CHAPTER-1.

INTRODUCTION
 INTRODUCTION TO DEMONETIZATION:

Demonetization is the act of removing the current currency from the economy
and replacing it with the new one. Removing the legal tender status of a unit of
currency is a drastic intervention into an economy because it directly effects the
medium of exchange used in all economic transactions. It can help stabilize
existing problems, or it can cause chaos in an economy, especially if undertaken
suddenly or without warning. That said, demonetization is undertaken by nations
for a number of reasons. Demonetization occurs when a government removes a
currency’s legal tender status, which means the money is no longer officially
recognized as a medium of exchange for meeting financial obligations or settling
debts. Typically, old notes are retired and replaced with new ones. In cases where
the intent is to stop corruption, demonetization usually targets only large-
denomination banknotes. By contrast, if the intent is to cut zeros from existing
price levels, introduce policies that dramatically reduce hyperinflation rates,
and/or restore public confidence in the monetary system, a government may
demonetize by introducing a totally new or renamed currency.
On November 8, 2016, India’s prime minister, Narendra Modi, made a surprise
evening television appearance to announce that, starting at midnight, the nation’s
500-rupee and 1,000-rupee (i.e., Rs 500 and Rs 1,000) currency notes would no
longer be legal tender. India’s demonetization is just one important part of a
much broader plan to reduce corruption, digitize the economy, and improve the
nation’s infrastructure. In India Demonetization made vibrations in the operations
as well as products and services of Banks. It created greater demand to digital
banking services where cashless transactions are prioritized. It made greater
influence on Management of liquidity and its demand raised by customers in
exchanging of their banned currency notes while minimizing risk and
maximizing quality of service. At the same time meeting the guidance of Reserve
Bank of India was challenging. Demonetization has disturbed the bank operations
and made the employees to work under unconditional stress in extended working
hours of a day. Most of the banks were not able to discharge other banking
services while exchanging the banned currency notes. Hence, the present study is
made to figure out the influence of demonetization on banking sector. It
showcases post demonetization effect on banks and its operations.

New currency notes of Rs 2000 and Rs 500 :

Post demonetization, RBI issued currency notes of Rs.2000 and Rs.500

under the new Mahatma Gandhi series of notes. These newly released notes are
entirely different from the previous higher denomination banknotes, and has a
number of additional security features. It is true that some inexact information
has also been circulated on social media platforms following the devaluation of
Rs.500 (old currency) and Rs.1000 notes. For example, there were rumors on
social media about chips being embedded into the new currency notes, which was
later dispelled by RBI in an official statement.
 MEANING :
Demonetization is a act of stripping a currency unit of its status as a
legal tender. Demonetization is necessary whenever there is a change of national
currency replacing old unit with new one. The opposite of demonetization is
remonetization where a form of payment is restored as legal [Link] refers to a
drastic intervention into the economy that involves removing the legal tender
status of a currency. Demonetization has been used as a tool to stabilize a
currency and fight inflation ,to facilitate trade and access to markets, and to push
informal economic activity into more transparency and away from black and grey
markets. It has been used to stabilize the value of a currency or combat inflation.
Demonetization is a proper description of a currency amount, usually for coins or
banknotes. In the process of demonetization, a particular unit of currency is
completely banned for use by the general public or members of the government.
The old currency is monetized in such a way that it becomes instantly invalid
and has to be either replaced by the new currency issued against it or deposited in
banks. When a legal tender is demonetized by the government, it loses its value
in the market, instantly becoming trash. When a government withdraws the old
currency from the market, it can issue a new currency . Demonetization
information is kept confidential until the last day; otherwise, it would defeat the
purpose of demonetization on its own. The main objective of demonetization is to
conflict tax avoidance and circulation of black money as well as counterfeit or
fake currency. If the notice of demonetization is leaked in any way, it gives
enough time to tax evaders and black money holders to convert their money into
other legal forms like – land, gold, jewellery etc. will never reach banks

 DEFINITION:
 Demonetization is a process of removing a currency from general usage, or
circulation. It helps to remove the black money from country and stop the
corruption and terror funds. It occurs whenever there is a change of national
currency: The current form or forms of money is pulled from circulation and
retired, often to be replaced with new notes or coins.
 It is an act of cancelling the legal tender status of a currency unit in
circulation. Anticipating positive changes on the liquidity structure as a
 whole, nations often adopt Demonetisation policy as a measure to
counterbalance the current economic condition. Countries across the globe
have used Demonetisation at some or the other point to control situations
such as inflation and to boost economy. In November, Indian government
banned the high denomination notes of Rs.1000 and Rs.500 as move to curb
counterfeiting and money laundering.

 BACKGROUND:

India has demonetized before: First time on 12th Jan 1946(Saturday),second

time on 16th Jan 1978 (Monday), Third time on 8th November2016 (Tuesday).In
2016, the Indian government decided to demonetize the500- and 1000- rupee
notes, the two biggest denominations in its currency system; these notes
accounted for 86% of the country’s circulating cash. With little warning, India's
Prime Minister Narendra Modi announced to the citizenry on Nov. 8 that those
notes were worthless, effective immediately – and they had until the end of the
year to deposit or exchange them for newly introduced 2000 rupee and 500 rupee
bills. Surgical Strike on Black Money called “Demonetization” brought
enormous changes in all the sectors of the country.
The whole country was taken aback when Prime Minister Narendra Modi on
November 8 announced that the currencies in the denominations of Rs 500 and
Rs 1,000 will be invalid post midnight. However, the lower denomination –Rs
10, Rs 20, Rs 50, Rs 100 and coins –will be valid. He further announced that new
notes of Rs 500 and Rs 2,000 would introduce shortly. Thus, giving millions of
Indians a panic attack.
But what do you think was this the first time an Indian currency was banned of a
sudden?
Well, the answer is NO. A look into the past will make you realise that India is no
new to demonetization. Demonetization has been implemented twice -1946 and
1978 – in the past.

