A PROJECT ON DEMONETISATION
SUBMITTED TO:
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SUBMITTED BY:
JAI KRISHNAN.K
MEANING:
Demonetisation is the process through which the central
government withdraws the approval of legal tender granted
to existing currency notes of certain denominations from
circulation. It is legal withdrawal of old currency notes in one
single move. After demonetisation the currency can longer
be used as a medium of exchange.
INTRODUCTION:
On 8th November 2016, the Government of India
announced demonetisation of all the Rs.500 and Rs.1000
currency notes. It also announced the issuance of new Rs.500
and Rs.2000 currency notes in exchange for the demonetised
currency notes. The Prime Minister Narendra Modi claimed
that the action would curtail the shadow economy, increases
cashless transactions and reduce the use of illicit and
counterfeit cash to fund illegal activity (such as terrorism).
The announcement of demonetisation was followed by
prolonged cash shortages in the weeks that followed, which
created significant disturbance throughout the economy.
According to a 2018 report form Reserve Bank of India (RBI),
approximately 99.4% of the currency notes were deposited
with the banking system, leading analysts to state that effort
had failed to remove black money from the economy. The
stock indices fell over 6 percent on the day after the
announcement. The change reduced the country’s industrial
production and the GDP growth rate.
OBJECTIVES:
Black Money
Removing black money from the economy was the
prime target of demonetisation. Black money refers to
cash that is not accounted in the banking system or cash
for which tax is not paid to the state. The government
had originally expected that at least Rs.3 lakh to Rs.4
lakh crore black money will get extinguished outside the
banking system due to demonetisation alone but only
Rs.1.3 lakh crore has been recovered through all anti-
black money measures including demonetisation.
Fake notes
Fake notes or counterfeit currency notes was
second big target of Modi Ji’s demonetisation.
Most number of currency notes seized in the post
demonetisation years was in the Rs.100
denominations-1.7 lakh pieces in 2019 to 2020, 2.2
lakhs in 2018 to 2019 and 2.4 lakh pieces in 2017 to
2018. Compared to the previous year, there was an
increase of 144.6 percent, 28.7 percent, 151.2
percent and 37.5 percent in counterfeit notes
detected in the denominations of Rs.10, Rs.50,
Rs.200 and Rs.500 respectively the RBI data
showed.
Currency in circulation
Creating a cashless economy was pitched as
another major target of demonetisation in the later
period. Currency in circulation according to RBI
data, was Rs.24.2 lakh crore from Rs.16.4 lakh crore
in 2016, as on March, 2020. Volume of currency
notes have increased to 11.6 lakh pieces in 2020
from 9 lakh pieces in 2016.
Digital payments have increased. UPI payment
volume stood highest at 1251.86 crore up from
91.52 crore among all digital or contactless
payment channels. UPI transaction value also went
up from Rs.1.09 lakh crore to Rs.21.31 lakh crores
during the same period. Total digital payments, in
terms of volume have gone up to 3.4 lakh in 2020
from just 70,466 in 2016.
ADVANTAGES:
Diminishing fraudulent practices
The best benefit of demonetisation is the
minimization of fraudulent acts in the country. During
the process, people with black cash would fear being
prosecuted for these crimes while hoarding cash for
exchange with banks since individuals would be unable
to exchange black money with banks. Hence, it is an
excellent way to deal with terrorism or other criminal
offenses related to counterfeiting currency.
Advanced investment system: With the demonetisation,
the banking system will improve considerably. If the
economy move toward a cashless direction, it paves the
way for better access to credits in the economic system
in the long run. The government will handle the
remaining white cash. Banks and financial institutions
can therefore utilize the newly legalized money to
confer loans to the needy borrowers and aid the banks
in generating interest.
Lowered liability
Allowing demonetisation can reduce the risks of
handling liquid cash. All produced notes are a liability for
the government, and for those who decide to turn in their
income, the current notes would lose their value. Hence, it
is way easier for the government to administer the
country’s economy in the form of Demonisation.
