Demonetization of Indian Currency

CHAPTER – I

1.1 INTRODUCTION

The government has implemented a major change in the economic environment by

demonetizing the high value currency notes – of 500 and 1000 denomination. These ceased₹ ₹

to be legal tender from the midnight of 8th November 2016. People have been given upto

December 30, 2016 to exchange the notes held by them. The proposal by the government

involves the elimination of these existing notes from circulation and a gradual replacement with

a new set of notes. The reasons offered for demonetization are two- fold: one, to control

counterfeit notes that could be contributing to terrorism, in other words a national security

concern and second, to undermine or eliminate the “black economy”. There are potentially two

ways in which the pre- demonetization money supply will stand altered in the new regime: one,

there would be agents in the economy who are holding cash which they cannot explain and hence

they cannot deposit in the banking system. This part of the currency will be extinguished since it

would not be replaced in any manner. Second, the government might choose to replace only a

part of the currency which was in circulation as cash. In other words, the rest would be available

only as electronic money. The empirical extent of these two components will be unraveled only

over the next six months. These two would have different effects on the economy in the short-

run and in the medium term, as will be explored below. To understand the effects of these

dimensions, it is important to understand what is it that cash does in the economy? There are

broadly four kinds of transactions in the economy: accounted transactions, unaccounted

transactions, those that belong to the informal sector and illegal transactions. The first two

categories relate to whether transactions and the corresponding incomes are reported for tax

purposes or not. The third category would consist largely of agents who earn incomes below the

exemption threshold and therefore do not have any tax liabilities. Finally, there would be demand

for cash for illegal purpose like bribes in elections, spreading over sanctioned limits, dealings in

crime and corruption.

Turning to the effects of demonetization, the first major and sustained effect of

demonetization would follow from the extent to which the currency is extinguished and what this

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currency was being used for. It is being assumed that all currency which will potentially be

extinguished would be currency being used as a store of value in the first and second category of

transactions. If this assumption is correct, then the impact of extinguishing this currency would

be limited. On the other hand, if the currency is used for any of the other transactions in the

economy, either as a store of value or more importantly, as a medium of exchange, then the

impact on the economy and the agents in the economy could be substantial. If, for instance, the

extinguished cash was used as a medium of exchange in financing unaccounted income

generation or income in the informal sector, demonetization would result in these activities

closing down and a corresponding reduction in the incomes and employment associated with

these activities. The spillover effect would be felt by the organized sector as well since the

consumption from the incomes generated would extend to the formal sector as well. The next

question to ask would be: would these activities/ agents choose to come within the folds of the

formal sector as a result of the changed economic environment or would they remain outside or

worsen the activities and would be extinguished along with the losses generated from the cash

that was extinguished.

CURRENCY

A currency is the most specific use of the word refers to money in any form when in

actual use or circulation as a medium of exchange, especially circulating banknotes and coins. A

more general definition is that a currency is a system of money in common use, especially in a

nation. Under this definition, US Dollars, British Pounds, Australian Dollars, Indian Rupee and

European Euros are examples of currency. These various currencies are recognized stores of

value and are traded between nations in foreign exchange market, which determine the relative

values of the different currencies. Currencies in this sense are determined by governments, and

each type has limited boundaries of acceptance.

Other definitions of the term “currency” are discussed in their respective synonymous

articles banknote, coin and money. The latter definition, pertaining to the currency systems of

nations, is the topic of this article. Currency can be classified into two monetary systems: fiat

money and commodity money, depending on what guarantees the value. Some currencies are

legal tender in certain political jurisdictions, which means they cannot be refused as payment of

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debt. Others are simply traded for their economic value. Digital currency has arisen with the

popularity of computers and the internet.

INDIAN RUPEE

The Indian rupee is the official currency of the Republic of India. The rupee is subdivided

into 100 paisa, through as of 2016, only the 50 paisa remains legal tender. The issuance of the

currency is controlled by the Reserve Bank of India. The Reserve Bank manages currency in

India and derives its role in currency management on the basis of the Reserve Bank of India Act,

1934. The rupee is named after the silver coin, rupiya, first issued by Sultan Sher Shan Suri in

the 16th century and later continued by the Mughal Empire.

In 2010, a new symbol ‘₹’ was official adopted. It was derived from the combination of

the Devanagari Consonant “ ” (ra) and the Latin capital letter “R” without its vertical bar. The₹

parallel lines at the top are said to make an allusion to the tricolor Indian flag, and also depict an

equality sign that symbolizes the nation’s desire to reduce economic disparity. The first series of

coins with the new rupee symbol started in circulation on 8th July 2011.

DEMONETIZATION

Demonetization is the process in which a particular currency or valuable mineral is

degraded as a legal tender. This happens when a certain currency is no longer in regular use

within the country of origin, or when a newer currency comes into circulation.

In other words, Demonetization is the act of banning/ taking back of a currency unit of its

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.

Advantages of Demonetization

The biggest advantage of demonetization is that it helps the government to track people

who are having large sums of unaccounted cash or cash on which no income tax has been paid

because many people who earn black money keep that money as cash in their houses or in some

secret place which is very difficult to find and when demonetization happens all that cash is of

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no value and such people have two options is to deposit the money in bank accounts and pay

taxes on such amount and second option is to let the value of that cash reduced to zero.

Since black money is used for illegal activities like terrorism funding, gambling, money

laundering and also inflating the price of major assets classes like real estate, gold and due to

demonetization all such activities will get reduced for some time and also it will take years for

people to generate that amount of black money again and hence in a way it helps in putting an

end this circle of people doing illegal activities to earn black money and using that black money

to do more illegal activities.

Another benefit is that due to people disclosing their income by depositing money in their

bank accounts government gets a good amount of tax revenue which can be used by the

government towards the betterment of society by providing good infrastructure, hospitals,

educational institutions, roads and many facilities for poor and needy sections of society.

Disadvantages of Demonetization

The biggest disadvantage of demonetization is that once people in the country gets to

know about in than initially for few days there is chaos and frenzy among public as everybody

wants to get rid of demonetized notes which in turn sometimes can lead to law and order

problem and chaotic situation especially in banks and ATMs which are the only medium to

change the old currency units to new currency units.

Another disadvantage is that destruction of old currency units and printing of new

currency new units involve costs which has to be borne by the government and if the costs are

higher than benefits then there is no use of demonetization.

Another problem is that majority of times this move is targeted towards black money but

if people have not kept cash as their black money and rotated or used that money in other asset

classes like real estate, gold and so on then there is no guarantee that demonetization will help in

catching corrupt people.

Impact of Demonetization

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1. Black Money And Corruption

By demonetization, black money will be taken out of Indian system. As predicted by

ICICI Securities Primary Dealership the government’s plan to remove INR 500 and INR 1000

notes from circulation will disclose up to INR 4.6 lakh crore in black money. Corruption will

also be automatically reduced by removing black money from economy.

2. Funding

Funding for smuggling and terrorism will take a blow since all the money will get back to

bank and from there it is easy to identify the fake currency. Demonetization thus affects the

funding of terror networks in Jammu and Kashmir, North – eastern states and the other areas.

3. Real Estate

Another impact of the demonetization would be reduction in cash transactions in real

estate. This is likely to reduce to real estate prices and make it affordable. In the short term,

prices of real estate would come down for the same reasons above. There will be fewer suitcases

moving.

4. Elections

Demonetization has shocked political parties. Many states like Punjab and Uttar Pradesh,

cash donations are a huge part of “election management”. Political parties will find themselves

helpless as cash hoards are often undeclared money. So, upcoming elections of 2017 will be

transparent to the some extent.

5. Gold / Silver and Jewellery

After demonetization the demand for gold and other precious metals rise greatly, because

people are trying to invest their black money in gold and to make it white in short period. But

demand for gems and jeweler to decline in the next two to three quarters.

6. Digital Payments

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People are adopting online payments system such as paytm, etc. after ban for high

denomination currency in India. Digital transaction systems, E – wallets and apps, online

transactions using E – Banking, usage of Plastic money (Debit and Credit Cards), etc, will

definitely see substantial increase in demand. This behavioral change could be a game changer

for India in the near future.

7. Fake Currency

The impact on the fake currency would be more significant. Many dealers with the

existing counterfeit notes would be trapped as they would have to take the notes to the bank and

have better chances of getting their racket exposed. This, they have only option to destroy their

notes and incur losses.

8. GDP

The sudden decline in money supply and increase in bank deposits is going to adversely

impact consumption demand in the economy in the short term. This coupled with the adverse

impact on real estate and informal sectors may lead to lowering of GDP growth.

9. Market

There will be positive move in markets in long run that could bring confidence of

overseas investors in Indian stock markets. Market goes a bit down in the short and medium

term. India is still a very attractive destination on a long – term basis. It is not the best market in

the next three months.

10. Decrease in Interest Rates

We will see lowering interest rates for education loans, home loans and medical loans

very soon. It will make higher education and medical facilities more accessible. This change is

hard to undo because if any subsequent government increases loan it will suffer huge backlash.

11. Lower Inflation

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As the black money goes out of the system the money supply will shrink to some degree.

This will reduce inflation rate in the absence of any open market interventions by the Reserve

Bank of India.

What is “LEGAL TENDER”?

Legal tender is any official medium of payment recognized by law that can be used to

extinguish a public or private debt, or meet a financial obligation. The national currency is legal

tender in practically every country. A creditor is obligated to accept legal tender towards

repayment of a debt. Legal tender can only be issued by the national body that is authorized to do

so, such as the U.S. Treasury in the United States and the Royal Canadian Mint in Canada.

GROSS DOMESTIC PRODUCT (GDP)

GDP is the final value of the goods and services produced within the geographic

boundaries of a country during a specified period of time, normally a year. GDP growth rate is

an important indicator of the economic performance of a country.

The OECD defines GDP as “an aggregate measure of production equal to the sum of the

gross value added of all resident and institutional units engaged in production”. An IMF

publication states that “GDP measures the monetary value of final goods and services- that is,

those that are bought by the final user- produced in a country in a given period of time”[1].

The sudden decline in money supply and increase in bank deposits is going to adversely

impact consumption demand in the economy in the short term. This coupled with the adverse

impact on real estate and informal sectors may lead to lowering of GDP growth.

Service sector is the largest sector of India and it contributes 52.52% of GDP during the

period 2014-15. Service sector accounts for 52.97% of total India’s GVA of 115.50 lakh crore

Indian rupees.

1 Callen, Tim, “Gross Domestic Product- An Economy’s All”- IMF.

It can be measured by three methods, namely,

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Output Method

Expenditure Method

Income Method

1. Output Method

This measures the monetary or market value of all the goods and services produced

within the borders of the country. In order to avoid a distorted measure of GDP due to price level

changes, GDP at constant prices real GDP is computed. GDP (as per output method) = Real GDP

(GDP at constant prices) – Taxes + Subsidies.

2. Expenditure Method

This measures the total expenditure incurred by all entities on goods and services within

the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM)

C: Consumption expenditure, I: Investment expenditure, G: Government spending and

(X – IM): Exports minus Imports, that is, net exports.

3. Income Method

It measures the total income earned by the factors of production, that is, labor and capital

within the domestic boundaries of a country. GDP (as per income method) = GDP at factor

cost + Taxes – Subsidies.

In India, contributions to GDP are mainly divided into 3 broad sectors – agriculture and

allied services, industry and service sectors. In India, GDP is measured as market prices and the

base year for computation is 2011-12. GDP at market prices = GDP at factor cost + Indirect

Taxes – Subsidies.

ECONOMIC GROWTH

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Economic growth is the increase in the inflation- adjusted market value of the goods and

services produced by an economy over time. It is conventionally measured as the percent rate of

increase in real gross domestic product, or real GDP, usually in per capita terms.

The rate of economic growth refers to the geometric annual rate of growth in GDP

between the first and the last year over a period of time. Implicitly, this growth rate is the trend

in the average level of GDP over the period, which implicitly ignores the fluctuations in the GDP

around this trend.

ECONOMY OF INDIA

The economy of India is the sixth- largest economy in the world measured by nominal

GDP and the third- largest Purchasing Power Parity (PPP). The country is classified as a newly

industrialized country, one of the G-20 major economies, a member of BRICS and a developing

economy with an average growth rate of approximately 7% over the last two decades. India has

one of the fastest growing service sectors in the world with annual growth rate of above 9% since

2001, which contributes to 52.97% of GDP in 2014-15.

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1.2 OVERVIEW OF INDIAN RUPEE

Background

Governments have, for centuries spent a large amount of time and resources in the

production of currency in a way that can best serve as the representation of regional and later

national pride and interests.