The first currency ban:

In 1946, the currency note of Rs 1,000 and Rs 10,000 were removed from
circulation. The ban really did not have much impact, as the currency of such
higher denomination was not accessible to the common people. However, both
the notes were reintroduced in 1954 with an additional introduction of Rs 5,000
currency.
Rs 500 and Rs 1000 notes were introduce in 1934 and after four years in 1938, Rs
10,000 notes were introduce.

The second:
That came in 1978; the then Prime Minister of India Morarji Desai announced the
currency ban taking Rs 1000, Rs 5000 and Rs 10,000 out of circulation. The sole
aim of the ban was to curb black money generation in the country.
New currency notes other than Rs 500 and Rs 2000:
Current circulating banknotes:

As of 26 April 2019, current circulating banknotes are in denominations of Rs

5, 10, 20, 50 and 100 from the Mahatma Gandhi Series and in denominations of
Rs 10, 20, 50, 100, 200, 500 and 2,000 from the Mahatma Gandhi New Series.

VARIOUS CONCEPTS RELATED TO DEMONETIZATION:

POSITIVE IMPACT OF DEMONETIZATION:

 Increased Savings – When currency is demonetized, people tend to
deposit their cash with a bank and store less physical currency at home. This
helps them save more.
 Lower lending rates – With currency demonetization, money moves
from people to banks and financial institutions. Therefore, there is a better
circulation of money. Further, banks and financial institutions have a lower
cost of funds which translates into lower lending rates.

 Better economy – Since demonetization induces people to deposit their

cash with the banks, there is a higher circulation of money in the economy.
The government receives more taxes and can undertake more development
projects. Eventually, this leads to a better-performing economy.

 Curbing anti-social activities – Usually, anti-social elements like

smugglers or terrorists use cash as a mode of transaction. When the
government decided to demonetize 500 and 1000 rupees notes, they were the
highest denomination notes in circulation. By demonetizing them, the
government forced these anti-social units to find ways to get rid of the old
notes. This allowed the government an opportunity to get a better control over
the unaccounted money in the economy and curb anti-social activities.

 Reducing counterfeit currency notes – During demonetization,

people deposit all old notes with banks who check if the notes are genuine or
counterfeit before accepting them. Therefore, this allows the government to
weed out counterfeit notes circulating in the market.

 Stored money by terrorists becomes invalid : The flow of currency

to support terror groups has stopped. As a result, many states are back to
normal.
 Digital mode of payment: Even small-scale shopkeepers have started
accepting digital mode of payment as they are left with no other choices
which prevent them to ask for higher price.

NEGATIVE IMPACT OF DEMONETIZATION:

Liquidity crisis:
Demonetization gave rise to liquidity problem as people found it difficult to get
sufficient amount of cash to fulfil their basic needs. Marginal section of the
society mainly depends on cash to meet their daily transactions. Out of total
currency in circulation 500 rupee notes constituted nearly 49% in terms of value.
More the time isrequired to resupply Rs 500 notes, the more will be will be the
duration of the liquidity crisis.

Usage of Online Transaction:

Use of online trans-action is one of the best solution but challenge isthat many
individuals who are of old age do not uti-lize smart phone and if they use then
also big ratioamong them is of individuals who do not feel secureon exchanging
the cash through online.

Medical Treatment:
The most bad hit are the in-dividuals who are not on plastic money and needto
deal with urgent medical treatment. The privateclinics and chemist are not
tolerating old notes nor extending credit.
Marriage Functions:
The individuals permitted towithdrawal of Rs 2.5 lakh in cash. Even for that
amount a lot of restriction have been imposed. Many are not getting Rs 2.5 lakhs
because of deficiency cash in the bank.
Daily Wagers:
Unskilled workers and daily wagersare jobless as their employers need cash to
pay themin cash. online transaction was not suitable for them.
Foreign Tourists:
Foreign tourists who have with-drawn cash after arriving to India are among
themost bad hit. Rather than enjoying the holidays inIndia they are hurrying
around in an outsider land,endeavoring to secure legal currency. The negative
criticism to the tourism industry which will influence its reputation.
Property Prices:
With less potential purchasers inthe market and less individuals having white
money,the demand for the land goes down and drives downits cost. This
accelerate the demand for land holdingwhich could drive the property costs
higher later on.
Wholesale Shopkeepers:
The trader class, is influenced given that most of wholesale shopkeepers keep
liquid cash to purchase material consistently. Not every traders keep cash
in a bank. Huge numbers of traders have incurred losses as a result of the
liquidity drying up in the market.

Loss of well being:

Most of the population who constitute the lower middle and lower class uses
currency to meet their dailytransactions. Such class of the society such as daily
wage labourers, small traders and other marginal section ofthe society use cash
more often. These sections of the society have lost their income in the scarcity of
[Link] crunch made firms to cut their labour cost and thus reduces the income
of the lower middle class.

Consumption:
Cash shortage adversely affected the consumption behaviour of the people in
India. The sales of consumer durables likely to be hampered in short term,
especially sales through unorganized channels are cash purchases. Most of the
purchases by retailers are through cash which brought down their volume of trade

Decrease in GDP:
Withdrawal of highest currency notes reduces the growth rate of the economy.
Demonetization reduces consumption pattern, income, investment etc. This may

bring a slowdown in India’s growth rate as the liquidity Crisis itself may last

three -four months.

Expected Result Not Found: The Reserve Bank has said that after the ban,
the amount of Rs. 16,000 crore did not come back to the banks which can be
considered as the profit of the government. But the government spent Rs. 7,965
crores on the printing of new notes. So if we deduct this amount from the 16000
crores then total profit of the government is reduced to Rs. 8035 crore only.