Decreased cases of tax evasion
The sudden severe movement can considerably
reduce tax avoidance if executed successfully. Tax
avoidance can give a terrific boost to the Indian
economy. The increased flow of taxes can enable the
government to undertake public welfare measures.
GDP increase
Higher tax collection gives scope to decreasing the
rate of interest on bank loans; hence, reducing tax
avoidance can bring clean money into the currency
stream and increase the disposable income of the
country’s economy.
DISADVANTAGES:
Inconvenient for the citizens
Demonetisation can cause major inconvenience to
the people of a country. If, at any point, the government
chooses to remove specific categories of banknotes
from currency circulation but keep the others, it can be
bothersome and confusing for individuals. Suppose,
when smaller coins are being removed from the
currency circulation, and banks fail to provide small
changes, it can cause inconvenience to most people to
deposit or exchange currency in most banks.
A standstill in Economic Growth
The economic growth in a country can face a
period of total gridlock due to business disturbances or
any such problems, at least in the short-term scenario
after the execution of the demonetisation process.
Difficulties with paying bills and disruption in trading
Suppose someone has sent current banknotes by
post before the commencement of demonetisation and
has experienced a delay; this can cause the bill to lose
its value after its implementation the previous currency
would become invalid. Faults could cause disruption in
trading within the highly bureaucratic implementation
system. This process may agitate the regular trading
activities since it demands time for suppliers and traders
to get used to the new system of transfers and
exchanges.
Remodification of ATMs
The Government has to remodify ATMs to make
the newly adopted currencies available to the people. It
will result in extra costs for banks and also trouble bank
customers.
Short-term economic crisis for the needy
If the newly adopted currency system fails to
achieve its aims, it will result in a financial emergency
for the needy in the country. Minute changes in the
state of everyday items or confusion about the validity
of the current currency can pose a lot of hardships and
panic among the poor citizens in the nation.
CRITICISM:
The government had mentioned three objectives of the
move: to eliminate black money, to get rid of counterfeit
notes and to attack terror funding. Of these, the last two
were add-ons that everybody knew did not carry much
credibility. A study by the Indian Statistical Institute had
estimated counterfeit currency to be a minuscule proportion
of total currency. Hence, the sudden demonetisation of 85%
of the country’s currency for the sake of getting rid of a
minuscule amount of counterfeit currency could not be taken
seriously as an argument.
Likewise, terror funding occurs through diverse routes and
nobody seriously thought that demonetisation would stop
terror funding or even hurt it temporarily. The real objective
was to eliminate black money; and believing that
demonetisation would do so, betrays the Modi government’s
total lack of understanding of the black economy, and hence
of the economy in general.
Demonetisation as a solution to the problem of black money
was based on an understanding of “black money” derived
from Bollywood films, namely, a stack of currency notes
stuffed in pillows, or in suitcases kept under beds. In fact,
there is no such thing as “black money”, only a number of
economic activities that are not officially declared, primarily
for the purpose of avoiding taxes.
In the event, however, 99% of the disabled currency notes
came back to banks for conversion into new notes. Nothing
demonstrates the utter failure of demonetisation as clearly
as this fact. The government’s expectation was that “black”
money would not be exchanged for “white” because their
possessors would be too scared to do so, for fear of being
caught if they turned up with large amounts whose presence
in their possession they could not explain.
CONCLUSION:
To summarize, the main benefit that the demonetisation
brought about was the considerable increase in the number
of income tax returns filed and the resultant tax collections. It
also led to a formalisation of the economy.
However, these could have been achieved by other policy
initiatives as well and not necessarily by demonetisation.
Tax reforms and effective monitoring of suspicious
transactions could be a viable alternative for resolving the
issues that the policy-makers sought to fix through
demonetisation.
Another benefit is that digital transactions have become
more common. But financial savings in the form of currency
notes have also increased, which means that people still
value cash.