Prime Minister Narendra Modi’s announcement on November 8 to withdraw currency

notes of demonetization 500 and 1000 and the issue of new notes worth 2000 and 500₹ ₹ ₹ ₹

clearly left the country in a shock from which it will take a while to recover. While analysts have

poured in both criticism and admiration for the government’s move, both sides do agree on the

historic nature of the announcement. However, currency reforms like these are not exactly new.

Since the Republic of India took birth and even before, paper currency in the sub continent had

been periodically transformed to reflect the needs of the time.

For many of us, the old versions featuring Mahatma Gandhi, on one side were all that we

ever knew. Though the Reserve Bank of India (RBI) introduced an updated version of the notes

in 2005, with some new security features, the overall look and design remained similar to the

original style, introduced in 1996. These notes were, however, preceded by decades of changes

in symbols, colors, sizes, denominations and more – a rich history that harks back to the colonial

era.

The Birth of a Paper Currency

Until the 18th century, silver and gold coins were commonly used in India. But as Private

European trading companies established their own banks in the region, such as the Bank of

Hindostan in Culcutta, they began issuing the very first versions of Indian paper notes, which

were initially just text-based.

As British companies began increasing their hold over what were then Bengal, Bombay

and Madras, they established presidency banks, beginning with the Bank of Bengal. This further

popularized the use of paper notes. The Bank of Bengal went on to release notes that featured a

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small image of a female figure meant to represent the idea of “commerce”, as well as the bank’s

name and the denomination in three scripts: Urdu, Bengali and Nagri.

However, it was only after the Paper Currency Act of 1861 that the British Colonial

government really got involved in producing money, establishing the paper currency as we know

it today. Money was now to be issued by the state alone, not banks. The new law was the

brainchild of James Wilson, the finance member of the India council that advised the British in

India. Wilson effectively was a sort of finance minister in the colonial government.

The “Victoria Portrait Series” notes were the very first paper notes officially introduced

by the government, available in denominations of 10, 20, 50, 100 and 1000. The notes₹ ₹ ₹ ₹ ₹

had details provided in two languages, as well as a small portrait of the queen on the top left.

At the time, as Manu Goswami explains in her book “Producing India”, the vast mass of

the region was divided into “currency circles”, each with notes that could only be used within a

specific area. These circles were centered on cities then known as Calcutta, Bombay, Madras and

Rangoon, as well as Kanpur, Lahore and Karachi.

Interestingly, in instances when money had to be securely transferred across distances,

the paper notes were sometimes cut in half, with one half being sent by post first and the second

half sent only after the first reached the destination, according to the RBI’s Monetary Museum.

Other colonial governments also printed notes for use in their territories in India. For

instances, France’s Banque de I’Induchine issued its own “roupie” notes in the late 1890s and

these stayed in circulation right upto 1954, when they were replaced with Indian government

notes. The Portuguese issued “rupia” notes starting in 1883 and they were used until 1961.

As British influence grew over the years, the denominations and styles of their currency

notes in India evolved; they began to feature more languages and details, as well as the portraits

of kings, starting with George V in 1923.

All these notes were printed by the Bank of England until India’s first currency printing

press was established in Nasik in 1928. Four years later, this press was producing all of India’s

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notes. In 1935, the responsibility of managing India’s money was handed over to the newly-

established Reserve Bank of India (RBI).

Money for Modern India

It took RBI several years to launch its own notes and the first versions looked similar to

the earlier editions of the colonial government. RBI’s first note was issued in 1938 and featured a

portrait of King George VI.

After Independence in 1947, India’s currency needs a new look, with imagery and

symbols to represent its new identity. The first Post- Independence note came out in 1949. The

1 had the image of the Lion capital of Ashoka at Sarnath, which would also become the₹

official emblem of India, printed on the top right.

Over the next few years, RBI released notes of different denominations featuring images

of monuments such as Mumbai’s Gateway of India and the Brihandeeswara temple in

Tamilnadu’s Thanjavur town. In the 1960s, notes began to be printed in different colors to help

people who couldn’t read.

The Ashoka pillar remained one of the main images on most notes until the 1980’s when

the next redesign occurred. This time the motifs oriented towards Indian art forms and symbols

of scientific and economic progress, a nod to the country’s development.

But perhaps the most important transformation over the years was technological. In 1944,

fearing the infiltration of Japanese forgeries in the latter years of the Second World War, RBI

introduced a security thread for the first time on its notes, as well as an updated watermark.

Decades later, in 1966 and in 2005, it released versions of a new “Mahatma Gandhi Series” of

notes. These came with an updated range of security features, including a latent image that could

only be seen when the note was held up to light in a certain way. Special inks were used for the

various texts and the notes carried details that could held the visually- impaired.

The last design change in recent memory was the inclusion of the new rupee currency

symbol, first adopted in 2010. Notes bearing this symbol, a combination of the Devanagari ‘Ra’

and Roman ‘R’, were printed for the first time in 2011.

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The Money of Tomorrow

Today, these notes are still an essential part of daily life, even as credit cards and online

payment services are becoming increasingly popular in urban India. But the demonetization of

the 500 and 1000 notes, the first such step in nearly 40 years, has paved the way for further₹ ₹

evolution of India’s paper currency.

The two new feature Devanagari numerals, along with the usual international standard

ones, a surprise addition given the long- running debate over the status of India’s many

languages.

The 500 note is now slightly smaller and stone gray in color but still features the₹

Mahatma. On the reverse, RBI has added the spectacles logo of Swacch Bharat- Prime Minister

Narendra Modi’s pet “Clean India” campaign- and an image of Delhi’s Red Fort. Meanwhile, the

2000 note is magenta in color and represents India’s Mars Orbiter mission, a new symbol to₹

mark the distance that the country has travelled over its long history.

Security Features of Indian Rupee

The Reserve Bank has the sole authority to issue bank notes in India. Reserve Bank, like

other Central banks the world over, changes the design of banknotes from time to time. The

Reserve Bank has introduced banknotes in the denominations of 5, 10, 20, 50, 100,₹ ₹ ₹ ₹ ₹

500 and 2000 in this series. These notes contain distinct easily recognizable security features₹ ₹

to facilitate the detection of genuine notes vis-à-vis forgeries.

The security features of the Indian rupee are as under, mentioned using a specimen of

demonetized note of 1000.₹

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1. See through Register

The see through register is a design that is printed on both sides of the note, on one side,

it is hollow and on the other side it is filled up. On Indian banks notes a hollow floral design is

printed on the reverse. It is placed in the middle of the vertical band next to the watermark and

looks like one single design when seen against the light.

2. Watermark

Most banknotes all over the world have a distinct watermark. The latest Mahatma Gandhi

series of banknotes contain a unique Mahatma Gandhi watermark. They bear a peculiar light and

shade effect along with multi-directorial watermark windows.

3. Optically Variable Ink

This kind of special ink changes its color when viewed from different angles. This is one

of the latest security features on Indian banknotes.

4. Fluorescence

This is a special security feature in which optical fibers and florescent ink is used which

glows when exposed to ultraviolet lamp. The number panels on Indian banknotes have this

special feature.

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5. Security Thread

The security thread is generally a thin line of inscription made of special material having

particular inscriptions. The security thread reads, ‘Bharat’ (in Hindi), ‘1000’ and ‘RBI’. Similar

features are used on the other notes issued in India.

6. Intaglio Printing

Inscriptions or motifs printed using the Intaglio printing or raised printing technique can

be felt by touch. The portrait of Mahatma Gandhi, the Reserve Bank seal, guarantee and promise

clause, Ashoka Pillar Emblem on the left, Reserve Bank of India Governor’s signature are

printed in intaglio.

7. Latent Image

The latent image is a security feature that is concealed within the note. It is visible only

when it is held horizontally at eye level.

8. Micro Lettering

Micro letterings are minute inscriptions which can be only ready under a microscope. On

Indian banknotes, the word RBI is printed using this technique between the vertical bank and

Mahatma Gandhi portrait.

9. Identification Mark

Identification notes are made on banknotes to help the visually impaired identity the

denomination of notes. On Indian banknotes they appear on the left of the watermark window on

all notes except 10 note. 20 notes have a Vertical Rectangle shaped identification mark, 50₹ ₹ ₹

notes have a Square shaped one, and 100 notes have a Triangle shaped one. ₹

A look at the security features of the newly- launched 2000 and 500 notes from the₹ ₹

RBI’s table.

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2000 (Color: Magenta)₹

1. See through register where the numeral 2000 can be seen when note is held against light.

2. Latent image of 2000 can be seen when the note is tilted.

3. Devanagari denomination.

4. Portrait of Mahatma Gandhi.

5. Micro letters ‘RBI’ and ‘2000’.

6. Color shift security thread with ‘RBI’ and ‘2000’.

7. Guarantee clause, Governor’s signature and RBI emblem on the right.

8. Watermarks of Mahatma Gandhi and electrotype 2000 numeral.

9. Number panel with numerals growing from small to big on top left and bottom right

sides.

10. Denominational numeral with Rupee symbol, 2000 in color changing ink.

11. Ashoka pillar emblem.

For visually impaired:

12. Rectangle with 2000 in raised print on right.₹13. Seven angular bleed lines in raised print.

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500 (Color: Stone Green)₹

1. See through register in denomination numeral.

2. Latent image of the denomination numeral.

3. Denomination numeral in Devanagari.

4. Orientation of Mahatma Gandhi’s portrait changed.

5. Windowed security thread changes from green to blue when note is tilted.

6. Guaranteed clause, Governor’s signature and RBI emblem shifted towards right.

7. Portrait and electrotype watermarks.

8. Number panel with numerals growing from small to big on top left and bottom right

sides.

9. Denomination in numerals with rupee symbol in color changing ink (green to blue) on

bottom right.

10. Ashoka pillar emblem on right.

For visually impaired:

11. Circle with 500 in raised print on the right.₹12. Bleed lines on the left and right in raised print.

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List of Indian Currency

Both CNP, located in Nashik, Maharashtra, BNP Mysore and BNP located in Dewas,

Madhya Pradesh, print Indian currency. Currency is also printed by Reserve Bank of India, along

with two presses owned by Bharatiya Reserve Bank Note Mudran Private Limited.

The Government of India has the sole right to mint coins. The responsibility for coinage

vests with the Government of India terms of the Coinage Act, 1906 as amended from time to

time. The designing and minting of coins in various denominations is also the responsibility of

the Government of India. Coins are minted at the four India Government Mints at Mumbai,

Alipore (Kolkata), Saifabad (Hyderabad), Cherlapally (Hyderabad) and Noida (UP).

The coins are issued for circulation only through the Reserve Bank in terms of the RBI

Act. The following are the currencies issued in India and the year of issue and year of

demonetization of Indian currency are mentioned in the table.

I. COINS

Coins Year of Introduction Year of Demonetized

1 Paise 1965 1981

2 Paise 1965 1981

3 Paise 1964 1971

5 Paise 1977 1977

10 Paise 1971 1982

20 Paise 1987 1997

25 Paise 1957 2011

50 Paise 1964 In Circulation

1 Rupee 1964 In Circulation

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2 Rupees 1982 In Circulation



II. CURRENCY NOTES

Currency Year of Introduction Year of Demonetized

1 Rupee 1940 In Circulation







500 Rupees 1987 2016

1000 Rupees 1938 2016

5000 Rupees 1954 1978

10000 Rupees 1938 1978

500 Rupees (Reissued) 2016 In Circulation


1.3 HISTORY

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The sudden move to demonetize 500 and 1000 and higher denomination notes were₹ ₹

first demonetized in January 1946 and again in 1978. The highest denomination note ever printed

by the Reserve Bank of India was the 10000 note in 1938 and again in 1954. But these notes₹

were demonetized in January 1946 and again in January 1978, according to RBI data. 1000₹

and 10000 bank notes were in circulation prior to January 1946. Higher denomination₹

banknotes of 1000, 5000 and 10000 were reintroduced in 1954 and all of them were₹ ₹ ₹

demonetized in January 1978.

The 1000 note made a comeback in November 2000. 500 note came into circulation₹ ₹

in October 1987. The move was then justified as attempt to contain the volume of banknotes in

circulation due to inflation. However, this is the first time that 2000 currency note is being₹

introduced. While announcing currently circulated 500 and 1000 notes as invalid from₹ ₹

midnight 8 November, Prime Minister Narendra Modi said new 500 note and 2000₹ ₹

denomination banknote will be introduced from November 10.

1.3.1 History of Reserve Bank of India (RBI)

The Reserve Bank of India was established on April 1, 1935 in accordance with the

provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately owned, it

was nationalized in 1949. Its central office is in Mumbai where the Governor of RBI sits. RBI

has 22 regional offices and most of them are located in state capitals. The Reserve Bank of India

also has three fully owned subsidiaries: National Housing Bank (NHB), Deposit Insurance and

Credit Guarantee Corporation of India (DICGC) and Bharatiya Reserve Bank Note Mudran

Private Limited (BRBNMPL).