No Abatement in the Corruption: The government claims that the

demonetization has reduced the corruption in the country which is not true. A
recent report released by the Transparency International says that India is the
most corrupt country in the Asia.

The Logic of lack of Terrorism : Some people believe that the

demonetization has reduced the terror activities in the J&K and in rest of the
country but this is true only for a short period. Now the incidents of encounters in
j&K with the security forces are still reported on daily basis.

Note Printing Cost: According to the figures released by the Reserve Bank
of India, the cost of printing notes increased to Rs 7,965 crore in FY17, which
was Rs. 3,421 crore in FY16. So demonetisation increased the cost of printing
currency notes in the country.

No reduction in fake Notes: The number of fake notes in the banking

system jumped by 20.4 % to 7,62,072 during 2016-17 compared to previous year.
During 2015-16, 6.32 lakh fake currency notes were detected. Apart from this,
we have heard the news of the fake notes coming out of ATM across the country.
Fall in Employment: India’s employed force grew from 401 million in April
2016 to 406.5 million in December 2016, it fell to 405 million between January
and April in the year [Link] are 73% Manufacturers did not hire for 3
months after the demonetization.

Decrease in GDP growth: During the Demonetisation, many industries

were not able to continue their production activities this is why the country's
growth rate, which was 7.5% in September 2016 declined to 5.7% in June 2017.
It means the demonetisation caused reduction of 1.5% in the Indian GDP.

EFFECTS OF DEMONETIZATION ON BANK

OPERATIONS:
Demonetization has brought plethora of challenges in additions to the challenges
which are already facing by Banks. The influences were short-term and long-term
views. In short-term, it disrupted the banks and stressed strongly to carry out
bank operations and in long run it helped the banks to pool the deposits without
incurring of any cost. Here are four influences of demonetization on Banks.

POSITIVE EFFECTS:
1. Increase in Deposits:
demonetization has increased the deposits in Banks. Unaccounted money in the
form of Rs.500 and Rs.1000 were flowing to the Banks and the sizes of deposits
have been increased. It helped the banks to grab the deposits and increase their
deposits.

2. Fall in cost of Funds:

Over the past few months, the deposits are increased. It led the banks to keep a
major part of deposits in the form of cash deposits. PSU Banks have a lion share
(over 70%) of the deposits and biggest gainers of the rise in deposits, leading to
lower cost of funds.
3. Demand for Government Bonds:
After sharp rise in deposits on post demonetization, banks started lending such
surplus deposits to the RBI under the reverse repo options. PSU Banks,
particularly, deployed excess funds in government bonds. The return on bond
investment is likely to add 15 to 20 per cent increase in the earnings of banks.

4. Sagginess in Lending:
lending growth of the banks is considerably less even after demonetization and its
impact of growth in the amount of public deposit. Banks have tried to lend the
money to the needy group by reducing their interest rates, but it shrunk over the
last few months.

Similarly, Demonetization has brought some operational issues to Banks. It

disturbed Bank‟s Employees, Operational Costs and Profitability. The following
are negative influences of Demonetization.

NEGATIVE EFFECTS:
1. Cash Reserve Requirement:
100% CRR on incremental deposits meant that banks did not earn any interest on
Rs. 3 Lakh crore of deposits for nearly a fortnight.

2. Waived off ATM Charges:

ATM charges were waived off during banned note exchange and banks incurred
a loss of Rs. 20 in every transaction.

3. Waived off Merchant Discount Rate:

Banks incurred loss of 1% discount charges from merchants on using of every
card transaction.
4. Non Selling of Loans:
Banks were focused on exchanging currency notes and they were not able to sell
any loan products. This made banks to curb their lending activities.
5. Reduced SMEs Sale and influence on NPAs:
During demonetization, some SME businesses had seen their sales drop by 50-80
percent and could default in their installments to banks. This led the banks to
consider it as NPA and affected its level in banks.

6. Stress on Employees:
Bank Employees were put under pressure and overtime work environment. It
depressed them and kept imbalanced life style. Few cases were found where the
employees committed suicide due to work pressure

OBJECTIVES BEHIND DEMONETIZATION:

 To control the circulation of the fake currency.
 To cutoff the supply line money, arms and immunizations to terror
funding.
 To transform Indian economy into cashless economy.
 To bring tax evasion to halt.
 To unearth and curb the black money.
 To curb the illegal and unethical business activities such as, the black
marketing, food adulteration, marketing of spurious goods, human
trafficking, smuggling of gold and drugs.

FEATURES OF DEMONETIZATION:
1. As tax administration measure:
People having cash falling under declared income deposited their cash in banks
immediately to be exchanged for new notes but those with black money had to
pay taxes at a penalty rate.

2. As a shift on the part of the government:

Demonetization is being considered as a strict measure by the government against
tax evasion which will not be tolerated or accepted.

3. Channelizing savings into the formal financial system:

Though , much of the cash deposited in the banking system is likely to be
withdrawn but some of the new deposits schemes introduced by the banks will be
used as loans, at lower interest rate.

4. Creation of a less cash or cash lite economy:

Another feature of demonetization is to help in channelizing more saving through
the formal financial system and improving tax compliance.

Effects of Demonetization on various sectors of Indian

Economy:
Demonetization, that sent a shockwave across the Indian economy, completes
one month since its announcement on the midnight of November 9. To uproot the
problems of corruption, black money, and counterfeiting, Prime Minister
Narendra Modi orchestrated this master plan which has reportedly swept off a
mammoth portion of India’s monetary base. It is anticipated that this surgical
strike on black money will also increase cashless transactions in the country and
untie all knots in tax collection. But on the other hand, rural households and elder
citizens have been worst hit due to the sudden monetary reform. The decision to
scrap all Rs.1000 and Rs.500 notes have made it to headlines all over the world,
attracting both positive and negative comments.

