Prime Minister Narendra Modi announced cancelling thecurrency as a legal tender on November 8th 2016. Rs.500 and Rs.1,000 banknotes weredemonetized with effect from the above mentioned date.
Demonetization policy by PMNarendra Modi has been seen as the greatest financial reform that intent tocurb the black money, counterfeit currency notes corruption.The government wanted to cease the usageof illegal and forged money which was used to fund illegal activities. November8, 2016, is being marked as “anti-black money day,” by the governmentand the BJP. This announcement was abrupt and impulsive. On November8, 2016, there was a live television address at 8PM.
After demonetization, Indiaconfronted severe cash shortages with huge negative effects across India. Peoplehad to stand in long queues to exchange the bank notes.Demonetization was heavily criticized by many economistsas cash shortages started increasing in an enormous manner. Demonetizationhas actually acted as a catalyst for mobile money and other forms of electronicfund transfers. The usage of digital financial services has drasticallyincreased even since demonetization.Economic, Social, Reputational andInstitutional damages were caused, decelerating GDP of the Indian economy.
Theweaker sections of the society and business had a huge impact. The Indianeconomy has slowed considerably since demonetization, 5.7 percent was thecountry’s growth which is the lowest compared to last three years. The current forms of currency would betaken out of circulation and would be replaced with new notes and coins. Thecurrency unit would be taken off of its status as legal tender.
Thereare various reasons as to why India went through such a regime. The very firstreason can be stated as to combat corruption and crime, which includescounterfeiting, tax evasion and so on. Other reasons being to discourage a cashdependent economy, combat inflation.Indian government had demonetizedits notes even before as well. It happened in 1946 and then in 1978.
Duringboth the years the aim was to combat tax evaded money. The coalition governmenthad demonetized banknotes of 1000, 5000 and 10,000 rupees, with the hopes ofcurbing counterfeit money and black money. TheReserve Bank of India had given fifty days’ time to deposit the demonetizedbanknotes as credit in their own bank accounts. Due to demonetization, scarcityof cash was there leading to chaos and anxiety among people.
Peoplefaced huge difficulties to exchange the old notes as they had to stand in thelong queues for hours. It has led problems to the old and aged. Not many bank branches were equipped withsufficient cash.
During the time of sowing season, the farmers couldn’t gettheir loan disbursed. It led to huge miseries of the farmers leading to a weakagriculture production.Afterbeing functional for few hours most of the the ATMs did not have enough cashand some of the ATMs were not even functioning. After the news was announced someviolence’s occurred , but no seriousinjury of any was reported.On April 2017, five months after the demonetization,there was a huge cash shortage.
A survey was conducted and was found that the conditionwas really bad that 83% of people were not able to withdraw money in Hyderabad.Peoplerushed to buy gold as a result the demand increased and prices also increased.There were times where a 60% premium was to be paid. PAN card was madenecessary by the government on all purchases. TheRBI kept a limit for Cash withdrawal which made life even more ruthless for thepeople in India. The RBI even had a rule of daily withdrawal limit. The limitwas really low that life was getting harder to sustain. The limitof withdrawal in a day was Rs.
2000 till 14 November and increased to Rs.2500 perday till 31 December. Then after this limit was increased to Rs.4,500 per dayfrom January 1, and again to Rs.10,000 from January 16, 2017 Cashwithdrawals were limited to Rs.10,000 per day and Rs.
20,000 per week peraccount from 10 to 13 November 2016. Again by increasing the limit people couldwithdraw Rs 24,000 in a week by 14, November 2016 .Limitswere placed on the following accounts, starting from Current accounts/ Cashcredit accounts/ Overdraft accounts stand withdrawn with immediate effect. Thenafter RBI improved the withdrawal limit of the Savings Bank account to Rs50,000from the previous amount being Rs24,000 on February 20, 2017. By March 13,2017, RBI had removed all the withdrawal limits from Savings Bank Accounts.Therewas a huge hash tag Campaign named ‘Live ATM Alert’. It was started by a groupof youngsters from Facebook.