The functions of Reserve Bank are governed by Central board of directors. The board is

appointed by the Government of India. The directors are nominated / appointed for a period of

four years. As per the Reserve Bank of India Act there are official directors and non- official

directors. The official directors are appointed by the government and include Governor and

Deputy Governors of RBI. There cannot be more than four Deputy Governors. Non – official

directors are nominated by the government. These include ten directors from various fields and

one government official. Apart from these, there are four other non – official directors, one each

from four local boards in Mumbai, Kolkata, Chennai and New Delhi.

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Awards

Reserve Bank of India on 22 January 2016, XBRL International presents India’s Central

bank with an award recognizing the regulators ongoing innovation in leveraging the standard in

pursuit of improved transparency and accountability.

1.3.2 History of Indian Rupee

The rupee in your pocket has a mysterious past. Behind Mahatma Gandhi’s smiling faces

lies a long history of struggle, exploration and wealth that can be traced back to the ancient India

of the 16th Century BC. Let’s demystify this history by bringing you the interesting stories about

how Indian currency has evolved over the ages into the rupee of today.

India was one of the first issuer of coins (Circa: 6th Century BC), and as a result it has

seen a wide range of monetary units throughout its history. There is some historical evidence to

show that the first coins may have been introduced somewhere between 2500 and 1750 B.C.

However, the first documented coins date from between the 7th / 6th Century B.C. to the 1st

Century A.D. These coins are called ‘Punch-Marked’ coins because of their manufacturing

technique.

Over the next few centuries, as traditions developed and empires rose and fell, the

country’s coinage designs reflected its progression and often depicted dynasties, socio- political

events, deities and nature. This included dynastic coins, representing Greek Gods of the Indo-

Greek period followed by the western kshatrapa copper coins from between the 1st and the 4th

century A.D.

In 712 A.D, the Arabs conquered the Indian province of Sindh and brought their

influence and coverage with them. By the 12th century, Turkish Sultans of Delhi replaced the

longstanding Arabs designs and replaced them with Islamic calligraphy. This currency was

referred to as ‘Tanka’ and the lower valued coins, ‘Jittals’. The Delhi Sultanate attempted to

standardize this monetary system and coins were subsequently made in gold, silver and copper.

In 1526, the Mughal period commenced, bringing forth a unified and consolidated

monetary system for the entire Empire. This was heavily influenced by the Afghan Sher Shah

21

Suri (1540-1545) who introduced the silver Rupayya or Rupee coin. The princely states of pre-

colonial India minted their own coins, all which mainly resembled the silver Rupee, but held

regional distinctions depending on where they were from. During the late 18th century when

political unrest occurred, agency houses developed banks such as the Bank of Bengal and Bahar,

The Bank of Hindostan, Orient Bank Corporation and the Bank of western India. These banks

also printed their own paper currency in the Urdu, Bengali and Nagri languages.

It was only in 1858 when the British Crown gained control of the one hundred princely

states, and subsequently ended the Mughal Empire, that the coin’s native images were replaced

by portraits of the Monarch of Great Britain to indicate British supremacy. In 1866, when the

financial establishments collapsed, the control of paper money also shifted to the British

Government. This was subsequently passed to the Mint Masters, the Accountant Generals and

the Controller of Currency. In 1867, the Victoria Portrait series of bank notes was issued in

honor of Queen Victoria.

After gaining its independence in 1947 and becoming a republic in 1950, India’s modern

rupee reverted back to the design of the signature rupee coin. The symbol chosen for the paper

currency was the Lion Capital at Sarnath which replaced the George VI series of banknotes. In

1996, the Mahatma Gandhi series of paper notes were introduced.

1.3.3 History of Indian Coins and Currency

I. Coins

It would be interesting for us to know that the first documented coinage seems to have

started with ‘Punch- Marked’ coins issued between the 7th- 6th century BC and 1st century AD.

The coinage can be classified into the following periods.

a. Ancient Period

b. Medival Period

c. Mughal Period

d. Late pre-colonial Period

e. British Period

22

f. Republic Period

g. Others

Our country won its independence on August 15, 1947. During the period of transition

India retained the monetary system and the currency and coinage of earlier period. India brought

out its distinctive coins on 15th August, 1950.

Our coins are presently being issued in denominations of 50 paise, one rupee, two rupees,

five rupees and ten rupees. Coins upto 50 paise are called ‘small coins’ and coins of rupee one

and above are called ‘Rupee coins’. Our coins can be issued upto the denomination of 100 as₹

per the Coinage Act, 1906.

II. Currency

Our financial instruments and ‘Hundies’ in India have a venerable history. Our paper

money, in the modern sense, traces its origins to the late eighteenth century with the issues of

private banks as well as those of semi- government banks. The Paper Currency Act of 1861

conferred upon Government of India the monopoly of Note Issue bringing to end banknote issues

of Private and Presidency Banks. Government of India continued to issue currency notes till the

Reserve Bank of India was established on 1st April, 1935. Reserve Bank issued banknotes in

January 1938 when the first Five Rupee banknote was issued bearing the portrait of George VI.

This was followed by 10 in February, 100 in March and 1000 and 10000 in June₹ ₹ ₹ ₹

1938. The George VI series continued till 1947 and thereafter as a frozen series till 1950 when

post independence banknotes were issued, with the Ashoka Pillar watermark.

Our banknotes in the Mahatma Gandhi series were introduced in 1996 and were issued in

a phased manner in the denominations of 5, 10, 20, 50, 100, 500 and 1000.₹ ₹ ₹ ₹ ₹ ₹ ₹

Presently 500 notes were reissued and 1000 notes were demonetized to control black money.₹ ₹

New 500 and 2000 notes were issued by the Reserve Bank of India.₹ ₹

Milestones

23

In 1540-1545, the Silver coins issued by Sher Shah Suri. It remained in use during the

Mughal period, Maratha era and British India.

In 1770-1832, earliest paper rupee issued by Bank of Hindostan (1770-1832), General

Bank of Bengal and Bihar (1773-1775), and Bengal Bank (1784-1791).

In April1, 1935 the Reserve Bank of India is setup.

In January 1938, first note of 5 issued by the Reserve Bank.₹ During February - June 1938, 10, 100, 1000 and 10000 issued.₹ ₹ ₹ ₹ In August 1940, 1 note introduced. 1 was first introduced on 30 November1917,₹ ₹

followed by 2 and 8 annas, and discontinued on 1 January 1926.₹ During March 1943, 2 introduced.₹ In August 12, 1946 500, 1000 and 10000 notes were demonetized to control black₹ ₹ ₹

money.

In 1950, first post- independence coins issued in 1 pice, 1.2, one and two annas, 1.4, 1.2

and 1 denominations.₹ In 1953, Hindi was displayed prominently on the new notes, and plural of rupiya 1954

was decided to be rupiya.

In 1954, high denomination notes of 1000, 5000 and 10000 reintroduced.₹ ₹ ₹ In 1957, rupee was decimalized and divided into 100 naye paise.

In 1957-1967, Aluminum one, two, three, five and ten paise coins introduced.

In 1967, sizes of notes reduced due to the lean period of the early sixties.

In January 16, 1978 new notes issued with symbols of science and tech (Aryabhatta on

2 note), progress (oil rig on 1 and form mechanization on 5) and Indian art forms₹ ₹ ₹

on 20 and 10 notes (Konark Wheel, Peacock). ₹ ₹ In October 1987, 500note introduced due to the growing economy and fall in₹

purchasing power.

In 1988, stainless steel coins of 10, 25 and 50 paise were introduced.

In 1992, 1 and 5 coins in stainless steel introduced.₹ ₹ During 1995, 1 and 2 notes were removed from circulation.₹ ₹ In 1996, the Mahatma Gandhi series of notes issued, starting with 10 and 500 notes.₹ ₹

This series has replaced all notes of the Lion Capital series. A changed watermark,

24

windowed security thread, latent image and intaglio features for the visually handicapped

were the new features.

In the year 2000, 1000 note was reintroduced.₹ During 2008-2008, new 50 paise, 1, 2 and 5 stainless steel coins introduced.₹ ₹ ₹ In 2009, the printing of 5 notes resumed.₹ In July 2010, new symbol “ ” is officially adopted.₹ During 2011, 25 paise coin and all paise coins below it demonetized. New series of 50

paise coins and 1, 2, 5 and 10 notes with the new rupee symbol introduced.₹ ₹ ₹ ₹ In 2012, new “ ” sign is incorporated in notes of the Mahatma Gandhi series in₹

denominations of 10, 20, 50, 100, 500 and 1000.₹ ₹ ₹ ₹ ₹ ₹ In November 2016, 500 and 1000 notes discontinued and new 500 and 2000₹ ₹ ₹ ₹

notes introduced.

The Pre-independence British Series

The Paper Currency Act of 1861 gave the British government the monopoly to issue notes in India.

Victoria Portrait Series

The series comprised the first British India notes- 10, 20, 50, 100.₹ ₹ ₹ ₹

Under print Series

In 1867, the Victoria Portrait series, withdrawn due to forgeries, was replaced by this series. Initially, notes were legally encashable only in the Currency Circle in which they were issued, but in 1903-11, 5, 10, 50 and 100 were universalized.₹ ₹ ₹ ₹

Small Denomination Notes

Paper currency of small denominations was started due to the First World War, with 1 ₹introduced on 30th November 1917.

King’s Portrait Series

This series carried the portrait of George V and was started in May 1923 with 10 notes ₹and included 5, 10, 50, 100, 500, 1000 and 10000. This continued till 1935 when ₹ ₹ ₹ ₹ ₹ ₹ ₹the Reserve Bank of India was set up.

1.4 OBJECTIVES OF THE STUDY

25

The objectives of doing this project are defined as under:

To know about the Indian currency and demonetization.

To know about the impact of demonetization of Indian currency.

To know whether it affects small scale or large scale industries largely.

To analyze the effects of demonetization on different sectors.

To know about the impact on the GDP.

To know how demonetization affects the future of Indian economy.

To know the drawbacks faced by the Indian economy on demonetization.

To know about the average sale before and after demonetization.

1.5 LIMITATIONS OF THE STUDY

26

Theoretical data are taken from internet; possibilities of wrong data can take in the report.

The data collection was confined to only few areas.

The sample for the present study comprised of 200 business in Kerala.

There is a chance of providing wrong data by the respondents.

The present study is constrained by time limit of three months.

Getting appointments from the concern respondent was very difficult.

Many respondents don’t express their original perception and views because of biasness.

Certain questions were not answered with justices.

1.6 SCOPE OF THE STUDY

In the present study, an attempt has been made to study on impact of demonetization on

500 and 1000 on business sector in Kerala. The present study is restricted to the network of₹ ₹

business sectors in few cities of Kerala. The study was focused on 200 business sectors and

therefore an in-depth study is based on demonetization.

27

1.7 STATEMENT OF THE PROBLEM

A study deals on impact of demonetization on 500 and 1000 especially on small₹ ₹

scale and large scale business in Kerala. For knowing about the income level and types of

business they engaged in, for how long the business sector are in business and the category of

business that deal with. For knowing the essentials of demonetization for the developing country

like India, its affect on GDP level of the country, to know about the existence of black money, to

know how the transactions of business made before demonetization and the technologies used to

overcome the demonetization. The study also reveals the respondents perception about

demonetization, time taken by the respondent to exchange the currency, risk occurred while

exchange of currency and the liabilities come across by the business. The study includes the

overall experience on demonetization of currency, current business situation, and average sale

before and after demonetization. Finally, to find general suggestions and the problems faced by

the business sector on demonetization.

28

1.8 CHAPTER SCHEME

The present project report has organized following chapters:

Chapter-I

This chapter deals with ‘Introduction, Overview of Indian Rupee, SWOT Analysis,

History of Indian Rupee and RBI, Objectives of the Study, Limitations of the Study and

statement of the Problem”.

Chapter-II

This chapter deals with “Review of Literature”.

Chapter –III

This chapter deals with “Research Methodology, Tools used for Analysis and

Hypothesis”.

Chapter-IV

This chapter deals with “Data Analysis and Interpretation” of the study.

Chapter –V

This chapter deals with “SWOT Analysis”

Chapter –VI

This chapter deals with “Findings, Suggestions and Conclusion”.

29

CHAPTER-II

REVIEW OF LITERATURE

INTRODUCTION

A literature review is a description of the literature relevant to a particular field or topic.