Impact of Demonetisation on Indian economy:

In a country where 85% of transactions take place by cash, cancelling the legal
tender character of two high denomination banknotes arises a lot of questions.
The service sector in the country that depends mostly on cash transactions will be
adversely hit because of Demonetisation. Not to mention, the consumption
activity of India has come to a screeching halt. This drop in economic activity
could last for a few months and as a result, GDP could fall significantly from the
previous year’s values.

Even as country faces the greatest financial crunch of all times, some analysts
predict the economic conditions to stabilize in a few quarters. Deutsche bank and
Goldman Sachs expect India to join the list of the fastest growing economies by
next fiscal year. An improved monsoon season in 2017 can favor agricultural
economy of the nation, which in turn will add to the financial recovery as a
whole. Economists also predict that the decision to scrap high-value currency
notes will lead to GDP growth by 2%.

Some of the major effects of demonetization is as follows.

Effect on Parallel Economy:

One of the major objectives of the demonetization is to fight against the black
money. With the demonetization the black money within the economy will be
blocked as the owners of the black money in the form of 500 and 1000 rupee
notes cannot replace it and deposit it in the banks as it is not having the proper
documents. In this way the parallel economy will be affected to a greater extent
which is the positive impact of demonetization.

Short run effect on money supply:

Money supply will be reduced in the market due to withdrawal of currency notes
from circulation. This effect will be the short run impact of demonetization. The
problem of money supply will be solved when the new currency notes widely
circulated in the market.

Effect on Consumption:
Decrease in money supply as a result of demonetization is also having an impact
on production and consumption. Due to decrease in money supply production
decreases and it affect the consumption negatively.

Fall in the prices:

Prices for different goods will fall with demonetization of currency. The prices of
consumer goods and the prices of real estate sector are expected to fall.

Increase in bank deposits:

The demonetization increases the deposits in current account and savings bank
account. As government announced the demonetization, the money held by the
household sector for the emergency purposes will be deposited with the banks,
which will increase the deposits in the banks.

Increase in alternative modes of transactions:

Due to demonetization the cash transactions are facing a reduction, which
increases the other alternative modes of transactions like use of credit cards, debit
cards online payments and transactions etc.

Effect on Anti-Social Activities:

Demonetization is a mighty blow on the anti-social activities. Due to the
demonetization funding of anti-social activities, smuggling can be curbed. These
anti-social activities weaken the economy. It is difficult to the anti-social activists
to recover from this. So the anti-social activities can be curbed to a greater extent.

Effect of Demonetization on bullion market:

Demonetization is expected to bring sharp changes in the prices of gold, and it is
likely to start reflecting from the first quarter of 2017. At present, gold rates are
not being announced by most of the jewelers due to dampening trade. Recently,
government also announced the exemption limits on gold ornaments as the next
giant move to curb black money. The notification comes within weeks after
invalidation of Rs.500 and Rs.1000 notes. The following restrictions have been
placed on the possession of gold:

 A married woman in India cannot keep more than 500 grams of gold in
custody
 The limits for unmarried women are 250 grams
 Male members of the family can keep only 100 grams of gold.
 The rule is not applicable for legitimate gold belongings.
Effects of Demonetization on real estate:

The unorganized sector will be largely affected by the invalidation of the higher
denomination currency notes. However, there won’t be much of a change in the
primary real estate market as property buyers make purchases either in the form
of cheques or through loans. The impact of Demonetisation may be felt in
secondary markets where most of the property dealings happen through cash. The
currency reform is likely to yield positive results in the real estate sector with
increased transparency in dealings. More opportunities can be expected from debt
investment, private equity, and FDIs as well.

Demonetization impact on equity and mutual funds:

The effect of Demonetization on equity funds is expected to be positive with

more money entering the organized system of financial transactions. If cash flow
across the nation is fully tracked, equities will strengthen significantly, as more
people will invest in equity linked savings schemes to save on taxes.

Impact on Bond market:

Surge in deposits will create more demand for government bonds and other high
rated bonds in a situation of tepid demands for credit, leading to lower bond
yields especially in the shorter end of the curve. At the same time, a reduction in
leakages in systemic liquidity will reduce the scope for open market operation
purchases in the coming days. We believe that the RBI will continue to sterilize
excess liquidity from the banking system to keep the short term rates aligned with
the policy rate.

Jan Dhan accounts:

At present, the contribution of Jan Dhan accounts in terms of deposits has been
significantly low in the overall banking domain. But post Demonetisation, these
idle accounts are witnessing a steep surge in deposits. Another positive side of
the Demonetisation is that government’s financial inclusion plan will gain
momentum with a large number of people—including those from rural areas—
opting for bank-based transactions.

E-wallets getting a major push:

With the cancellation of Rs.500 and Rs.1000 currency notes, e-wallet companies
such as Paytm, PayU India, Mobikwik, etc. are witnessing a sudden rise in their
daily transactions. Demonetisation will also have an impact on the hiring needs
and other business functions of these companies. Even app-based cab companies
are launching their promotional materials to encourage cashless transactions.

Pre-owned vehicles market:

Sales activities in the in used vehicle market is expected to decline following the
Demonetization move. This can adversely affect the original manufacturers to a
certain degree, as prospective buyers may not find it easy to discard their old
vehicles and go for a new one.

Effect of Demonetization on interest rates:

As a result of increased liquidity, RBI is likely to cut down the rates of interests
applicable on fixed deposits, recurring deposits, and the like. Since banks are sure
to accumulate huge deposits in the months that follow, the borrowing cost for
Banks will be reduced. This benefit will be extended to customers in the form of
lower interest rates on loan products.

