International Journal of Applied Research 2017; 3(9): 433-436
ISSN Print: 2394-7500
ISSN Online: 2394-5869
Impact Factor: 5.2
Impact of demonetization on Indian economy
IJAR 2017; 3(9): 433-436
[Link]
Received: 01-07-2017 Dr. G Ganesan and B Gajendranayagam
Accepted: 02-08-2017
Abstract
Dr. G Ganesan Countries across the globe watching India as a democratic country and is poised to become a leader of
Former Professor & Head,
regions. In the global environment, India has multiple strengths of larger youth population, growing
School of Commerce,
middle class people, increasing literacy level and improving technical knowledge among the work force
Bharathiar University,
Coimbatore, Tamil Nadu, which would address favorably any proactive change in the present setup. Moreover, demonetization,
India coupled with Digital India and Jan Dhan Yojana, is aimed at strengthening transparency in money
transactions by curbing black money, corruption and financial crimes. Therefore, it is the best time to
B Gajendranayagam strike the chord of second financial reforms and new banking sector operations in tandem digital
Ph. D Research Scholar, network so as to achieve remarkable economic development at a faster rate.
School of Commerce, In addition, a few immediate negative implications of demonetization are also seen in terms of
Bharathiar University, minimum growth in GDP, losing job by wage earners in some industries and real estate sector which
Coimbatore, Tamil Nadu, have affected the Indian economy to some extent. But, adopting good governance practices, providing
India sound infrastructure, congenial atmosphere to start business and ensuring trained workforce would have
got positive long term impact on Indian economy. Further, total transparency in business operations
through banking services would also increase tax revenue to the GDP ratio. Therefore, this paper will
take up the issues relating to demonetization and its linkage to the implications of various sectors in
Indian economy during pre and post demonetization periods discusses the experience and impact of
demonetization on Indian economy.
Keywords: Demonetization, Financial Reforms, Income tax, Real Estate, GDP, GVA
Introduction
Indian economy is said to be a fast growing and also considered to be bright spot among
other emerging markets in the world. In the global environment, India has multiple strengths
of larger youth population, growing middle class people, increasing literacy level and
improving technical knowledge among the work force which would address favorably any
proactive change in the present setup. Moreover, demonetization, coupled with Digital India
and Jan Dhan Yojana, is aimed at strengthening transparency in money transactions by
curbing black money, corruption and financial crimes. As per the data released by the Central
Statistics Office (CSO) the growth figures of many industries have showed downward trends
from 7.6% to 7.1% for the financial year ending 2017 just before the quarter when the
demonetization exercise is introduced. Several economists also viewed that the current and
ongoing attempt to flush out black money would shave a good 2% of the GDP.
Issues
India is basically a cash transaction oriented economy in almost all business activities. It is
true that any country which has a strong banking and financial system would have got the
capacity to withstand any crisis arising out of financial dealings. In that order, Indian
financial system is inherently strong and our banking system is also well structured to meet
any financial endeavor.
The demonetization exercise which was suddenly introduced in India during the quarter
(October – December, 2016) had affected the performance of many industries in the
Correspondence immediate next quarter (January-March, 2017) and on the other hand some other industries
Dr. G Ganesan have positive implications. Therefore, this paper will take up the issues relating to
Former Professor & Head,
School of Commerce, demonetization and its linkage to the implications of various sectors in Indian economy
Bharathiar University, during the financial year 2016-17 particularly pre and post demonetization periods and
Coimbatore, Tamil Nadu, discusses the experience and impact of demonetization on Indian economy.
India
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International Journal of Applied Research
Review of Literature In addition, there are some who now argue that the Indian
CMA Jai Bansal (2017) reveals that GDP of Country Banking System is now “flush with cash” and this has
slightly decreases as compare with the previous year but we enabled the government to “nudge” the RBI to cut rates as
cannot say it will be same in future also. This intervention is well as to allow banks to pass on the benefit of ample
a one-time draining of this current stock of black money but liquidity to consumers by lowering lending rates. On the
unless the root causes of corruption are removed, corruption other hand, with more taxes being collected due to higher
will continue. It is sort of like a dialysis, more of a short deposits in banks that can be taxable as well as increased
term cleaning up than a solution of the problem. It needs to compliance due to greater scrutiny and oversight by the
be repeated periodically. Income Tax Department, the government too might be
Dr. Partap Singh (2016) [2] researched on Impact of tempted to announce lower rates for taxes and other aspects
Demonetization on Indian Economy and concluded If the of what are known as fiscal measures. In this context, it is
money disappears, as some hoarders would not like to be worth remembering that fiscal stimulus which is by
seen with their cash pile, the economy will not benefit. On lowering taxes and providing more incentives to consumers
the other hand if the money finds its way in the economy it as well as producers by boosting supply can be
could have a meaningful impact. However experiences from complemented and supplemented by the monetary stimulus
different countries shows that the move was one of the which is by boosting demand for goods and services by
series that failed to fix a debt-burdened and inflation-ridden lowering lending rates thereby putting more money in the
economy. hands of consumers.