This is often written as part of a thesis proposal, or at the commencement of a thesis. A critical

literature review is a critical assessment of the relevant literature. Literature ‘covers everything

relevant that is written on a topic: books, journal articles, newspaper articles, historical records,

government reports, thesis and dissertations, etc. The important word is 'relevant'. A literature

review gives an overview of the field of inquiry: what has already been said on the topic, the key

writers. It also gives an idea about the prevailing theories and hypotheses. The review also

specifies what questions are being asked, and what methodologies and methods are appropriate

and useful.

A critical literature review shows how prevailing ideas fit into the thesis and how the

thesis agrees or differs from them.

Human being are with full of curiosity and this draws them towards finding the facts.

Knowing the facts requires the researcher to understand and get in-depth knowledge of the topic.

The selection of the topic was on the basis of the current scenario in the society. After selecting

the topic the researcher tried to conduct a complete study of the available literature to know the

past, present scenario and also to understand the future trend. Literature review also helped the

researcher to know of the deviations in the present study and if possible to give certain remedial

measures.

The objective of the study according to the researcher is to understand the conceptual

framework of Demonetization and to have a complete knowledge of these impacts in relation to

the Indian market.

2The Tax Research Team (2016) has written in favor of demonetization is that the cash

that would be extinguished would be “black money” and hence, should be rightfully

30

extinguished to set right the perverse incentive structure in the economy. While the facts are not

available to anybody, it would be foolhardy to argue that this is the only possibility. Therefore, it

is imperative to evaluate the short-run and medium-term impacts that such a shock is expected to

have on the economy. Further, the impact of such a move would vary depending on the extent to

which the government decides to remonetize. The paper elucidates the impact of such a move on

the availability of credit, spending, and level of activity and government finances.

3Anirudh Burman (2016), investigated the government’s move to demonetize 500 and₹

1000 notes, and place restrictions on withdrawals, exchanges and deposits has attracted both₹

appreciation and criticism. This piece analyses the framework of this discourse and its

implications for the economy and society. Terms like “demonetization”, “corruption”,

“inconvenience and hardship”, “implementation” form the basis of this discourse. Interestingly,

most of these terms have originated from the government itself. The piece argues that by

confining ourselves to these terms, they fail to group the true nature and impact of this measure.

4Sandeep Kaur (2016) had written that demonetization refers to withdrawal of a

particular form of currency from circulation. Demonetization is necessary whenever there is a

change of national currency. The old unit of currency must be removed and substituted with a

new currency unit. The currency was demonetized first time in 1946 and second time in 1978.

On Nov, 2016 the currency is demonetized third time by the present Modi government. This is

the bold step taken by the government for the betterment of the economy and country. This paper

discusses the impact of recent demonetization on Indian system.

2The Tax Research Team, Journal of Demonetization: Impact on the Economy, Working Paper

No. 182, National Institute of Public Finance and Policy, 2016.

3Anirudh Burman, Journal on the Problematic terms in the demonetization debate, (2016).

4Sandeep Kaur, “Demonetization and its Impacts in India”, International Journal of Research

(IJR), 2016.

31

5Prasanna V. Salian and Gopakumar K has examined the relationship between

inflation and GDP growth in India. Empirical evidence is obtained from the co integration and

error correction models using annual data collected from the Reserve Bank of India. The result

shows that there is a long-run negative relationship between inflation and GDP growth rate in

India. Inflation is harmful rather than helpful to growth. These results have important policy

implications.

6Worthington (1995), “The cashless society” paper describes society, where clumsy and

expensive- to handle coins and notes are replaced by efficient electronic payments initiated by

various types of plastic cards is a tantalizing prospect for the twenty- first century. Some of the

interested parties stand to gain more than others if the cashless society becomes a reality. Paper

outlines the rationale of those who are keen to promote the cashless society and the implications

for marketers charged with winning consumer acceptance for payment of plastic card. The

plastic card payment product is analyzed under the three headings of pay later, pay now and pay

before and a view is offered as to the future prospects for each type of plastic card in contributing

to the development of the cashless society.

7Bhattacharyya Jita, Bhattacharyya Mousumi (2012), the study revealed that there

was a long term relationship between FDI, merchandise, service trade and economic growth in

India. Bi-directional causality is observed from FDI to economic growth and FDI to merchandise

trade. A unidirectional causality is also observed from merchandise trade to service trade.

5Prasanna V. Salian and Gopakumar K, “Journal of Inflation and Economic Growth in India –

An Empirical Analysis”.

6 Worthington (1995), “The Cashless Society”.

7Bhattacharyya Jita, Bhattacharyya Mousumi, “Impact of Foreign Direct Investment and

Merchandise and Services Trade of the Economic growth in India: an Empirical study”, 2012.

32

8Singh s., Singh M, (2011), “investigates the trend of FDI inflow in India, during 1920-

2007 using time series data. This paper aims to study the reasons behind the fluctuations of the

FDI inflow in India and to search the cause that in responsible for the fluctuations of the trends

of FDI.

9Manpreet Kaur and Akriti (2015), “investigated the issue of black money has come

into forefront of the society with active participation of our youth and Parliament. In the context

of current status it includes sources from where black money is generated and its uses in the

country at different levels. This paper represents the framework, policy adoptions and strategies

that Indian government should adopt to tackle with this issue and also describes the impact on

economy in this context. It also studies the one of the corruption. It shows up to what extent, the

corruption leads to its generation which has considerable impact on various sections of the

society. At last but not least, conclusion of this paper is provided representing the ongoing issue

of black money there should be a strong and appropriate legislative framework. The present

paper helps to know about present status of black money in India and its impact on economy.

10Sir B. Rama Rau (1960) discusses the course of monetary policy in the context of

inflation in India during and after the Second World War. He makes mention of the inability of

the Reserve Bank of India in controlling the inflationary pressure, built up during the war and

post war period, on account of little control it had over the basic causes of inflation. The two

causes of inflationary price spiral experienced during the war and post-war period, according to

him, were 1) the failure of the rate of production, especially of food grains, to keep pace with the

8Singh s., Singh M, “Trends and prospects of FDI in India”. 2011.

9Manpreet Kaur and Akriti , “ Black Money in India: Current status and impact on economy”,

Journal of research in Commerce and Management, Vol 4, Issue 4, 2015.

10Sir B. Rama Rau: “ Evolution of Central Banking in India”, Vora and Co. Publishers Pvt.

Ltd., Bombay,pp. 35-61, 1960.

33

alarming growth of the population and 2) deficit financing and other government policies which

caused the supply of money to increase with the population. He, by discussing the steps taken by

the Reserve Bank through monetary policy, calls for caution in the matter of deficit financing for

combating inflation.

11Vakil, C.N. (1966) describes the devaluation of rupee in 1966 as Prayashchitta

(Penance) for the past sins of the government of India, which resulted in price rise in the country

and forced it to devalue the rupee as a corrective rising prices in India were plan expenditure on

projects involving long gestation periods, increasing deficit financing, wasteful expenditure and

price controls. He makes an attempt to explain in a simple language the background and

implications of the devaluation of rupee to the people and suggests a handful of measures to

avoid inflationary price rise and recourse to devaluation.

12S.K. Taneja (1968) discusses the problem of falling rupee, devaluations of 1949 and

1966 and the factors responsible thereof. He attributes the weaker rupee during the post-

independence period to continuously rising prices. He maintains that the inflation was the biggest

single problem before the Indian economy and other major economic ailments had their roots in

it. According to him, prices scaled higher and higher peaks since second five year plan and by

1968 they became twice as high as they were nearly a decade and half ago. The result, he

opines, was the continuous fall in the value of rupee, which was worth only 12 paise by 1968. He

thus called for a fresh approach from the government to arrest rising prices so as to strengthen

the rupee.

11Vakil, C.N.: “The Devaluation of the Rupee: A Challenge and an Opportunity, Lalvani

Publishing House, Bombay, 1966.

12S.K. Taneja: “The Indian Rupee in a Maelstrom”’ Sterling Publishers Pvt. Ltd., Delhi-6,

pp.123-125, 1968.

34

13Reddy ,Y.V.(1999) states that India’s record of inflation for the period 1950-51 to

1997-98 has been satisfactory, with the average rate of inflation working out to 6.7 percent and

the modal value of distribution of inflation rates lying in between 5 and 10 percent. According to

him, the inflation rate in India has been far less volatile than in most developing countries, with

standard deviation at 6.6 and the rate crossing the 15 percent mark on only four occasions during

the last half a century or so. He however maintains that high pressures of inflation were felt on

almost all occasions, due to exogenous shocks such as oil price like, the gulf crisis and wars and

domestic supply shocks as adverse monsoon conditions. He also opines that the impact of

monsoon conditions on volatility in prices is getting increasingly moderated perhaps due to the

expansion of irrigated agriculture as also buffer stock operations.

14Mahajan, Dhanashri Jayan (2003), presents an overview on inflation in India since

1956-57. She maintains that, the rate of inflation causes concern in a country having high levels

of inequality of income. By presenting the data on inequalities in India, she insists on special

attention to the problem of inflation. She also makes some suggestions for combating inflation.

She, by citing the views of Paul Krugman, Sukhamoy Chakravarthy and C. Rangarajan, opines

against absolute price stability (i.e., zero rate of inflation) and suggests a rate of inflation of

around 4% as acceptable.

15Gupta, Raj Narain (1959), discusses the link between deficit financing and inflation

and concludes that it is one of the reasons of inflationary price rise in India. He maintains that

deficit financing is not the only villain in an inflationary situation. According to him, a study of

breakdown of the wholesale price index shows that the price rise occurred mainly in the food

13Reddy ,Y.V.(1999): “Inflation in India: Status & Issues”, in Reddy ,Y.V.(2000): “Monetary

and Financial Sector Reforms in India- A Central Banker’s Perspective”, UBS Publishers &

Distributers Ltd., New Delhi,1999.

14Mahajan, Dhanashri Jayan: “Inflation in India”, in ‘Indian Economy after a Decade of

Reforms’, Sanvedan Prakashan, Aurangabad, pp.83-89, 2003.

15Gupta, Raj Narain: “Deficit Financing and Inflation”, Yojana, Vol.3, No.19, 1959.

35

grains sector and not in manufactured or semi manufactured articles. And the price rise in the

food grains category is the result of poor crops, coupled with a rise in population and rise in the

standard of living of the people. He expresses the need for utmost caution to be taken while

resorting to deficit financing, but states that the real solution to the problem of inflation lies in

greater production. By mentioning the precautions to be taken to prevent deficit financing led

inflation, he concludes that control over inflation can be attained if certain conditions are

fulfilled.

16Panandikar, D.H. Pai (1972), presents an anatomical view of Indian Inflation by

distinguishing between demand pull and cost push inflation as found in agricultural and

industrial sector respectively. He opines that the price rise normally begins with an excess

demand for food leading to food inflation. If the Food Corporation of India fails to unload

sufficient stock at right time and the government to effect adequate imports, the food inflation

accentuates and pushes up the cost of living with which wages are closely linked, industrial costs

are consequently driven up and what follows is a rise in the prices of manufactured goods.

He, by presenting a formula for price determination of food grains, identifies four

important factors responsible for causing overall inflation in the economy. They are 1) an

increase in the income of non agricultural sector leading to increase in food demand, 2) increase

in money supply having the same effect of increasing demand for food 3) a fall in the production

of food grains and 4) a fall in imports or rise in stocks with government and traders. A

meaningful solution to the inflation problem, as he suggests, lies in enlarging the food supply.

17Dhar, T.N. (1972) provides a perspective on behavior of prices in the post 1972 period

by analyzing the trend since 1966-67. He maintains that the price spiral had undoubtedly

enlarging its orbit; there was no danger of it getting out of control and touching the sky heights.

16Panandikar, D.H. Pai: “Anatomy of Indian Inflation”, Yojana, Vol.16, No.18, pp.742-752,

1972.

17Dhar, T.N.: “the Price Perspective”, Yojana, Vol.16, No. 18, pp. 755-758, 1972.

36

He accepts the inevitability of a price rise when developmental programs are being implemented,

but calls for a judicious mix of policy measures including curb over the growth in money supply,

check on speculation and increase in production to avoid price rise spirals.

18Gupta, R.N. (1972) admits that a normal dose of price rise of about 3 -5% per year is

possible in the economy as a corollary of development. According to him, there is an inescapable

price which people must pay for massive planned investments in capital goods projects with long

gestation periods. With the ever increasing money supply in the economy and slow growth in the

availability of consumer goods, prices tend to go up. After reviewing all the causes of spiraling

rise in prices around 1972, and suggesting possible remedies for control, he makes a case for

reliance on own savings to step up the rate of investment.

19Raj, K.N. (1972), elaborates the inflationary price rise that occurred around 1972-73,

makes an attempt to reach to the real causes of inflation in India. According to him, it is always

made out that monetary expansion more than the growth in supply of goods and services that is

responsible for inflation; it has not been undisputedly established. The real problem lies in the

imbalance that exists in the food grains and raw material sector and therefore it is here that all

attention should gather instead of running budget surpluses and controlling lending to the

government.

