
raids on such jewellers. Notices have also been issued to many jewellers. This
sector is seriously hit by demonetisation as buyers prefer to pay in cash.
iii. Banks: Banks have proved to be the backbone of this entire process of
demonetisation and also the biggest beneficiaries. As on the direction of
government, old notes have to be exchanged with the new one, this resulted in
increased liquidity position of banks which could be utilised for lending. Both
deposit and lending rates have been cut by many banks.
iv. Media and Entertainment industry: Currency ban adversely impacted the media
and entertainment industry as it resulted in lesser number of viewers. The
major portion of the drop has been seen in lower middle class. The sudden
decision of demonetisation affected the film industry as well. This brought the
production of films to a halt. Also, the new and small players in the industry are
most affected by demonetisation.
v. Hospitality and tourism: Due to demonetisation Indian tourism industry have
been severely impacted as the majority of spending is in cash. Most of the
luxury foreign trips are sponsored by black money has come to a halt. Due to
the cash crunch, local tourism will also get affected The unorganised sector is
most impacted with the inability to make payment in cash, Further, the
slowdown is also faced by the restaurant's businesses with the inability of cash.
vi. Luxury items: Demonetisation will have a drastic impact on this sector. Majority
of the people spend their unaccounted money on luxuries. After the note ban,
luxury segments and allied business like clothing, electronics, luxury car will
have a huge setback.
vii. Automobiles: Demonetisation has also affected automobile industry The major
decline in demand has been seen in twowheelers business as compared to four
wheelers/luxury cars because buyers prefer to pay in cash for buying a two-
wheeler. The used car industry is another segment affected by a demonetisation
wherein sudden decrease in sales has been reported by several dealers. In this
industry, payments are not regulated.
viii. Retail: The cash crunch is leading to low consumer demand for the products.
This ultimately leads to decline in their sales volume. Since cash is the
favourable mode of payment in buying daily needs which in turn result in the
number of cash transactions. The impact of demonetisation on small and the
unorganized traders is higher than the organised sector.
ix. Agriculture: There are various factors impacting agriculture such as sale,
distribution, marketing and transport, such factors are dominantly cash-
 dependent. Further, demonetisation disrupted the supply chains, this sector has
severely been impacted by huge wastage of perishables. The small farmers
selling their products on daily basis to the wholesale centres, mandis and to the
consumers have also been impacted by demonetisation.
x. Labour-intensive sectors: In order to pay daily wage labourers huge amount of
cash is required, they have faced problems buying their routine stuff.
Limitations on the withdrawal amount from the bank is affecting the weekly
payment to contract personnel in mining, textile and leather industries.
Additionally, daily requirements of the factory owners are being affected by the
restrictions on cash withdrawal. This is adversely impacting the procurement
and production in this sector. However, the situation will improve once the cash
flow becomes normal.

Impact of demonetisation on Indian Economy: Positives and Negatives Positives:

1. Black money: Prime Minister Narendra Modi on a single stroke has choked the black money.
Out of total currency which is Rs 17 lakh crore, Rs 3 lakh crore is estimated as black money.
Operators of black money run a parallel economy which weakens the base of the country’s
economy. Modi’s demonetisation decision resulted in the collection of huge deposits with the
bank, all unaccounted money has either been deposited into the banks with the heavy penalty
or been simply destroyed.
2. Economy: This demonetisation has proved to be a turning point for the economy by cleaning-up
the black money which in turn has brought more borrowings to the treasury, improved inflation
outlook and increased GDP of India. Investment opportunities have also been revived and gave a
boost to infrastructure and the manufacturing sector. A huge amount of money deposited in
banks which in turn helped reduces interest rates and lower income tax rate.
3. Real estate: It is said that real estate is an industry prospers on black money. The amount of
illegal money involved in this sector is huge. An estimate tells us that in Delhi-NCR at least 40
percent of real estate deals are in black. Modi’s demonetisation move reduced the flow of
unaccounted money into the real estate sector. This will help in curtailing the use of black
money in real estate sector which in turn result in the reduction in the prices of land and
property.
4. Hawala transactions: Demonetisation was a big thrash to the hawala racketers. In Hawala
money is transferred without its actual movement. Hawala had become the route to facilitate
money laundering and terror funding. Hawala rackets run on black money. The sudden
withdrawal of black money out of the economy was a surgical strike to hawala operations.
Destruction of currency notes by hawala operators have also been reported.
5. Counterfeit currency: Demonetisation was a mighty blow to the counterfeit Indian currency.
Currency with syndicate operator operating both inside and outside the country has been
wasted. Counterfeit currency is one of the main reasons behind the devaluation of the real
worth of Indian currency. Indian Statistical Institute reported that at any given point of time fake
currency notes amounting to Rs 400 crore were in circulation in the economy and around Rs 70
crore fake currency notes are pushed into the country every year. But the real number could be
much larger. With Prime Minister Modi’s demonetisation decision to ban old currency notes of
Rs 500 and Rs 1,000 notes and replacing them with new one completely sucked the circulation
of fake currency. As new currency notes have come with highly advanced security features
which are barely possible to replicate.
 6. Terror financing: The main source of Terror financing is through counterfeit currency and
hawala. This is how it works. Fake currency is circulated by the network of hawala operators.
These hawala operators have a link with gamblers and smugglers of arms and drugs. Indirectly,
they all end up financing terrorism. In addition, the terrorists obtain huge money by donations
routing such money through hawala transactions. All channels of terror financing are now closed
with the control in the circulation of counterfeit currency and hawala operators.
7. Maoism: Maoist sympathisers have declared Modi’s demonetization move as “undeclared
financial emergency’. There are reasons for it. Currency ban proved to be a serious attack on the
Maoists movement. Black money is the major source of fund for Maoists. Maoists used to raise
crores of rupees annually through extortions. Such unaccounted money is used to purchase
arms and ammunition. with Modi’s demonetisation move, all those black monies are reduced to
pieces of papers. Ever since note ban, no major incidence of violence took place from the states
like Andhra Pradesh Odisha, Telangana. and Chhattisgarh.
8. Kashmir violence: Stone pelting has reduced in Kashmir because of note ban. No stone pelting
has been reported in Kashmir since the withdrawal of highest currency notes from the economy.
As reported by. Intelligence agencies 1,000 crores are sent annually by Pakistan to the
separatists for creating chaos in Kashmir. The money to the separatists is transferred through
hawala. With hawala transactions completely curtailed left separatists curelessly. Modi
completely dismantled the Kashmir unrest with his surgical strike called demonetisation.

Negatives:
1. Liquidity crisis: Demonetisation gave rise to liquidity problem as people found it difficult to get
sufficient amount of cash to fulfil their basic needs. Marginal section of the society mainly
depends on cash to meet their daily transactions. Out of total currency in circulation 500 rupee
notes constituted nearly 49% in terms of value. More the time is required to resupply Rs 500
notes, the more will be will be the duration of the liquidity crisis.
2. Loss of well-being: Most of the population who constitute the lower middle and lower class uses
currency to meet their daily transactions. Such class of the society such as daily wage labourers,
small traders and other marginal section of the society use cash more often. These sections of
the society have lost their income in the scarcity of cash. Cash crunch made firms to cut their
labour cost and thus reduces the income of the lower middle class.
3. Consumption: Cash shortage adversely affected the consumption behaviour of the people in
India. The sales of consumer durables likely to be hampered in short-term, especially sales
through unorganised channels are cash purchases. Most of the purchases by retailers are
through cash which brought down their volume of trade.
4. Decrease in GDP: Withdrawal of highest currency notes reduces the growth rate of the
economy. Demonetisation reduces consumption pattern, income, investment etc. This may
bring a slowdown in India’s growth rate as the liquidity crisis itself may last three-four months.
5. Interest rate and Bank deposits: Deposit of the bank may increase in short-term due to
demonetisation, but will come down in long-term. Such money may be saved into banks just to
convert the old notes with the new one. These are not voluntary savings aimed to get interest
rather it is because of demonetisation. It will be withdrawn by the savers as soon as the supply
of new currency takes place. This indicates that new savings are only for short-term which may
be encashed at the appropriate time in future. this may reduce interest rates in short but not in
the long term
6. Black money: One of the main reasons behind demonetisation move was to curb black money
but only a small portion of the black money is actually stored in the form of cash. Most of the
black money is kept in the form of land, gold and buildings etc. Hence the amount of
 unaccounted money deposited with the banks is only up to the amount of cash deposited.
Countrywide awareness is created among the people to fight against black money