Cement and steel industry:

A temporary decline in sales can be observed in the cement and steel sectors
which are closely linked to real estate. A closer look at the situation reveals
sizeable impact of Demonetization on construction industry—daily wage earners
being the worst sufferers. However, with an increase in bank deposits
complementing the savings rate, the short-term difficulties will be outstripped
soon.

Short-term effect on GDP:

Reduced consumer demands owing to dulled cash flow will trigger a considerable
decline in GDP figures for a few quarters. The effect of Demonetisation on the
above-mentioned industries such as construction, gold, and other secondary
markets will be reflected in GDP. But, the situation will be under control once
cash flow is normalized in these areas of business.

Effects on MSMEs
Demonetization had a lasting effect on Indians MSMEs (Medium, Small and
Micro Enterprises). Various medium and small enterprises turned towards
digitalization, however, the micro industries were affected by the worst of its
wrath. The micro industry owners were not a part of the black economy and they
were clearly unprepared for the effects of demonetization. Many micro industry
workers returned back to villages and the growth rate of these
companies went as low as 1%. The MSME sector has been recovering from the
drastic changes and its impact on the revenue, but demonetization forced the
MSME sector to be friendlier and more accommodating towards the digital
arenas and made them more accommodating towards change.

Effects on tourism:
The most difficult period of demonetisation sits squarely in the busiest season for
the tourism industry. There was a slump in hotels and associated services
bookings in the first week after the currency withdrawal. However, the premium
hotel segment has not seen any impact as bookings are mostly done in advance
and online. So the hit has mostly been confined to the unorganized sector.
Media and Entertainment
industry:
Currency ban adversely
impacted the media and
entertainment industry as it
resulted in lesser number of
viewers. The major portion of
the drop has been seen in
lower middle class. The
sudden decision of
demonetisation affected the film
industry as well. This brought
the production of films to a halt.
Also, the new
and small players in the industry
are most affected by
demonetisation.
Media and Entertainment
industry:
Currency ban adversely
impacted the media and
entertainment industry as it
resulted in lesser number of
viewers. The major portion of
the drop has been seen in
lower middle class. The
sudden decision of
demonetisation affected the film
industry as well. This brought
the production of films to a halt.
Also, the new
and small players in the industry
are most affected by
demonetisation.
Media and Entertainment
industry:
Currency ban adversely
impacted the media and
entertainment industry as it
resulted in lesser number of
viewers. The major portion of
the drop has been seen in
lower middle class. The
sudden decision of
demonetisation affected the film
industry as well. This brought
the production of films to a halt.
Also, the new
and small players in the industry
are most affected by
demonetisation. IMPACT OF
DEMONETIZATION ON TRAVEL INDUSTRY:
1. Impact on inbound and outbound travel:
Travellers to India have faced a lot of problems during their trip as these tourists
are more likely to use cash, rather than cards. Exchange of currency has become a
task and with the unavailability of the currency, it was very difficult to find a
good bargain. It is not convenient for these travellers to use their credit or debit
cards because of the exorbitant transactional charges levied by their home banks.
Many travellers also complained that their e-cards were not activated for
international transactions as well. In the same way, travellers moving out of India
are faced with similar issues due to currency exchange. Since we Indians believe
in 'Atithi Devo Bhava', a lot of foreign tourists were helped by locals all over
India.

2. Impact on domestic travel:

Indians already travelling within India have faced severe problems for obvious
reasons. Firstly, they have faced severe issues in payments because of the sudden
ban of notes. Hotels and restaurants have not been accepting the defunct
currencies and all ATMs haven’t been configured for the new notes.

3. Decrease in traffic on online travel websites:

The initial few days after the note ban have seen a severe impact on the online
travel agency’s traffic. The visits to the website had suddenly dropped initially.
However, it was just a temporary side effect.
4. Travel plans procrastinated:

Many travellers have procrastinated their travel plans due to many reasons, the
most important one being liquidity of funds. They also prioritised the bank work
before travel, due to government’s stringent deadlines on cash deposit and

currency exchange. The currency exchange has been so maddening that Indian
nationals have felt like foreigners in their own country.

5. Impact on restaurant reservation:

Restaurants have seen many cancellations and cases of no show. Restaurant

reservations in Delhi NCR dropped by 28%, in Mumbai by 7% and in Bengaluru
by 2%. This disruption has largely affected small-time hoteliers and restaurateurs.

6. Impact on airline booking:

The unexpected ban has seen a severe impact on airline booking as well, with a
lot of travellers postponing or cancelling their plans. Now with the economy
being more liquid, the bookings have picked up.

7. Drop in visitors to national monuments:

Due to demonetisation, the number of visitors to monuments of national

significance have declined. It was because most of the payments made here are in
cash. It is only understandable that even foreigners have faced issues visiting
these places.

8. Rise in digital payments:

On the other side, the travel industry has seen a lot of transactions done
electronically. However, this has been limited to places where POS and online
payments are available.
9. Small vendors have resorted to the use of digital wallets like
Paytm:

Because of lack of digital establishments, vendors have found it easy to accept

money through digital wallets. It is only the ease of paying money via a simple
phone number that has enabled this convenience.

10. Travel industry is bullish:

While most of these side-effects are temporary, it is believed that in due course
the pendulum will be back to normal. Travel is very optimistic about its pick up.

This change is expected to positively impact the travel scene. With a shift
towards digital money, we hope that it will make transactions safer for travellers.
The ease of plastic money is stimulated towards building a cleaner and safer India
for travellers.