20Krishnaswamy, S.Y (1974), opines that five year plans are the root causes of inflation.

He holds the plans responsible for growing imbalance between money supply and goods

produced. The planning that emphasis the development of the mother machines that makes other

machines and the required heavy investment in India. He therefore calls for the reorientation of

planning. He also discusses the limitations of monetary policy instruments such as bank rate,

reserve requirements, etc. in controlling inflation.

18Gupta, R.N.: “Can the Trend be Reversed?” Yojana, Vol.16, No. 18, pp.759-761, 1972.

19Raj, K.N.: “Why Inflation”, Yojana, Vol.22, pp. 16-18, 1974.

20Krishnaswamy, S.Y: “Fiscal Policy, Inflation and the Plan”, in “Inflation in India”, edited by

S.L.N. Simha, Vora & Co. Publishers Pvt. Ltd. Bombay, pp. 116-128, 1974.

37

21Simha, S.L.N. (1974) makes an attempt to study the link between black money and

inflation. He examines to what extent black money contributes to inflation or whether in fact it is

a result of inflation. According to him, the phenomenon of black money is, by and large, the

result of inflation and not its cause. He thus disproves the thesis that black money is the cause of

inflation and presents the proposition that black money, if anything, is a result of inflation which

is caused largely by wrong fiscal, monetary and economic policies, and aggravated by

administrative inefficiency, poor planning, lack of a sense of discipline and austerity and a

general lowering of standards of vigilance at all levels. He maintains that it is the deficit

financing by the government that creates a situation of excess demand for everything in relation

to supplies and thus results in inflation and payments in black money.

22Singh, Balwant (1989), challenges the proposition that changes in the price level are

primarily the result of changes in the rate of growth of money. He, using the data on broad

money (M3) and movements in the wholesale price index, reaches a conclusion that “in the

Indian setup, there is a bi-directional causality between money supply and prices. However, the

impact of money supply (M3) on prices (WPI) is less significant in terms of granger causality

tests. This suggest that the causality between prices and money supply is of certainty in nature,

i.e. rise in prices invariably leads to rise in money supply”. In his opinion, in the Indian

conditions much of the variation in prices is due to structural influences, e.g. crop failures,

commodity shortages, administrated pricing policies, etc, rather than a result of monetary

operations only.

21Simha, S.L.N: “Black money and Inflation:, in “Inflation in India”, edited by S.L.N. Simha,

Vora & Co. Publishers Pvt. Ltd. Bombay, pp. 173-178, 1974.

22Singh, Balwant: “Money Supply- Prices: Causality Revisited”, Economic & Political Weekly,

Vol.24, No. 47,pp 2613-2615, 1989.

38

23Sengupta, Keya (1991) studies the relationship between procurement prices, food

grains prices and inflation in India. According to her, procurement prices that are fixed by the

government from time to time play an important role in determining food grain prices and given

the importance of the food grains sector in the Indian economy in terms of employment and

output, food grain prices determine the course of general level of prices. Her study for the period

of 1981-82 to 1990-91, reveals that the general price level follows the movements in

procurement prices, with most of the oscillations in the latter appear to be causing similar

oscillations in the former. Her express concern over the frequent hikes in procurement prices

without any sound economic criteria, as they can distort the entire price structure and have

disastrous consequences in terms of aggravating the balance of trade problem.

24Ummat, R.C. (1992) discusses the problem of inflation around 1991-92 in India and

the factors responsible for it. He maintains that inflation continues to be one of the major

concerns of the country and attributes upsurge in it around 1991-92 to factors like more money

supply, Gulf crisis pushing up the prices of petroleum products, devaluation of the rupee

resulting in higher import costs, significant increase effected in the prices of fertilizers, coal,

food rains, supplied through PDS and stepping up of power rates and tariff increases in telephone

and other service sector. Elaborating the steps taken through Union Budget 1992-93 in brief, he

concludes that it is well designed to combat Inflation.

25Shankar, Shyiashri (1992) appreciates the budget of 1992-93 for taking right steps to

suppress the inflationary rise in prices, that began in Oct 1990 and assumed serious proportions

in 1991 on account of the reasons like large monetization of budget deficits, gulf problems, poor

23Sengupta, Keya: “Procurement Prices and Inflation”, Yojana, Vol.35, No.18, pp 10-14, 1991.

24Ummat, R.C.: “An Agenda for Containing Inflation”, Kurushetra, Vol. 40, No.7, pp.9-10,

1992.

25Shankar, Shyiashri: “Bringing Inflation under Control” , Yojana, Vol.36, No.8, pp.27-28,

1992.

39

kharif and rabbi crops and inadequacy of foreign exchange reserve to import essential

commodities. Revamping of the public distribution system, drastic cut in fiscal deficit, reduction

in SLR, built up of foreign exchange reserves and such other steps initiated through budget of

1992-93, made her conclude the budget to be promising and capable of bringing the inflation

under control.

26Ghoshal, M.K. (1993) presents a review of inflationary situation during the period of

1990-92. He elaborates both the demand pull and cost push factors that were at work in causing a

cumulative price rise o around 25.7% during 1990-92. He attributes the accelerated inflation

since Oct 1990 particularly to the excess demand caused by undue monetary expansion in the

past. Citing the examples of Germany and Japan as booming economies with remarkable price

stability, he lays stress on macroeconomic management to correct basic imbalances and on

modernization of the economy though technological innovations and entrepreneurial leadership.

He hopes the economic reforms and the strategic liberalization initiated since 1991 to improve

the price scenario in the medium term.

27Chakravarthy, Sukhamoy (2007) considers inflation as the single most important

problem before the country, which if not controlled won’t let us move towards the attainment of

our basic objectives of poverty eradication and self- reliance. He refers to the possible causes of

inflation that have been identified in literature, but express the need of proper understanding

about how these causes interact amongst themselves, before making predictions about course of

inflation. In his opinion, the genesis of inflation problem in 2007 lies in the area of food

production, which often exhibits erratic behavior and becomes responsible for food inflation

which later or sooner spreads to other sectors of the economy. For combating inflation, he calls

for the use of an appropriate mix of monetary and fiscal policies as also mobilization of

resources from agriculture through taxation.

26Ghoshal, M.K.: “Inflation: Review and Outlook”, Yojana, Vol.36, No.24, pp.4-5, 1993.

27Chakravarthy, Sukhamoy: “Our Fight against Inflation”, Yojana, Vol.51, pp.47-48, 2007.

40

28Pant,Devendra Kumar (2007) makes an attempt to study the nexus between inflation,

growth and poverty and maintains that though the economic growth has been strong during

2005-06 to 2006-07 period, its effect on poverty reduction, which was seen during 1993-94 to

2004-05 period, has not been observed mainly on account of the high inflation. And according to

him, this is particularly true about rural poverty and the main reason has been the slower growth

of the agricultural sector.

29Batura, Neha (2008) provides a comprehensive analysis of the trend in inflation over

the two years of 2006-07 and 2007-08. She offers a neat explanation of as to when the inflation

began to accelerate and whether the price rise experienced was across the board or not. She also

attempts a comparison of consumer’s price inflation with wholesale price inflation.

30Govt. of India (2002) discusses the trend in inflation in India since 1050 and states that

the WPI inflation remained below 7% during 1950’s & 1960’s, but accelerated to touch double

digit figures in the first half of 1970’s. Though the inflation moved southward during the second

half of 1970’s, it remained elevated until 1995-96. It states that inflation has however remained

at a low level from 1995-96 onwards in terms both the 52 week average and point-to-point basis.

28Pant,Devendra Kumar: “ Inflation, Growth and Poverty”, Yojana, Vol.51, pp.11-14, 2007.

29Batura, Neha: “Understanding Recent Trends in Inflation”, Economic and Political Weekly,

Vol.43, No.24, 2008.

30Govt. of India: “Economic Survey”, 2001-02. Govt. of India, New Delhi, 2002.

31Aiyar, Swaminathan S. Anklesaria argues that the inflation that India and other

developing countries experienced around 2008 is not a monetary phenomenon and cannot be

curbed by monetary policy. According to him, the inflation observed with respect to food and

41

fuel items is primarily the result of supply side problems and thus monetary policy can do little

to control it. Core inflation is however amenable to momentary manipulation, so the European

Central Bank, Bank of England and U.S. Federal Reserve System board target not overall

inflation but core inflation, that is, prices other than those of food and fuel.

32S.K.Basu (2007) in study entitled, “Role and problems of small scale industries”

discusses the role and problems of small scale industries. Emphasizing their importance in the

economic programme of the nations, he deals at length with their financial problems and the

functions of the state financial corporation helping them.

31Aiyar, Swaminathan S. Anklesaria: “India Disproves Friedman on Inflation”, Economic

Times, 2008.

32S.K.Basu., “Role and Problems of Small Scale Industries”. Calcutta: Mukerjee and Co. Pvt.

Ltd, 2007.

CHAPTER –III

3.1 RESEARCH METHODOLOGY

42

RESEARCH

Research in common parlance refers to a search for knowledge. One can also define

research as a scientific and systematic search for pertinent information on a specific topic. In

fact, research is an art of scientific investigation. The Advanced Learner’s Dictionary of

Current English lays down the meaning of research as,” a careful investigation or inquiry

especially through search for new facts in any branch of knowledge”.25 Redman and Mory

define research as a “systematized effort to gain new knowledge”. 26 Some people consider

research as a movement, a movement from the known to the unknown. It is actually a voyage of

discovery.

Research is an academic activity and as such the term should be used in a technical sense.

D. Slesinger and M. Stephenson in The Encyclopedia of Social Sciences define research as

“the manipulation of things, concepts or symbols for the purpose of generalizing to extend,

correct or verify knowledge, whether that knowledge aids in construction of theory or in the

practice of an art”.27 Research is, thus, an original contribution to the existing stock of knowledge

making for its advancement.

Research Methodology is a way to systematically solve the research problem. It may be

understand as a science of studying how research is done scientifically. It is necessary for the

researcher in studying his research problem along with the logic behind them. Researchers need

to understand the assumption underlying various techniques and they need to know the criteria

by which they can decide that certain techniques and procedures will be

25The Advanced Leaner’s Dictionary of Current English, Oxford, 1952, p.no.1069.

26L.V. Redman and A.V.H. Mory, The Romance of Research, 1923, p.no.10.

27The Encyclopedia of Social Sciences, Vol. IX, Mac Millan, 1930.

applicable to certain problems and others will not. All this means that it is necessary for the

researcher to design his methodology for his problem as the same may differ from problem to

problem

The scope of research methodology is wider than that of research methods.

43

RESEARCH DESIGN

“A research design is the arrangement of conditions for collection and analysis of data in

a manner that aims to combine relevance to the research purpose with economy in procedure”. 28

In fact, the research design is the conceptual structure within which research is conducted; it

constitutes the blueprint for the collection, measurement and analysis of data. As such the design

includes an outline of what the researcher will do from writing the hypothesis and its operational

implications to the final analysis of data.

Research design is needed because it facilitates the smooth sailing of the various research

operations, thereby making research as efficient as possible yielding maximal information with

minimal expenditure of effort, time and money. Research design stands for advance planning of

the methods to be adopted for collecting the relevant data and the techniques to be used in their

analysis, keeping in view the objective of the research and the availability of staff, time and

money. Preparation of the research design should be done with great care as any error in it may

upset the entire project. Research design, in fact, has a great bearing on the reliability of the

results arrived at and as such constitutes the firm foundation of the entire edifice of the research

work.

DESCRIPTIVE RESEARCH DESIGN

Descriptive research studies are those studies which are concerned with describing the

characteristics of a particular individual. The studies concerned with specific predictions, with

narration of facts and characteristics concerning individual, group or situation are all examples of

28Claire Selltiz and others, Research Methods in Social Sciences, 1962, p.no.50.

descriptive research studies. Most of the social research comes under this category. In descriptive

studies, the researcher must be able to define clearly, what he wants to measure and must find

adequate methods for measuring it along with a clear cut definition of ‘population’ he wants to

study. Since the aim is to obtain complete and accurate information in the said studies, the

procedure to be used must be carefully planned. The research design must make enough

provision for protection against bias and must maximize reliability, with due concern for the

44

economical completion of the research study. The design in such studies must be rigid and not

flexible and must focus attention on the following:

a) Formulating the objective of the study.

b) Designing the methods of data collection.

c) Selecting the sample.

d) Collecting the data.

e) Processing and analyzing the data.

f) Reporting the findings.