Sukanta Sarkar (2010) conducted a study on the parallel It is ensured that the demonetization exercise would
economy in India: Causes, impacts & government initiatives drastically affect the corrupt practices and People who are
in which he focused on the existence of causes and impacts holding black money in cash would not be able to exchange
of black money in India. According to him, the main reason much as they would be in a fear of getting prosecuted by the
behind the generation of black money is the Indian Political authorities. Further, enemies of the country who are
System i.e. Indian govt. just focused on making committees involved in counterfeit currency and terrorism would not be
rather than to implement it. So, he concluded that laws able to continue it further.
should be implemented properly to control black money in As per CRISIL there will be a direct positive impact on
our economy. government’s tax revenue collections, its ability to spend on
infrastructure investments and resultant impact on growth.
Objectives Since government investments will increase and there will
1. To understand the implications of demonetization on be a positive impact on the GDP in the long run. Higher
various sectors. income tax collections arising from better compliance would
2. To analyze the impact of demonetization on Indian offer scope to reduce tax rates over long term, which would
economy. increase disposable income. This can give a positive impact
on consumption demand in long term.
Methodology Initially, it is very difficult to create cashless society as more
The present study is diagnostic and analytical as well and than 50 percent of Indian population is not well versed with
secondary data were used for the purpose of analysis. Main card transactions. Also for these initial months, it will be
source of data has been collected from the Central Statistics very difficult to make in cash transactions of a higher
Office (CSO) and supporting information is taken from the amount. The liquidity squeeze caused by demonetization
facts released by Reserve Bank of India (RBI) and different will be negative across sectors with high level of cash
websites relating to it. The collected data were analyzed transactions. Real estate, jewelry, retailing, restaurants,
with paired sample t - test and regression analysis so as to logistics, consumer durables and luxury brands, cements and
understand the immediate effect and to measure its impact some segments in retail/SME lending space will be facing
on Indian economy. short term instability.
Implications of demonetization Impact of Demonetization on Indian Economy
On referencing various information from the leading Statistical analyses have been done and measured the impact
financial dailies, the consensus view among many of demonetization and results have been arrived at the end.
economists is that while there would be indeed a noticeable
slowdown in the economy for a “quarter or two”, most of Analysis & Discussion
them seem to agree that growth would indeed bounce back The impact of demonetization on Indian economic growth
and the Indian economy would regain its momentum as well has been widely outraged. According to the government's
as turnaround with a renewed sense of vigour due to higher latest growth estimates, the pace of growth will be impacted
tax revenues. It is a fact that, as per the recent estimates by by slow growth in the manufacturing and mining sectors and
some economists, nearly 90% of the total cash in circulation also in the traditional retail sector. The study ensures that
has come back into the banking system and hence, the stated some of the industries have been affected unfavorably in
purpose of the Demonetization exercise which was to term of poor performance and on the other hand some other
“extinguish” black money and enable the RBI to lower its industries have been benefited in term of growth prospects.
liabilities thereby providing the government with a huge
dividend seems to have been belied.
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International Journal of Applied Research
Table 1: Quarterly Data of Gross Value Added on Various Sectors in India
2016-17 (Rupees Billion)
Sectors / Year
H1 H2
Agriculture, Forestry and Fishing 7000.06 9961.67
Mining & Quarrying 1518.53 1786.33
Manufacturing 10078.78 10120.5
Electricity, Gas, Water Supply & Other Utility 1218.68 1187.23
Construction 4471.11 4475.57
Trade, Hotels, Transport, Communication and Services Related to Broadcasting 10200.22 11239.34
Financial, Real Estate and Professional Services 13676.84 10619.54
Public Administration, Defence and Other Services 6855.46 7444.56
Total Gross Value Added at Basic Price 55019.67 56834.72
Source: Central Statistics Office (CSO)
Note: H1 include Quarter 1 + Quarter 2(April to June & July to September respectively), H2 include Quarter
3 + Quarter 4 (October to December & January to March respectively).
Trade, Hotel, transport, and Public administration, Defense
showed increasing trend comparing to previous half year
thus there is a highly positive impact of agriculture on gross
value added. Manufacturing, Construction, Electricity, Gas,
Water supply and other utility shows, that there is no
significant change on impact of demonetization. However,
Financial, Real Estate and Professional Services showed
decreasing trend as compared to previous six months. So
there is a negative impact on Financial, Real Estate and
Professional Services.
Though there are changes in various sectors of Indian
economy, but these are not significantly impacted Indian
economy. The following analysis has proved the hypothesis:
Chart 1
Table 1 depicts four quarterly data converted into half year H0: There is no significant difference between impact of
of gross value added on various sector in India specifically, demonetization on pre and post period
Agriculture, Forestry and Fishing, Mining & Quarrying,
Table 2: Paired Samples t –Test
Paired Differences
95% Confidence Interval of Sig. (2-
Std. Error t df
Mean Std. Deviation the Difference tailed)
Mean
Lower Upper
Pair 1 H1 –H2 -113.625 828.106 292.780 -805.939 578.689
-.388 7 .709
Source: Computed Data
Note: H1 include Quarter 1 + Quarter 2(April to June & July to September respectively), H2 include Quarter 3 + Quarter 4
(October to December & January to March respectively).