Impact on consumer durables:

The market for white/brown goods still operates 80% on cash, thereby affecting
volumes. Makers of durable goods are launching new schemes to tempt
consumers to go cashless. Some of them are also extending discount offers and
promotions such as waiver of processing fees and installment schemes with
delayed start of payments.
Impact on Airlines:
Negative There has been a significant impact on inbound travel. Some airlines
have seen bookings go down by about 16% in the week after demonetisation
compared to the one before that. Discretionary travel has been the worst hit. Poor
sales have forced all airlines to bring forward their airfare sales—usually reserved
for the low season starting January. International traffic to West Asia and South-
East Asia, especially by traders and low-wage workers, has been hit. Business jet
operators say several charter flights have been cancelled as payments are often
made in cash.

Impact on Infrastructure:
 Negative for now, positive in long term Power demand and road traffic have
been hit. Road companies faced short-term cash flow problems because they
weren’t able to collect tolls, but things are limping back to normalcy. Wage
payment to labour can be an issue for some time, which can impact execution in
the short term

Effects On Daily Wage Workers:

A major portion of the Indian workforce is a part of the informal economy. They
use cash to meet all their expenses and demonetisation has resulted in a lot of
them losing their jobs due to unavailability of cash. According to CMIE’s
Consumer Pyramids Household Surveys (CPHS), approximately 1.5 million jobs
were lost during the final quarter of the financial year 2016-17. The estimated
employment during this period was 405 million as compared to 406.5 million
during the previous four months.

Effects On Inflation:

The Reserve Bank of India (RBI) considers the Wholesale price index (WPI) and
the Consumer Price Index (CPI) to measure inflation. Demonetisation is expected
to reduce inflation as consumers have cut down on spending and aggregate
demand has considerably fallen. According to government press releases, the
official WPI for ‘All Commodities’ (Base: 2004-05=100) for the month of
December, 2016 declined by 0.2 percent to 182.8 (provisional) from 183.1
(provisional) for the previous month. The index started rising during the month of
January and rose by 1.0 percent to 184.6 (provisional) from 182.8 (provisional)
for the previous month. This may be correlated with the availability of cash with
people which led to increased spending.

Effects On Terror Funding:

Demonetisation was aimed as a clean-up of the economy where Fake Indian

Currency Notes (FICN) would be checked. It is aimed at rendering all fake notes
of rupees 500 and 1000 useless and thus drastically affecting illegal funding of
terror groups in Jammu and Kashmir, states in the North-East, and Naxalism-
influenced states.

Effects On Political Parties:

Many Political Parties use large amounts of undeclared cash to campaign for
elections and meet other requirements. Due to Demonetisation such acts might
get restricted to an extent and parties will have to formulate new strategies .

Effects Towards a Digital Economy:

 Absence of liquid cash has led to people making transactions using cheques or
account transfers. They have also switched to virtual wallets like Paytm which
allows electronic transfer of money. All this might result in a digital economy
where transactions are being recorded and the economy has more white money.
This might increase the government’s tax revenue.

Effects on Agricultural sector:

Agriculture is referred
as the backbone of Indian
economy as it contributes about
17% to the total
Agriculture is referred as the
backbone of Indian economy as it
contributes about 17% to the total
GDP. In India more than 60 per cent of the population is directly or indirectly
depend on the agricultural or agricultural activities. Cash is the primary mode of
transaction in agriculture sector. The farmers struggled a lot at the time of
demonetisation because the saving habits as well the payment mode of farmers
were only on cash.
70% of the farmers market their products through farm markets or they may be
street vendors where cashless transaction is impossible. The farmers who
owned limited acres had not keep lump sum in bank accounts largely due to
fact of low income and no knowledge about the digital transaction, which had a
large impact on the farmers at the time of demonetisation. Demonetization
has affected every Indian, but it has hit the agricultural sector the hardest.
Because, farmers cannot buy seeds, fertilizers and other things required for their
winter crops. As results, wheat outcome was decreased in northern India. Fruit
and vegetable farmers were also badly hit. They need cash on daily basis to
purchase inputs like pesticides, fertilizers and hired labour for harvest and also
to transport and sell at urban centres. Lack of cash with farmers leading to less-
than optimal use of inputs resulted in lower yields, reduced sales, higher wastage
and lower price realization. In the scenario of demonetisation of currency, most
of the transaction going on credit basis. The input dealers (seed, fertilizer and
pesticide dealers) are increasing prices by 20-30% of the normal price as the
transactions were on credit basis. In product market also big traders and
commission agents are offering credit to farmers at much higher interest
(reaching 36% for just a month) than in normal conditions. The cash crunch
caused by demonetisation affected farmers badly who were not acquainted with
cashless transactions

Effects on Manufacturing Sector:

Demonetization of high-value currency notes in November hit the

manufacturing sector as indicated by a private sector survey. The Nikkei India
Manufacturing Purchasing Managers’ Index (PMI) fell to 49.6 in
December, the first time it hit below the 50-mark in 2016, from 52.3 in
November. A reading below 50 implies contraction while one above 50 indicates
expansion. Companies saw new work and output dip for the first time
in 2016. In turn, quantities of purchases were scaled back and employment
lowered .
The production for some industries has been impacted by the non-
availability of select raw materials (e.g., agriculture- commodities). Industries
had cut down production to adjust for the unanticipated rigger levels of unsold
finished goods across the supply chain. Supply chains had further getting
affected by the cash crunch faced by transportation vendors. Traders and
distributors were unable to pick up stock because of the liquidity crunch.
There was a decline in trade and manufacturing output as industries were
knocking by the hard cash crisis. The Purchasing Managers' Index (PMI) fell
to 46.7 in November from 54.5 in October, recording its sharpest reduction
in three years. A reading above 50 indicates growth and a reading below shows
contraction. This indicates a slowdown in both, manufacturing and services
industries. The PMI report showed also showed that the reduction in inflation in
November was due to shortage in money supply. The growth in eight core sectors
such as cement, steel and refinery products, which constitute 38% of the Index of
Industrial Production (IIP), was only to 4.9 percent in November as compared
with 6.6 percent in October.

