- Published: October 31, 2021
- Updated: October 31, 2021
- University / College: Dartmouth College
- Language: English
- Downloads: 12
Prime Minister Narendra Modi announced cancellation of Rs.
500 and Rs.1,000 banknotes as a legal tender (i.e.
demonetizing) onNovember 8th 2016 . Demonetization policy by PM Narendra Modi has been seenas the greatest financial reform that intent to curb the black money,counterfeit currency notes corruption.The government wanted to cease the usage of illegaland forged money which was used to fund illegal activities. November 8, 2016,is being marked as “anti-black money day,” by the government and theBJP.
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 deal with tax evaded money.
The coalitiongovernment at that time had demonetized banknotes of 1000, 5000 and 10,000rupees, with the hopes of suppressing 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 .OnFebruary 20, 2017 RBI increased withdrawal limit of SB account to Rs50,000 fromRs24,000. By March 13, 2017, RBI had removed all the withdrawal limits fromSavings Bank Accounts.Therewas a huge hash tag Campaign named ‘Live ATM Alert’, which was organized bysome youngsters from Facebook, by informing people where the live and workingATMs are .After the announcement of demonetization stockexchanges such as BSE SENSEX and NIFTY crashed down to 6 percent.
Many cashshortages were seen in the country with severe negative effects across theeconomy. People who had gone to exchange their bank notes had to stand in longqueues and around 33 deaths werereported as a result 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 massive income loss. Customers and employers had no cash to payto the 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.