Topic: India’s Demonetization

India’s Demonetization

Professor: Dr. h. c. Ulrich Daldrup

Sarat Chandra Vemulapalli

4020380 (Energy Systems)

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Topic: India’s Demonetization

Contents

Introduction

Demonetization

Reasons for demonetization in India (2016)

Impact of demonetization

Pros and Cons of demonetization

Summary

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Topic: India’s Demonetization

Introduction

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• India is a Country in South Asia, it is the seventh – largest country by area and second – most populous country (with over 1.2 billion people) and most populous democracy in the world.[1]

• Nearly 87% of transactions in India economy are conducted through cash.[2]

• There are millions of families who have mobile phones but no bank accounts.

Source: Euromonitor Passport 2013

Topic: India’s Demonetization

Cash Intensity vs. GDP

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• India is the biggest cash intensive economies of the world with cash to GDP ratio of 12%.

• – i.e. the value of notes and coins in circulation as a percentage of GDP.

Source: BIS (2010)

Topic: India’s Demonetization

Demonetization

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It is a radical financial step in which a currency unit‘s status as a legal tender is declared invalid.[3]

This move is usually executed when old currencies have to be replaced by new

one‘s or whenever there is a change of national currency. Demonetization has done before in india: 1946, 1954, 1978 and 2016.

Source: www.Quora.com

Topic: India’s Demonetization

Demonetization in other countries

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Country's Reasons Results

Nigeria(1984) Combat inflation, corruption Inflation hit country and economy collapsed.

Ghana(1982) To tackle tax evasion, and corruption empty excess liquidity

The move backfired, with the public losing faith in the banking system and switching over to physical assets and foreign currency.

Zimbabwe(2009) Hyper inflation above 21% Zimbabwe used to have a one trillion dollar note, after demonetization, the value of trillion dollars dropped to $0.5 dollar and were also put on eBay.

North Korea(2010) Black market Left people with no food and shelter

Soviet Union (1991) Black market Failed to halt inflation

Australia (1996) To stop widespread counterfeiting. The first country to release polymer(plastic)

Source: Indiatimes [4]

Topic: India’s Demonetization

Reasons for demonetization in india (2016)

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On 8th November our Prime minister took a drastic step against,

– Illegal activities like terrorism , smuggling and many more fraudulent activities.

– Corruption and black money are the biggest hindrances in the fight against

poverty.[5]

India‘s economic growth

Black money

Terrorism

Corruption

Topic: India’s Demonetization

Impact on Indian economy

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Currency printed by (government of India) supplied into the market by [6]

I. By banking

II. Public expenditure

Due to corruption , black money and illegal activities make overflow of money into

the market this leads to buy more things (i.e gold, car‘s other goods).

According to Reserve bank of india in the year 2015-16 around 7 lakhs counterfeit

notes are detected.

Real estate prices had skyrocketed due to black money.

Dut to increase in demand, industries hire more people, pay more salaries and

more production.

Causes inflation, a general increase in prices and fall in the purchasing value of

money.

Topic: India’s Demonetization

Impact of demonetization

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Tackling black money [7]

– Not payed tax and still circulates in market

Reduces money circulation

– Hand to hand liquid cash transactions reduces

Boosts bank deposits and savings

– Demonetization will boost bank deposit‘s and saving‘s

Financial inclusion

– By August 2014, 15 M new bank account’s are opened by supporting prime minister new scheme under which every family living in India must have a bank account . This yojana is know as the Jan Dhan Yojana.

Support Government finances

– The increased financial inclusion will help the government pay welfare benefits directly into bank accounts and cut corruption.

Increase in tax revenue

Topic: India’s Demonetization

Pros of Demonetization

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Real estate prices are normalizing, the middle class will have the opportunity to

buy and rent property.[8]

It helps the government to track people who are having large sums of

unaccounted cash.

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.

Increases tax revenue (18%)

– Ministry of Finance Secretary (Revenue) declares grew rate of 18%

compared to corresponding last year by march 2017.

The new currency introduced- 500 INR and 2000 INR are harder to counterfeit.

Topic: India’s Demonetization

Cons of Demonetization

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Real estate falls (which contributes 11% of GDP).[9]

Won‘t stop black money generation.

Uneducated and poor people/rural population face difficulties.

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

new currency 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 demonetisation.

Another problem is that this move targeted the black money, but many people

who had not kept cash as their black money and rotated or used that money in

other asset classes like real estate, gold and so on were not affected by

demonetisation.

Topic: India’s Demonetization

Summary

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• What about the black money in the form of gold, dollars and property (assets) ? • Black money in abroad (Hawala) ? • People lost their trust in currency, now people started investing in bullions like

gold, silver etc. Conclusion: There is no guarantee that things will be better in future.

Topic: India’s Demonetization

Reference

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1. http://www.worldometers.info/world-population/india 2. populahttp://fletcher.tufts.edu/~/media/Fletcher/Microsites/Cost%20of%20Cas

h/IBGC%20WP13-01%20Cash%20Outlook%20India.pdftion/ 3. http://www.investopedia.com/terms/d/demonetization.asp 4. Economictimes.indiatimes.com 5. http://blogs.timesofindia.indiatimes.com/sanjeev-singh-blog/5-reasons-why-

narendra-modis-demonetisation-drive-will-not-curb-black-money/ 6. https://www.managementstudyguide.com/demonetization-impact-on-indian-

economy.htm 7. http://www.cnbc.com/2017/01/17/india-demonetisation-news-india-could-see-

four-consecutive-quarters-of-below-7-percent-growth.html 8. http://currentstuffs.com/top-advantages-and-disadvantages-of-demonetization 9. http://www.importantindia.com/25515/demonetization-advantages-and-

disadvantages-of-demonetization/

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