Impact for IT industry:

This has impacted many industries and more so the IT industry in a positive way.
With minimal cash dependence across industries, there is going to be much
demand for IT adoption. IT industry stands the chance to be positively affected
by this change and will see a huge boost due to this move.

As the country moves towards more cashless way of transacting – new-age

payments like Paytm and Mobikwik, online banking and e-commerce platforms
will see an increased demand in the near future as people will show willingness
to move away from cash. This particularly will benefit IT startups and Fintech
domains that work on online payments that enable technology processes for such
companies.

Companies will realize the need for IT systems to enable the ease of online
transactions for its customers giving IT companies many opportunities. This also
could create key requirements for technology processes for tracing financial
information, eKYC form Income Tax departments. Government initiatives such
as Aadhar, Jandhan will nudge a lot of Fintech companies to enable financial
institutions and banks to adopt these facilities.

With cash transactions facing a sharp reduction, it leads to many alternative

forms of payments like online, debit and credit card transactions. Digital
transaction systems, payment apps and E wallets, plastic money and online
transactions using E banking are clearly seeing a substantial increase in demand.
New-age payment gateways like Paytm has seen a sudden spike in adoption with
250% increase in application downloads and a 1000% increase in transaction
value.

IMPACT OF DEMONETIZATION ON AUTOMOBILE

SECTOR:
The Indian government’s bold move to invalidate large currency denominations
in November has led to a severe liquidity crunch across the nation. In an
economy where trade in hard cash is deep-rooted; this move of demonetization
customarily resulted in a slowdown across several sectors. The automotive sector
is among one such cash-starved sector which is bearing this brunt and coping
with this blow. In the automobile sector, the scrapping of currency had a big
effect. The month of November saw the bookings swooping down by 50%.
However the subsequent month for December 2016 showed even more shocking
results for the auto makers in the economy. The sale of vehicles in India dropped
down to a 16 year low. In December, the Society of Indian Automobile
Manufacturers (SIAM) termed this decision of demonetization as a temporary
disturbance in the healthy industry and has anticipated that it’ll pass quickly but
evidently throwing the impact which will be deeper and might bring down a few
hopes. Automobile sales saw their biggest monthly fall in 16 years in December
after Prime Minister.

Two-wheelers:

This decision has affected the manufacture of two-wheelers. The biggest struggle
for two-wheeler sales is taking place in the villages where the bike/scooter
purchases happen majorly via cash transactions, which have now are completely
idle. Considering that only a limited amount of cash withdrawals from ATMs and
banks will take place, most of the customers have decided to wait or drop the idea
of purchasing. While some producers are preparing to stop production for few
days to reduce inventory pressure; there are companies like Honda which is
delaying production. However, other manufacturers like Suzuki Motorcycle India
Private Limited (SMIPL) have come out with cashless schemes to get some hike.
Two wheeler market leader Hero Moto Corp Ltd’s sales during the month of
December declined to 34% to 330,202 units. Motorcycle volumes at Bajaj Auto
Ltd dropped 11% to 106,665 units. Sales at TVS Motor Co. Ltd also fell 8% to
153,413 units, inclusive of scooters’ sales.

Commercial vehicles:
Commercial vehicles including Tractors have also shown a decline of 31%
approximately between the months of October to November 2016. November
was not good for the commercial vehicles and transport industry. Haulage trucks
were hit the hardest in this segment. A huge decline in the used truck market as
well, as second-hand truck sales are done almost entirely in cash.

Passenger vehicles:

Passenger vehicles and private car sales were flat comparatively.

The examples related to sales of passenger vehicles :

Passenger vehicle sales at Mahindra and Mahindra Ltd, market leader in utility
vehicles (UV), dropped 8% to 18,197 units.

Sales at Maruti Suzuki India Ltd and Hyundai Motor India Ltd fell 4% each
during the month.

Hyundai Motor India Ltd (HMIL) domestic sales got down by 4.3% in
December were at 40,057 units as against 41,861 units in the same month in
previous years.

Mahindra & Mahindra's sales in the domestic market were down 1.5% to 34,310
units compared to 34,839 in the year-ago period.

Ford India also saw its domestic sales dip by 6.04% to 5,566 units last month as
against 5,924 units in the same month a year ago.

Hinduja Group flagship company Ashok Leyland reported a 12% decline in total
sales at 10,731 units in December 2016.

Country's largest car maker Maruti Suzuki India saw domestic sales in December
at 1,06,414 units, down 4.4% from 1,11,333 units in December 2015.

The overall retail sales were down by 24-25% immediately after the note ban and
the walk-ins at showrooms were down by 40%.
INFLUENCE OF DEMONETIZATION IN THE PHARMA
SECTOR OF INDIA:

It is very well known that cash is used quite a lot in the Pharma business,
particularly as bribe. Big Pharma companies make use of cash transactions in
order to get a hold of the market. Initially, it was difficult for the small Pharma
companies and the entrepreneurs to stand a chance against the big players. But,
after the demonetization act has come into effect, the big companies are
struggling to maintain the flow of cash for bribing their clients. As a result of it,
the entrepreneurs or new players have found a new ground for competition.
Demonetization has certainly provided a lot of advantage to the new Pharma
companies.

Another way in which demonetization is going to affect Pharma sector is related

to the rates of medicines. Since most of the transactions now are going to take
place via online and banks, therefore the amount of profit made cannot be kept
hidden by the Pharma companies and stores. So, it will certainly discourage the
Pharma stores to charge more from the customers. In addition, demonetization
will also bring in the habit of maintaining legal invoices as well as bills.