Demonetisation: Success points

India has marched on the path of digital transactions at a much faster pace. Key points describing
success of demonetisation are:

1. Rate of Inflation goes down

Prices of commonly consumed commodities like Pulses, fruits, vegetables had gone down
substantially post demonetization. Accordingly it brought down the rate of inflation during
the months that followed demonetization. The chart below represents the impact of
demonization on the commodities
2. India moves to cashless economy
One of the key effects of Demonetization 2016 has been that more people have made digital
payments part of their lives moving towards a cashless economy. The details of growth of
such digital transactions since January 2016 to August 2017 reflect that NEFT transactions
that involved Rs. 7086 bn increased to Rs.12500 bn; Debit cards transactions increased from
Rs.2328 bn to Rs. 2700 bn; credit cards from Rs. 214 bn to Rs.366bn and the IMPS
transaction which was not used by the people, got a share of Rs.651 bn. The Data shared by
Reserve Bank of India reflect the trend:
3. Stock Market gets bullish
After demonetization stock market in India got bullish. While BSE index which was 27, 459
on November 7, 2016 rose to 33680.92 on November 6, 2017, the NSE rose from 8497 to
0,443. The data shared by Bloomberg reflect the trend.

4. Banks’ lending increases for small businesses

Banks’ finance to small business was going down in pre-demonetization period. There was a
negative growth even in short period of months. As on November 25, 2016, a negative
growth of -7.71% was recorded in Banks’ lending to small business. It went to -8.16% as on
December 23, 2016. However, as on September 29, 2017 the Reserve Bank of India has
reported a positive growth of 1.65% in lending to small business by the Banks.

5. More people use Mobile wallets than cash

Instead of using cash, more people have started using Mobile wallets for making payments
for their regular needs. Even less educated people have learned and switched over to mobile
 transactions. The volume of transactions which was Rs.22.14 bn in January 2016, had gone
up to Rs. 83.53bn in January 2017.

Failures of Demonetization
Economic Growth slows down
Post demonetization growth of Indian Economy slowed down from 9.1% to 5.7% in less than one
year. Month-wise GDP growth chart for the period March 2016 to September 2017 as shared by
Bloomberg emphasizes this fact as detailed below:
Realty sector bears the brunt
The triple decisions of demonetisation, RERA and GST resulted in a deceleration of new property
launches. The supply of new housing units in the top-6 cities in India during the first three quarters of
2017 was down by around 60 per cent, compared with the corresponding period of 2016.

With respect to property sales, the secondary market was obviously highly susceptible to
demonetisation as compared to the primary market. Property transactions in the secondary sales and
luxury housing segments tended to have significant cash components, and such sales have been
hampered significantly due to demonetization.

However, the shadow of Demonetization now appears to be fading in reality sector. The prevailing
attractive home loan rates, flexible payment plans and other attractive offers by developers, coupled
with restricted new supply addition, has led to a steady decline in the unsold inventory.

As of Q3 2017, only 6,38,500 units remained unsold in the top-6 cities, registering a 9 per cent
decline from Q4 2016 levels. The demand for affordable and mid-segment housing has been on a
rise.

Initiatives such as interest waivers on home loans, the government’s push for affordable housing
through Pradhan Mantri Awas Yojana (PMAY) and the ‘Housing for all by 2022’ mission have come
to the forefront over the past one year. Various policy initiatives, amendments and reforms were all
aimed at making the real estate sector more transparent, organised and fundamentally stronger.
Demonetisation played a significant role in this process.

In the long term, the real estate sector is likely to regain a faster growth trajectory and is estimated to
contribute around 13 per cent to India’s gross domestic product by 2028. This optimistic forecast is
very much attainable because the various reforms now redefining the realty landscape in India will
not only incrementally boost consumer sentiment but also improve investment inflows from foreign
and domestic institutional investors.