The research design in case of descriptive studies is a comparative design throwing light

on all points narrated above and must be prepared keeping in view the objectives of the study

and the resources available. However, it must ensure the minimization of bias and maximization

of reliability of the evidence collected. The said design can be appropriately referred to as a

survey design since it takes into account all the steps involved in a survey concerning a

phenomenon to be studied.

DATA COLLECTION

The task of data collection begins after a research problem has been defined and research

design/plan chalked out. While deciding about the method of data collection to be used for the

study, the researcher should keep in mind two types of data viz.,

Primary data and

Secondary data.

1. PRIMARY DATA

Data obtained from the first hand by the researcher is called the primary data. Here the

main source of primary data collection was interviews, discussion and interaction with retailers

by using the questionnaire.

Questionnaire as an instrument of data collection:

45

Questionnaires were used as an instrument for data collection for primary data collection.

P.V. Young has classified the questionnaire in two groups,

1) Structured Questionnaire.

2) Non- structured Questionnaire.

Structured questionnaire contain definite, concrete questions with additional questions

limited to those necessary to classify inadequate answers or to elicit a more detailed response.

Structured questionnaire can be of two types, namely “disguised” and “non-disguised”. This

classification is based on whether the object or purpose of study is revealed to the respondent. In

structured disguised questionnaire, researcher doesn’t disclose the object of the study.

Non- structured questionnaire, often known as interview guide is used, for focused, depth

and non directive interviews. It contains definite subject matter areas, the coverage which is

required during the interview, but the interviewer is largely free to arrange the form and timing

of enquiry.

TYPES OF QUESTIONS

Open- End Questions.

Close- End Questions.

An open-ended or simply ‘Open’ or ‘Free Answer’ questions gives the respondent

complete freedom to decide the form, length and detail of answers. Open questions are

performed when the researcher is interested in knowing what is uppermost in the mind of the

respondent.

Close-end questions has only two answers in the form ‘yes’ or ‘no’, ‘true’ or ‘false’ or

‘do not use’, etc.

Mailed Questionnaire

Most of the researcher uses this type of questionnaire. In this type the respondents are

living in for- flung areas at a distance and the questionnaire is sent to them through e-mail. They

46

fill the questionnaire and return back to the researcher or concerned department. A particular

guidelines or instructions list is attached to the questionnaire for the respondent’s guidance. This

will be helpful in reducing time.

2. SECONDARY DATA

Secondary data refers to the data available in some form or another and may include the

result of the previously performed research or the available materials such as newspaper, reports

may be from the internet. Various sources of secondary data used in this research are:

Internet.

Reports & Publications.

Journals.

SAMPLING

Sampling may be defines as the process of obtaining information about an entire

population by examining only a part of it. In any investigation if data are collected only from a

representative part of the universe we say that the data are collected by sampling. The

representative part is called a sample. For example; if we want to know the average height of

students of a particular college, it is sufficient if the required measurements are taken from a few

students selected at random.

The basic objective of sampling is to draw inferences about the population.

ADVANTAGES OF SAMPLING

1. Less time and effort.

2. Less cost.

3. Administrative convenience.

4. More detailed, reliable and accurate information.

5. Destructive nature of certain enquires.

6. Sampling method is the best suited at times.

METHODS OF SAMPLING

47

In this study non-probability sampling has been adopted. Under the non-probability

sampling convenience sampling has been taken for the purpose of study.

SIMPLE RANDOM SAMPLING TECHNIQUE

The sampling units are chosen primarily on the basis of convenience to the researcher is

known as simple random sampling technique. The advantage of probability sampling is that

sampling error can be calculated. Sampling error is the degree to which a sample might differ

from the population. When inferring to the population, results are reported plus or minus the

sampling error. In non-probability sampling, the degree to which the sample differs from the

population remains unknown.

SAMPLE DESIGN

A sample design is a definite plan for obtaining a sample from a given population. It

refers to the procedure, adopted by an investigator for selecting items for a sample. There are

many sample designs. An investigator can choose the appropriate design.

SAMPLE UNIT

Small and large scale business sectors in few areas of Kerala.

SAMPLE SIZE

The larger the size, the more accurate the result would be. But practically, it’s not feasible

to survey the entire target outlets. The sample size of the survey done by me was 200 business

sectors.

SAMPLING PROCEDURE

I try to find out most of the business sectors in the market.

CONTACT METHOD

48

I personally visited most of the business sectors. Few business sectors due to their busy

schedule or loyalty for their brand refused to respond at all.

49

3.2 TOOLS USED FOR ANALYSIS AND HYPOTHESIS

Statistical tools were used for the study, simple analysis by percentage methods and

statistical analysis by:

Percentage Analysis.

Ordinal or Ranking Scale Method.

Chi- Square Test.

PERCENTAGE ANALYSIS

Percentage analysis is the method to represent raw streams of data as a percentage for

better understanding of collected data. Percentage refers to a special kind of ratio. It is used to

make comparison between two or more series of data. They can be used to compare the relative

items, the distribution of two or more series of data since the percentage reduce everything as

common base and allow the meaningful comparisons to be made. Percentage refers to the special

kind of ratio percentage are used in making comparison between two or more series of data.

Percentages are used to describe relationship. Column, line charts, Bar charts and Pie charts are

used to explain the tabulation clearly.

FORMULA:-

No. of Respondents Percentage (%) = × 100

Total Respondents

ORDINAL OR RANKING SCALE METHOD

In ranking scale methods, data can allow setting up inequalities. Intervals of the scale are

not equal i.e., adjacent rank need not to be equal in their differences. Median is appropriate

measure of central tendency. Percentile or quartile is used for measure dispersion. Ranking scale

method mostly used for qualitative research, but in this type more precise comparison is not

possible and we don’t get absolute values.

50

CHI- SQUARE TEST

The chi-square test is an important test amongst the several tests of significance

developed by statisticians. Chi- square, symbolically written as χ ² (pronounced as ki- square), is

a statistical measure used in the context of sampling analysis for comparing a variance to a

theoretical variance.

A chi- squared text, is any statistical hypothesis test in which the sampling distribution of

the test statistic is a chi- squared distribution when the null hypothesis is true, or any in which

this is asymptotically true, meaning that the sampling distribution (if the null hypothesis is true)

can be made to approximate a chi- squared distribution as closely as desired by making the

sample size large enough. Calculate the chi- square statistical by completing the following steps:

For each observed number in the table subtract the corresponding.

Expected number = (O-E)

Square of difference [(O-E)2]

Expected number for that cell [(O-E)2/E]

Sum all the values for (O-E)2/E.

The test is, in fact, a technique through the use of which it is possible for all researchers

to

1. Test the goodness of fit.

2. Test the significance of association between two attributes, and

3. Test the homogeneity or the significance of population variance.

As a test of goodness of fit, χ² test enables us to see how well does the assumed

theoretical distribution fit to the observed data? If the calculated value of χ² is less than the table

value at a certain level of significance, the fit is considered to be a good one which means that

the divergence between the observed and expected frequencies is attributable to fluctuations of

51

sampling. But if the calculated value of χ² is greater than its table value, the fit is not considered

to be a good one.

As a result of independent, χ² test enables us to explain whether or not two attributes are

associated. In such a situation, we proceed with the null hypothesis that the two attributes are

independent which means that new medicine is not effective in controlling fever. On this basis

we first calculate the expected frequencies and then work out the value of χ². If the calculated

value of χ² is less than the table value at a certain level of significance for given degrees of

freedom, we conclude that null hypothesis stands which means that the two attributes are

independent or not associated. But if the calculated value of χ² is greater than its table value, our

inference then would be that null hypothesis does not hold good which means the two attributes

are associated and the association is not because of some chance factor but it exists in reality.

(Oij –Eij)2

χ² = ∑ Eij

Where,

Oij = observed frequency of the cell in ith row and jth column.

Eij = expected frequency of the cell in ith row and jth column.

The Degree of Freedom

D.F = (C-1) (R-1)

Where,

C = number of columns.

R = number of rows.

52

CHAPTER – IV

DATA ANALYSIS AND INTERPRETATION

The analysis and interpretation of a method adopted the satisfaction level of respondent.

It is done by adopting various method of analyzing the result obtained from the respondents.