The location and details of ATMs that were liveand dispensing cash were being shared which helped them in gatheringinformation and to broadcast it.BSE SENSEX and NIFTY fell over 6 percent on the dayafter the announcement. Severe cash shortages were seen with severe detrimentaleffects across the economy. People seeking to exchange their bank notes had tostand in lengthy queues, and several deaths were linked to the rush to exchangecash. Around 33 deaths were reported as aresult of demonetization. Theproblem was faced mostly by people having low income and people working fordaily wages as they did not own a bank account. Even giving fifty days’ time wasn’tenough and they were struggling with the limited education and resources toopen a new bank accountTheworst part was these old notes were not even accepted in hospitals, a childdied in the hospital as the parents had old notes which were of no use and theydidn’t even have time to exchange the notes in an emergency situation.
People collapsedwaiting in the lengthy queues. Some people even committed suicide as they wereunable to feed and look after their family.Thecountry faced a huge income loss. Customers and employers had no cash to pay tothe workers. Demonetization had effects in many industries, such as farming,retail sector etc. An angry farm protest broke out in Madhya Pradesh andMaharashtra. The problem of liquidity remained as a question mark as hugeproblems were faced while transacting amounts.The Economy that suffered the most was the rural and informal economy asmost of their transactions were cash-based.
A huge decline was seen in theprices of perishables such as fruits and vegetables as well as some of thepulses. A Decline was seen in the Two wheelers and cars sectors also.The real estate and property market too had its hugeimpacts. It badly disturbed the propertymarket as black money was mainly utilized in this sector. Even thoughsales increased there was huge overhang of unsold inventory. The RBI itself had to face a huge trouble as the domestic earnings haddeclined. It had to pay interest of Rs17,426 crore even after it wiped up the excessliquidity in the banking system following demonetization.
The central bank inits previous year had earned an interest of Rs506 crore in its liquiditymanagement operations. RBI’s printing costs also escalated due to this.Though it was a disorderlymove by the government, demonetization itself failed as nearly 99 per cent ofthe recalled bank notes were deposited or exchanged. Though the Indiansillegitimate wealth remains politically popular, it had huge impacts inbusinesses. The bankshave received more than 97% of demonetized notes all over India . A total ofRs.17.97 Trillion ($220 billion) demonetized.
The government’s initial estimateof Rs.15.4 trillion was demonetized in the form of Rs500 and Rs1000 bank notes.Rs 9.2trillion was pumped back into the economy in the form of Rs500 and Rs2000 banknotes. They calculated again after two months.Arun Jaitley, the FinanceMinister of India said that this demonetization was meant to have a cleansingeffect for the whole economic system. He told that it would increase andimprove the economy.
He even stated that demonetization and Goods and Services Tax (GST) will be step to change the spendinghabit and lifestyle of people.Another aim of this was to have a bankaccount for each and every citizen, the banking scheme for the poor was notfully in action, demonetization has led many people especially people from poorbackground to have an account and make everything a cashless transaction.Government wants every citizen to bemonitored online not to poked their nose in their privacy but to checkeverything on money bases goes abiding by law .The government wanted to transform India intoa cashless economy which would be beneficial for both the government and thepeople. Transactions done online could be monitored and taxed . Using of debitcard and credit card has gone up, and also the use of Paytm has struck avirtual goldmine.Demonetization has helped to check counterfeitnotes which were been in the economy in bulk and for many years. It will bedifficult for new counterfeit as fake notes are removed from the economy.
It is a break down on terrorism and naxalismalso as they run counterfeit notes and black money.Terrorism and naxalism have been severely hitas they don’t have any fund . This is the first step of eradicating them fromour country.
Corruption we as Indian citizens are taxpayers and patriotic, corruption is something which cannot be tolerated and tobring some change to it demonetization was a big start. It bought a drasticdownfall to black money holders and tax evaders.This Demonization wasmeant to be a key structural reform measure that PM Modi had in his vision. Hewanted to the pervasive corruption and tax fraud in India to be reduced.
There hasbeen a debate regarding this as to whether it’s a success or not and whetherthe Indian public agrees with him on his vision.