The above table shows the paired sample t – test of Gross
Value Added for H1 and H2 of major contributing sectors
on Indian Economy. The paired difference shows that there
is no significant difference between the samples and the
mean value is -113.625. The significance value is greater
than the p–value 0.05(0.709), hence the null hypothesis is
accepted. It proved that there is no Significant difference
between Half yearly 1 and Half yearly 2.
Table 3: Trend and Forecasting GVA Value of Agriculture,
Forestry and Fishing
Year Trend Value
2011-12 15018.16
2012-13 15243.98
2013-14 15882.36 Chart 2
2014-15 16061.40
2015-16 16172.08 The above table and chart shows the trend forecasting of
2016-17 16961.73 GVA Value of Agriculture, Forestry and Fishing from 2012-
2017-18 17158.07 2016. It is inferred from Table 3 that the trend value of
2018-19 17538.53 Agriculture, Forestry and Fishing ranges between Rs.
Source: Computed Data from CSO’s All four quarters in each 15018.16 and Rs. 16172.08 during the study period. It is
year. concluded that there is increasing trend of Agriculture,
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International Journal of Applied Research
Forestry and Fishing. The forecasting of the Agriculture, Conclusion
Forestry and Fishing for the year 2017 will be Rs. The present study showed the impact of Demonetization on
16961.73which is showing an increasing trend 17538.53 for different sectors of Indian economy. The gross value added
the year 2019. The R2 value is 0.982 and the slope value for of India is slightly decreasing as compared to the previous
the Agriculture, Forestry and Fishing is 362.0 and the years, but during the current financial year the half yearly
intercept value is 14623. data are in increasing trend. As per the t-test analysis the
positive effect of demonetization between the pre and post
Table 4: Trend and Forecasting GVA Value of Banking, Financial, period has no significant difference in short term and
Real estate and Professional Services through the regression analysis it is confirmed that there is a
Year Trend Value positive impact during the long term period. Agriculture
2011-12 15306.91 sector typically sees high cash transactions and therefore
2012-13 16755.93 near-term impact could be seen till liquidity is infused in the
2013-14 18440.71 rural areas. As farmers face a temporary shortage of cash in
2014-15 20755.50 hand, it could lead to a delay in payment which in turn
2015-16 22987.97 would hurt the related companies in the short term. The real
2016-17 24296.38 estate sector has been affected in a short term period
2017-18 26353.06 negatively, whereas this sector will be escalating to a
2018-19 28376.77 positive growth in the forth coming years. This intervention
Source: Computed Data from CSO’s All four quarters in each year is a one-time draining of this current stock of black money
but unless the root causes of corruption has been removed. It
is sort of like a dialysis, more of a short term cleaning up
than a solution of the problem. It needs to be repeated
periodically.
References
1. Kapoor, Mahimam. Impact of Demonetization on
Banking, 2016. Sector, [Link]
2. Partap Singh. Impact of Demonetization on Indian
Economy, International Journal of Science Technology
and management. 2016; 5(12).
3. Vijayakjumar S. Demonetization And Complete
Financial Inclusion, IJMRR, 2016; 6(12).
4. Sinha, Sanjeev. Demonetization impact, New Delhi,
2016.
Chart 3 5. Partap Singh. Depreciation of Rupee in Indian
Economy: An Analysis, International Journal of
The above table and chart shows the trend forecasting of Innovations in Engineering and Technology (IJIET),
GVA Value of Banking, Financial, Real estate and and 2013; 2(4).
Professional Services from 2012-2016. It is inferred from 6. Ravi Prakash A, Vijay Kumar S, Shiva Kumar T.
Table 4 that the trend value of Banking, Financial, Real Designing Complete Financial Inclusion. Financial
estate and Professional Services ranges between Rs. Inclusion – Aspects, Issues and the Way Forward,
15306.91and Rs. 22987.97during the study period. It is Himalaya Publishing House, 2009,
concluded that there is increasing trend of Banking, 7. PTI. Demonetisation will benefit economy in long run:
Financial, Real estate and Professional Services. The Jaitley. The Hindu Business Line, 2016, 9.
forecasting of the Banking, Financial, Real estate and
Professional Services for the year 2017 will be Rs. 24296.38
which is showing an increasing trend 28376.77 for the year
2019. The R2 value is 0.997 and the slope value for the
Agriculture, Forestry and Fishing is 1904 and the intercept
value is 13100.
Table 6: Regression analysis
Std. Error
R Adjusted Durbin-
Model R of the
Square R Square Watson
Estimate
1 .926a .857 .833 894.221 1.986
Source: Computed data
Note: a) Predictors: (Constant), H2. B) Dependent variable:
H1
The above table confirms that the impact of demonetization
on Indian economy is 85.7% as the r2 value depicts. It is
clearly noted that the effect of demonetization has been
widely outraged.
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