4.1 PERCENTAGE ANALYSIS

TABLE 4.1.1

Classification of the Respondents on the basis of Sex

S.NO SEX NO. OF RESPONDENT PERCENTAGE

1. Male 130 65

2. Female 70 35

TOTAL 200 100

SOURCE: PRIMARY DATA

INFERENCE

From the above table, it is inferred that

65 Percent of the respondents were Male.

35 Percent of the respondents were Female.

53

FIGURE 4.1.1

Classification of the Respondents on the basis of Sex

Male Female0

10

20

30

40

50

60

70 65

35

SEX

PERCENTAGE

54

TABLE 4.1.2

Classification of the Respondents on the basis of

Age of Business Man

S.NO AGE NO. OF RESPONDENT PERCENTAGE

1. 10 - 20 Years - -

2. 20 - 30 Years 65 32.5

3. 30 - 40 Years 75 37.5

4. Above 40 Years 60 30

TOTAL 200 100


INFERENCE


0 Percent of the respondents were in the range between 10 – 20 Years.

32.5 Percent of the respondents were in the range between 20 – 30 Years.

37.5 Percent of the respondents were in the range between 30 – 40 Years.

30 Percent of the respondents were in the range Above 40 Years.

55

FIGURE 4.1.2


Age of Business Man

10 - 20 Years 20 - 30 Years 30 - 40 Years Above 40 Years0

5

10

15

20

25

30

35

40

0

32.5

37.5

30

AGE OF BUSINESS MAN

PERCENTAGE

56

TABLE 4.1.3


Educational Qualification

S.NO QUALIFICATION NO. OF RESPONDENT PERCENTAGE

1. Undergraduate 30 15

2. Graduate 65 32.5

3. Postgraduate 65 32.5

4. Others 40 20

TOTAL 200 100


INFERENCE


15 Percent of the respondents were Undergraduate.

32.5 Percent of the respondents were Graduate.

32.5 Percent of the respondents were Postgraduate.

20 Percent of the respondents have other qualification.

57

FIGURE 4.1.3


Educational Qualification

15

32.5

32.5

20

EDUCATIONAL QUALIFICATION

UndergraduateGraduatePostgraduateOthers

58

TABLE 4.1.4


Type of Business

S.NO TYPE OF BUSINESS NO. OF RESPONDENT PERCENTAGE

1. Sole Proprietorship 55 27.5

2. Partnership Business 65 32.5

3. Limited Company 45 22.5

4. Others 35 17.5

TOTAL 200 100


INFERENCE


27.5 Percent of the respondents were doing Sole Proprietorship business.

32.5 Percent of the respondents were doing partnership business.

22.5 Percent of the respondents were doing Limited Company business.

17.5 Percent of the respondents were using doing other type of business.

59

FIGURE 4.1.4


Type of Business

Sole Proprietorship

Partnership Business

Limited Company

Others

0 5 10 15 20 25 30 35

27.5

32.5

22.5

17.5

TYPE OF BUSINESS

PERCENTAGE

60

TABLE 4.1.5


Monthly Income

S.NO MONTHLY INCOME NO. OF RESPONDENT PERCENTAGE

1. Below 10000₹ 15 7.5

2. 10000 – 25000₹ ₹ 60 30

3. 25000 – 50000₹ ₹ 65 32.5

4. Above 50000₹ 60 30

TOTAL 200 100


INFERENCE


7.5 Percent of the respondents have income below 10000.₹

30 Percent of the respondents have income between 10000 to 25000. ₹ ₹

32.5 Percent of the respondents have income between 25000 to 50000.₹ ₹

30 Percent of the respondents have income above 50000.₹

61

FIGURE 4.1.5


Monthly Income

Below 10000₹ ₹ 10000 – ₹25000

₹ 25000 – ₹50000

Above 50000₹0

5

10

15

20

25

30

35

7.5

3032.5

30

MONTHLY INCOME

PERCENTAGE

62

TABLE 4.1.6


Category of Business the Company engaged in

S.NO CATEGORY NO. OF RESPONDENT PERCENTAGE

1. Stock Broking 10 5

2. Health Care 35 17.5

3. Real Estate 100 50

4. Non- Profit Business 40 20

5. Others 15 7.5

TOTAL 200 100


INFERENCE


5 Percent of the respondents were engaged in Stock Broking.

17.5 Percent of the respondents were engaged in Health Care.

50 Percent of the respondents were engaged in Real Estate.

20 Percent of the respondents were engaged in Non- Profit Business.

7.5 Percent of respondents were engaged in other type of business.

63

FIGURE 4.1.6


Category of Business the Company engaged in

Stock Brok

ing

Health Care

Real Estat

e

Non- Profit Business Others

0

10

20

30

40

50

60

5

17.5

50

20

7.5

CATEGORY OF BUSINESS

PERCENTAGE

64

TABLE 4.1.7


Number of Years the Company in Business

S.NO TIME PERIOD NO. OF RESPONDENT PERCENTAGE

1. 1 Year – 2 Years 25 12.5

2. 2 Years – 5 Years 95 47.5

3. 5 Years – 10 Years 65 32.5

4. Above 10 Years 15 7.5

TOTAL 200 100


INFERENCE


12.5 Percent of the respondents have business between 1 Year – 2 Years.

47.5 Percent of the respondents have business between 2 Years – 5 Years.

32.5 Percent of the respondents have business between 5 Years – 10 Years.

7.5 Percent of the respondents have been in business above 10 Years.

65

FIGURE 4.1.7


Number of Years the Company in Business

12.5

47.5

32.5

7.5

TIME PERIOD

1 Year – 2 Years2 Years – 5 Years5 Years – 10 YearsAbove 10 Years

66

TABLE 4.1.8


Essentials of Demonetization for a developing Country like India

S.NO ESSENTIALS NO. OF RESPONDENT PERCENTAGE

1. Yes 110 55

2. No 90 45

TOTAL 200 100


INFERENCE


55 Percent of the respondents said that demonetization is essential.

45 Percent of the respondents said that demonetization is not essential.

67

FIGURE 4.1.8


Essentials of Demonetization for a developing Country like India

Yes

No

0 10 20 30 40 50 60

55

45

ESSENTIALS OF DEMONETIZATION

PERCENTAGE

68

TABLE 4.1.9


Existence of Black Money in India

S.NO EXISTENCE OF BLACK

MONEY

NO. OF RESPONDENT PERCENTAGE

1. Yes 180 90

2. No 20 10

TOTAL 200 100


INFERENCE


90 Percent of the respondents said Black Money exist in India.

10 Percent of the respondents said Black Money does not exist in India.

69

FIGURE 4.1.9


Existence of Black Money in India

Yes No0

102030405060708090

90

10

EXISTENCE OF BLACK MONEY

PERCENTAGE

70

TABLE 4.1.10


Situation come across Demonetization

S.NO SITUATION NO. OF RESPONDENT PERCENTAGE

1. Yes 120 60

2. No 80 40

TOTAL 200 100


INFERENCE


60 Percent of the respondents satisfied the situation of demonetization.

40 Percent of the respondents not satisfied the situation of demonetization.

71

FIGURE 4.1.10


Situation come across Demonetization

Yes No0

10

20

30

40

50

60

70

60

40

SITUATION

PERCENTAGE

72

TABLE 4.1.11


Business Transaction Made

S.NO BUSINESS

TRANSACTION


1. Online 20 10

2. E- Banking 30 15

3. Cash 110 55

4. Cheque 25 12.5

5. Others 15 7.5

TOTAL 200 100


INFERENCE


10 Percent of the respondent’s do business through online.

15 Percent of the respondent’s do business through e- banking services.

55 Percent of the respondent’s do business through cash.

12.5 Percent of the respondent’s do business through cheque.

7.5 Percent of the respondent’s do business through other mode of transaction.

73

FIGURE 4.1.11


Business Transaction Made

10 15

55

12.5 7.5

BUSINESS TRANSACTION

OnlineE- BankingCashCheque

74

TABLE 4.1.12


Technologies used to Overcome Demonetization

S.NO TECHNOLOGIES NO. OF RESPONDENT PERCENTAGE

1. Online 80 40

2. E- Banking 55 27.5

3. Cash 5 2.5

4. Cheque 35 17.5

5. Others 25 12.5

TOTAL 200 100


INFERENCE


40 Percent of the respondent’s use online technology.

27.5 Percent of the respondent’s use e-banking technology.

2.5 Percent of the respondent’s use cash technology.

17.5 Percent of the respondent’s use cheque technology.

12.5 Percent of the respondent’s use other technology.

75

FIGURE 4.1.12


Technologies used to Overcome Demonetization

Online

E- Banking

Cash

Cheque

Others

0 5 10 15 20 25 30 35 40

40

27.5

2.5

17.5

12.5

TECHNOLOGIES USED

PERCENTAGE

76

TABLE 4.1.13


Perception about Demonetization

S.NO PERCEPTION NO. OF RESPONDENT PERCENTAGE

1. Highly Satisfied 55 27.5

2. Satisfied 60 30

3. Not Satisfied 50 25

4. Highly Not Satisfied 35 17.5

TOTAL 200 100


INFERENCE


27.5 Percent of the respondents were highly satisfied.

30 Percent of the respondents were satisfied.

25 Percent of the respondents were not satisfied.

17.5 Percent of the respondents were highly not satisfied.

77

FIGURE 4.1.13


Perception about Demonetization

Highly Satis-fied

Satisfied Not Satisfied Highly Not Satisfied

0

5

10

15

20

25

30 27.530

25

17.5

PERCEPTION

PERCENTAGE

78

TABLE 4.1.14


Time Duration taken to Exchange the Currency

S.NO TIME DURATION NO. OF RESPONDENT PERCENTAGE

1. Once in a Day 30 15

2. Once in Two Days 45 22.5

3. Once in a Week 75 37.5

4. Once in a Month 50 25

TOTAL 200 100


INFERENCE


15 Percent of the respondent’s took once in a day to exchange currency.

22.5 Percent of the respondent’s took once in a two days to exchange currency.

37.5 Percent of the respondent’s took once in a week to exchange currency.

25 Percent of the respondent’s took once in a month to exchange currency.

79

FIGURE 4.1.14


Time Duration taken to Exchange the Currency

15

22.5

37.5

25

TIME DURATION

Once in a DayOnce in Two DaysOnce in a WeekOnce in a Month

80

TABLE 4.1.15


Risk occurred due to Demonetization

S.NO RISK OCCURRED NO. OF RESPONDENT PERCENTAGE

1. Yes 105 52.5

2. No 95 47.5

TOTAL 200 100


INFERENCE


52.5 Percent of the respondent possessed risk.

47.5 Percent of the respondent does not possessed risk

81

FIGURE 4.1.15


Risk occurred due to Demonetization

Yes No45

46

47

48

49

50

51

52

5352.5

47.5

RISK OCCURRED

PERCENTAGE

82

TABLE 4.1.16


Business Affected through Demonetization

S.NO BUSINESS AFFECTED NO. OF RESPONDENT PERCENTAGE

1. Fully Affected 45 22.5

2. Affected 65 32.5

3. Partly Affected 50 25

4. Not Affected 40 20

TOTAL 200 100


INFERENCE


22.5 Percent of the respondent’s business were fully affected.

32.5 Percent of the respondent’s business were affected.

25 Percent of the respondent’s businesses were partly affected.

20 Percent of the respondents were not affected.

83

FIGURE 4.1.16


Business Affected through Demonetization

Fully Affec

ted Affected

Partly A

ffected

Not Affec

ted

05

101520253035

22.5

32.5

2520

BUSINESS AFFECTED

PERCENTAGE

84

TABLE 4.1.17


Demonetization affected the GDP level of the Country

S.NO LEVEL OF

SATISFACTION


1. Yes 160 80

2. No 40 20

TOTAL 200 100


INFERENCE


80 Percent of the respondents said GDP level is affected

20 Percent of the respondents said GDP level is not affected.

85

FIGURE 4.1.17


Demonetization affected the GDP level of the Country

YesNo

01020304050607080

80

20

GDP LEVEL

PERCENTAGE

86

TABLE 4.1.18


Sectors affected by Demonetization

S.NO SECTORS NO. OF RESPONDENT PERCENTAGE

1. Health 70 35

2. Real Estate 35 17.5

3. Stock Market 5 25

4. Others 45 22.5

TOTAL 200 100


INFERENCE


35 Percent of the respondents said demonetization affects health.

17.5 Percent of the respondents said demonetization affects real estate.

25 Percent of the respondents said demonetization affects stock market

22.5 Percent of the respondents said demonetization affects other sectors.

87

FIGURE 4.1.18


Sectors affected by Demonetization

35

17.525

22.5

SECTORS AFFECTED

HealthReal EstateStock MarketOthers

88

TABLE 4.1.19


Business compared to Last Year

S.NO LEVEL OF

SATISFACTION


1. Excellent 35 17.5

2. Good 70 35

3. Bad 45 22.5

4. Average 50 25

TOTAL 200 100


INFERENCE


17.5 Percent of the respondent business was excellent.

35 Percent of the respondent business was good.

22.5 Percent of the respondent business was bad.

25 Percent of the respondent business was average.

89

FIGURE 4.1.19


Business compared to Last Year

Excellent

Good

Bad

Average

0 5 10 15 20 25 30 35 40

17.5

35

22.5

25

BUSINESS OF LAST YEAR

PERCENTAGE

90

TABLE 4.1.20


Liabilities on Implementing Demonetization

S.NO LEVEL OF

SATISFACTION


1. Yes 90 45

2. No 110 55

TOTAL 200 100


INFERENCE


45 Percent of the respondent’s come across liabilities.

55 Percent of the respondent’s does not come across any liabilities.

91

FIGURE 4.1.20


Liabilities on Implementing Demonetization

Yes No0

10

20

30

40

50

6045

55

LIABILITIES COME ACROSS

PERCENTAGE

92

TABLE 4.1.21


Experience on Demonetization

S.NO LEVEL OF

SATISFACTION


1. Excellent 50 25

2. Good 60 30

3. Bad 40 20

4. Average 50 25

TOTAL 200 100


INFERENCE


25 Percent of the respondent’s experience was excellent.

30 Percent of the respondent’s experience was good.

20 Percent of the respondent’s experience was bad.

25 Percent of the respondent’s experience was average.

93

FIGURE 4.1.21


Experience on Demonetization

25

3020

25

EXPERIENCE ON DEMONETIZATION

ExcellentGoodBadAverage

94

TABLE 4.1.22


Current Business Situation

S.NO SALES NO. OF RESPONDENT PERCENTAGE

1. Excellent 15 7.5

2. Good 65 32.5

3. Bad 30 15

4. Average 90 45

TOTAL 200 100


INFERENCE


7.5 Percent of the respondent’s business situation was excellent.

32.5 Percent of the respondent’s business situation was good.

15 Percent of the respondent’s business situation was bad.

45 Percent of the respondent’s business situation was average.

95

FIGURE 4.1.22


Current Business Situation

Excellent

Good

Bad

Average

0 5 10 15 20 25 30 35 40 45

7.5

32.5

15

45

CURRENT BUSINESS SITUATION

PERCENTAGE

96

TABLE 4.1.23


Average Sale before Demonetization

S.NO SALE NO. OF RESPONDENT PERCENTAGE

1. Below 10000₹ 5 2.5

2. 10000 – 25000₹ ₹ 50 25

3. 25000 – 50000₹ ₹ 35 17.5

4. Above 50000₹ 110 55

TOTAL 200 100


INFERENCE


2.5 Percent of the respondents have sale below 10000.₹

25 Percent of the respondents have sale between 10000 to 25000. ₹ ₹

17.5 Percent of the respondents have sale between 25000 to 50000.₹ ₹

55 Percent of the respondents have sale above 50000.₹

97

FIGURE 4.1.23


Average Sale before Demonetization

Below ₹10000

₹ 10000 – ₹25000

₹ 25000 – ₹50000

Above ₹50000

0

10

20

30

40

50

60

2.5

25

17.5

55SALE BEFORE DEMONETIZATION

PERCENTAGE

98

TABLE 4.1.24


Average Sale after Demonetization

S.NO SALE NO. OF RESPONDENT PERCENTAGE

1. Below 10000₹ 35 17.5

2. 10000 – 25000₹ ₹ 75 37.5

3. 25000 – 50000₹ ₹ 65 32.5

4. Above 50000₹ 25 12.5

TOTAL 200 100


INFERENCE


17.5 Percent of the respondents have sale below 10000.₹

37.5 Percent of the respondents have sale between 10000 to 25000. ₹ ₹

32.5 Percent of the respondents have sale between 25000 to 50000.₹ ₹

12.5 Percent of the respondents have sale above 50000.₹

99

FIGURE 4.1.24


Average Sale after Demonetization

17.5

37.5

32.5

12.5

SALE AFTER DEMONETIZATION

Below 10000₹ ₹ 10000 – 25000₹ ₹ 25000 – 50000₹

Above 50000₹

100

4.2 ORDINAL OR RANKING SCALE METHOD

4.2.1 Ranking the type of category the company is engaged into the business

SI.NO CATEGORY NO. OF RESPONDENTS

1. Stock Broking 10

2. Health Care 35

3. Real Estate 100

4. Non-Profit Business 40

5. Others 15

TOTAL 200


INFERENCE

From the table it is seen that category the company is engaged in the business as under:

SI.NO CATEGORY RANK

1. Stock Broking V

2. Health Care III

3. Real Estate I

4. Non-Profit Business II

5. Others IV

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4.2.2 Ranking the type of business in which transactions are made

SI.NO CATEGORY NO. OF RESPONDENTS

1. Online 20

2. E- Banking 30

3. Cash 110

4. Cheque 25

5. Others 15

TOTAL 200


INFERENCE

From the table it is seen that the type of transactions which is made by the business are as

under:

SI.NO CATEGORY RANK

1. Online IV

2. E- Banking II

3. Cash I

4. Cheque III

5. Others V

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4.3 CHI – SQUARE TEST

Chi – square is an important non-parametric test and such no tests are necessary in

respect of the type of population. We require only the degree of freedom (simplicity of course

the size of the sample) for using this test. As o non-parametric test, Chi- square can be used (i) as

a test of goodness of fit and (ii) as a test of independence.

Since the researcher used the test of independence only the details about test of

independence is given below.

TEST OF INDEPENDENCE

χ² test enables us to explain whether or not two attributes are associated. In order that we

may apply the chi- square test either as test to judge the significance of association between

attributes, it is necessary that the observed as well as theoretical or expected frequencies must be

grouped in the same way and theoretical distribution must be adjusted to give the same total

frequency as we find in case of observed distribution.

Karl Pearson developed a test for testing the significance of discrepancy between

experimental values and the theoretical values obtained under same theory or hypothesis. This

test is known as χ 2 test of goodness of fit. Karl Pearson preview that the statistic.

(Oij –Eij)2

χ² = ∑ Eij

χ² is used to test whether difference between observed and expected frequencies are

frequent.

To find χ² table value degree of freedom should be calculated. Degree of freedom is

calculated using the formula (R-1) (C-1). The table value for this degree of freedom is seen using

9% of significant level. If χ² table values are greater than χ² calculated value Null Hypothesis is

accepted or Null Hypothesis is rejected.

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4.3.1. To determine whether there is significant relationship between Income and average

sale before demonetization.

Ho: There is no significant relationship between Income & the average sale before

demonetization.

H1: There is significant relationship between Income & the average sale before

demonetization.

OBSERVED FREQUENCY

MONTHLY

INCOMEAVERAGE SALE BEFORE DEMONETIZATION

TOTALBelow 10000₹ 10000 – 25000₹ ₹ 25000-₹ ₹

50000

Above 50000₹

Below 10000₹ 1 4 2 8 15

10000 – 25000₹ ₹ 1 15 11 33 60

25000 – 50000₹ ₹ 2 16 11 36 65

Above 50000₹ 1 15 11 33 60

TOTAL 5 50 35 110 200

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EXPECTED FREQUENCY

(5*15) / 200 = 0.375 (5*65) / 200 = 1.625

(50*15) / 200 = 3.75 (50*65) / 200 = 16.25

(35*15) / 200 = 2.625 (35*65) / 200 = 11.375

(110*15) / 200 = 8.25 (110*65) / 200 = 35.75

(5*60) / 200 = 1.5 (5*60) / 200 = 1.5

(50*60) / 200 = 15 (50*60) / 200 = 15

(35*60) / 200 = 10.5 (35*60) / 200 = 10.5

(110*60) / 200 = 33 (110*60) / 200 = 33

CALCULATIONS

OBSERVED

FREQUENCY

(O)

EXPECTED

FREQUENCY

(E)

(O-E) (O-E)2 (O-E)2/E

1 0.375 0.625 0.3906 1.0417

4 3.75 0.25 0.0625 0.0167

2 2.625 -0.625 0.3906 0.1488

8 8.25 -0.25 0.0625 0.00758

1 1.5 -0.5 0.25 0.1667

15 15 0 0 0

105

11 10.5 0.5 0.25 0.0238

33 33 0 0 0

2 1.625 0.375 0.1406 0.0865

16 16.25 -0.25 0.0625 0.0038

11 11.375 -0.375 0.1406 0.01236

36 35.75 0.25 0.0625 0.00175

1 1.5 -0.5 0.25 0.1667

15 15 0 0 0

11 10.5 0.5 0.25 0.0238

33 33 0 0 0

CALCULATED VALUE (TOTAL) 1.70019

(O –E)2

Calculated χ² = ∑ E

Where,

O – Observed Frequency

E – Expected Frequency

Calculated χ 2 = 1.70019

106

Degree of Freedom = (C-1) (R-1)

= (4-1) (4-1)

= (3) (3)

= 9 D.F at 5% level of significance.

Therefore, Tabulated χ² = 16.919

Since calculated χ² less than Tabulated χ² (1.70019 < 16.919).

Therefore, we accept the hypothesis. (i.e.) there is significant relationship between

income and the average sale before demonetization.

107

4.3.2. To determine whether there is significant relationship between Income and average

sale after demonetization.

Ho: There is no significant relationship between Income & the average sale after

demonetization.

H1: There is significant relationship between Income & the average sale after

demonetization.

OBSERVED FREQUENCY

MONTHLY

INCOMEAVERAGE SALE AFTER DEMONETIZATION

TOTALBelow 10000₹ 10000 – 25000₹ ₹ 25000-₹ ₹

50000

Above 50000₹

Below 10000₹ 2 6 5 2 15

10000 – 25000₹ ₹ 11 23 19 7 60

25000 – 50000₹ ₹ 11 24 22 8 65

Above 50000₹ 11 22 19 8 60

TOTAL 35 75 65 25 200

108

EXPECTED FREQUENCY

(35*15) / 200 = 2.625 (35*65) / 200 = 11.375

(75*15) / 200 = 5.625 (75*65) / 200 = 24.375

(65*15) / 200 = 4.875 (65*65) / 200 = 21.125

(25*15) / 200 = 1.875 (25*65) / 200 = 8.125

(35*60) / 200 = 10.5 (35*60) / 200 = 10.5

(75*60) / 200 = 22.5 (75*60) / 200 = 22.5

(65*60) / 200 = 19.5 (65*60) / 200 = 19.5

(25*60) / 200 = 7.5 (25*60) / 200 = 7.5

CALCULATIONS

OBSERVED

FREQUENCY

(O)

EXPECTED

FREQUENCY

(E)

(O-E) (O-E)2 (O-E)2/E

2 2.625 -0.625 0.3906 0.14881

6 5.625 0.375 0.1406 0.025

5 4.875 0.125 0.0156 0.00321

2 1.875 0.125 0.0156 0.00833

11 10.5 0.5 0.25 0.02381

23 22.5 0.5 0.25 0.01111

109

19 19.5 -0.5 0.25 0.01282

7 7.5 -0.5 0.25 0.03333

11 11.375 -0.375 0.1406 0.01236

24 24.375 -0.375 0.1406 0.00577

22 21.125 0.875 0.7656 0.03624

8 8.125 -0.125 0.00156 0.00192

11 10.5 0.5 0.25 0.02381

22 22.5 -0.5 0.25 0.01111

19 19.5 -0.5 0.25 0.01282

8 7.5 0.5 0.25 0.03333

CALCULATED VALUE (TOTAL) 0.40378

(O –E)2

Calculated χ² = ∑ E

Where,

O – Observed Frequency

E – Expected Frequency

Calculated χ² = 0.40378

110

Degree of Freedom = (C-1) (R-1)

= (4-1) (4-1)

= (3) (3)

= 9 D.F at 5% level of significance.

Therefore, Tabulated χ² = 16.919

Since calculated χ² less than Tabulated χ² (0.40378 < 16.919).

Therefore, we accept the hypothesis. (i.e.) there is significant relationship between

income and the average sale after demonetization.

111

CHAPTER – V

SWOT ANALYSIS

5.1 STRENGTHS

Put an end to Black money economy in India.

Stringent IT department monitoring into individual bank accounts.

Encourage cashless transactions.

New security features in the newly introduced currency which makes it difficult to

replicate.

5.2 WEAKNESS

Re-calibration of ATM machines on time.

Insufficient available infrastructure with the current banking system.

Sudden shortage of cash due to improper availability of cash.

Improper channelization and distribution of cash across various cities.

Rural area needs are completely ignored.

Huge communication gaps in the promised deadlines.

Supply chain, Retail and Procurement sectors hampered drastically due to the cash mode

payment gaps within their process cycle.

Healthcare and Pharmaceutical sector hampered drastically due to improper instructions

on channelizing the demonetized currency.

Wedding planners business put to halt for undecided time.

Inflation may see a steep and steady hype due to delay in transportation of needful

groceries on time to the market.

Travel and tourism sector is running low business due to sudden shortage of cash.

112

5.3 OPPORTUNITIES

Sudden pickup of online wallets economy.

Merchant payment gateways and POS terminal economy boosted immensely.

Higher visibility of the transactions at individual level to the government.

More accurate taxation starting this financial year.

Real- Estate business to be more transparent.

Gold and other commodities investment to be more accurate and transparent.

More online market places spanning different sectors to be welcomed.

5.4 THREATS

Illegal exchange of demonetized cash.

Gray market of fraud account holders to accumulate demonetized cash as much as

possible in multiple accounts.

Poor people to come under IT Department scanners for their prolonged savings.

Proposals to reintroduce some high value currency may bring back the black money

market into business.

113

CHAPTER – VI

6.1 FINDINGS

The demonetization would eradicate corruption in the longer run.

It also identified that the cashless transaction would become as the norm of payments in

future.

Indian rupee has become weaker than currency of 96 countries or economies after

demonetization of Indian currency.

Rupee has become weaker by 2.66% against US Dollar from 66.40 to 68.17 INR.

The GDP rate has decreased from 7.6% to 7.1%.

Black money in India has been reduced.

Most of the transactions are made through digital currency.

New security features are added to the newly introduced currency.

Rural area needs are completely ignored.

Most of the small scale business sectors are affected through demonetization.

Most of the business sectors posses’ high risk on demonetization.

The sale of POS terminal has been increased.

GENERAL FINDINGS

65% of the respondents were male.

32.5% of the respondents were graduates and post graduates.

32.5% of the respondents have income between 25000 to 50000.₹ ₹ 50% of the respondents were engaged in real estate business.

55% of the respondents said that demonetization is essential for India.

90% of the respondents said that black money exists in India.

Most of the respondents were satisfied with the situation of demonetization.

Most of the respondents used online transaction to overcome demonetization.

Most of the respondents said that the GDP level of India is affected.

The business situation has been improving.

55% of the respondents have average sale above 50000 before demonetization.₹

114

Most of the respondent’s average sale has been reduced between 10000 to 25000₹ ₹

after demonetization.

FINDINGS RELATED TO HYPOTHESIS

There is significant relationship between income and average sale before demonetization.

There is significant relationship between income and average sale after demonetization.

115

6.2 SUGGESTIONS

The small scale sectors can introduce new technologies to improve business.

Rural sectors should be highly concentrated.

The availability of new currencies should be increased.

The withdrawal amount through ATM machines should be increased.

The infrastructure of the banks should be improved.

Healthcare and Pharmaceutical sectors should be given more importance.

More protection should be given to control black money in the future.

Banks should provide accounts to every individual.

Taxes should be collected from everyone accurately.

116

6.3. CONCLUSION

The demonetization undertaken by the government is a large shock to the economy. The

impact of the shock in the medium term is a function of how much of the currency will be

replaced at the end of the replacement process and the extent to which currency in circulation is

extinguished. While it has been argued that the cash that would be extinguished would be “black

money” and hence, should be rightfully extinguished to set right the perverse incentive structure

in the economy, this argument is based on impressions rather than on facts. While the facts are

not available to anybody, it would be foolhardy to argue that this is the only possibility. As

argued above, it is possible that these cash balances were used as a medium of exchange. In other

words, while the cash was mediating in legitimate economic activity, if this currency is

extinguished there would be a contraction of economic activity in the economy and that is a cost

that needs to be factored in while assessing the impact of the demonetization on the economy and

its agents.

It is likely that there would be a sport in the banking deposits. While interpreting the

phenomenon, however, one has to keep in mind that a large part of their deposits were earlier

used for transactional purposes. For example, if a small trader deposits 2 lakh rupees in the Jan

Dhan account since the currency in which he held these balances in for transactional purposes

has been scrapped, it would be incorrect to interpret this as success of the programme in bringing

in people who were hiding black money. Nor can they be interpret as additional balances that the

banking sector can lent out on the same basis as earlier deposits, since the deposits now would

remain in accounts for much shorter periods that deposits based on savings would be.

Even though there are sufferings and agony among the masses right at the moment but

the forecast is that its benefits will be seen in the long run.

The government is taking all the necessary steps and actions to meet the currency demand

and soon the trial and tribulations of the business will be over with the smooth flow of the new

currency.

117

Demonetization of Indian Currency

Leadership & Management

Transcript of Demonetization of Indian Currency