We all know that how Pharma companies and distributors try to keep the
doctors happy by offering benefits on regular basis, usually in the form of gifts,
tours, etc. With the inception of demonetization, this habit of influencing the
doctors for generating prescription will no longer is going to flourish. So, it will
certainly provide the smaller companies to compete in the market in a better way.

Better regulation of the Pharma market has also become possible with the effect
of demonetization. As more fluidity will take place in banking transactions, the
government will be able to have a better regulation over the pharmaceutical
market. This will give rise to a less corrupted Pharma market. At the same
time, with the implementation of new rules and regulations, the prices of
expensive medicines will also slash down, which in turn will benefit the common
man.

So, there are tons of benefits associated with the demonetization of the Indian
Pharma sector. With the passage of time, more smoothness will be brought into
it. Overall, it will be advantageous for the customers as well as for the new
Pharma companies.

Demonetisation: How India's textile industry is tottering after

note ban:

Since the turn of the century, Bhiwandi, 30 km north of Mumbai, has wilted
against competition from Bangladesh and Vietnam. Bhiwandi holds more than a
sixth of India’s 6.5 million power looms—machines that manufacture fabric from
yarn—according to this April 2016 Economic & Political Weekly report. A
congested city of about 1.5 million, it was once a key link in India’s cotton
economy, which employs 25 million workers alone, the second-largest employer
after agriculture, according to this 2015 government report.
Bhiwandi has now been further crippled by the aftermath of the November 8,
2016, scrapping of 86% of bank notes, by value. The Indian textile industry is
already challenged by falling exports, low productivity and rising
prices, IndiaSpend reported in July 2016.
The textile industry, of which decentralised power looms and knitting are the
largest components, contributes to 2% of India’s gross domestic product.
Maharashtra, with more than 1.1 million power looms, is one of India’s largest
power loom hubs, providing direct employment to a million people in Bhiwandi,
Malegaon, Dhule, Sangli and Sholapur.
Bhiwandi is one of the key links in India’s textile supply chain–from farm to
loom–that IndiaSpend visited to investigate the effects of notebandi. Although
there are no consolidated data, we found production cuts, job losses and revenue
declines in an already struggling sector.

Impact of Demonetization on Restaurants:

Initially, restaurants owners were apprehensive of the actual impact of
demonetisation on restaurants, thinking that the curse is spelt for just a few days.
Now, a lot of restaurant owners have begun to fear the consistent dip in footfalls
even days after demonetization.

The cash crunch has hit small restaurants or Quick Service Restaurants (QSRs)
the worst. Since such eateries offer food at budget-friendly prices, i.e. typically
under Rs 500 for two, a severe drop in attendance has been witnessed at these
places.

It is not just the small restaurants, but food outlets of all types have been hit by
the effect of demonetisation. Even restaurants in Delhi, the biggest food market,
have seen a crunch. Restaurants in posh Delhi NCR locations like Gurugram
have seen a 15 percent drop in their sales.
From juice stall owners who have been observing a drop of 75 percent in their
sales to an average of 20-30 percent drop in casual and fine dining restaurants,
demonetization has trapped the entire F&B industry that has witnessed a 15-40
percent crash in sales overall.

IMPACT OF DEMONETIZATION ON MICRO FINANCE

SECTOR:

Microfinance is one of the strongest tools available to fight poverty and uplift
millions of Indians to a better standard of living. Microfinance began its journey
by providing credit to the poor. Since 1992, In India, 60% of the population
depends on the agricultural sector for their livelihoods and 30 % of the population
lives below the poverty line. This population in the rural area required micro-
credits for different purposes, such as small one's commercial purpose,
agricultural purpose and personal purpose. Microfinance institutions provide
microcredit to poor people and provide these loans in cash. The demonetization
has had a great impact in the sectors with the greatest use of liquid cash, the lack
of availability of new banknotes has affected the informal high-intensity cash
economy of low-income groups served by microfinance in the weeks following
the old Rs 500 and Rs 1000 banknotes declared illegal. Microfinance institutions,
other than banks had forced their customers to obtain new banknotes or to pay the
amounts of their loans in other legal denominations. Because of this, there was a
cash crunch in India. The Governor of the Reserve Bank of India made it clear
that the government was fully aware of the consequences of its decision and that
it was not at all a badly planned operation, as some have suggested. As often
happens, cash is the most powerful tool for financial inclusion. Anyone can
access it directly, without depending on financial or technological intermediaries
looking for transaction fee/charges. Once you have liquid cash, you can spend 4 it
every time, anywhere and in the quantity you have, without anyone being able to

track it. These are the freedoms and fundamental rights we take for granted. The
microfinance industry is cash – intensive, customers take loans in cash and they
repay loans in cash. This has become a major challenge for microfinance firms. A
sudden limited money supply in the economy has come as a double whammy for
microfinance institutions. MFIs temporarily stopped providing loans to their
customers and loan repayments have also taken a major hit... Even microfinance
institutions, which lend to women and self-help groups of small businesses, have
been hit by the sudden withdrawal of cash. The demonetization. This MFI started
to ignore the loan defaults due to demonetization. This led to a temporary
increase in the institutions' unproductive activities. It is not just the quality of
resources that are affected by this chain reaction, but also the ability to generate
income from these institutions is a big threat. Daily bets and low-income people
cannot pay their debts on time due to the lack of available money. The
mobilization of collections is the biggest challenge for retail customers after the
withdrawal of Rs. 500 and Rs. 1000 notes of the Indian economy. The institutions
of Micro-Finance are reluctant to lend money to those who do not have bank
accounts. This measure is taken by them to ensure the timely collection of
payments, but the lack of alternatives is alienating their retail customers.
Although there will not be much impact on MFIs in the long run, the current
shock of the economy is affecting MFI service providers and their customers. The
main alteration observed in this sector is during the collection cycles. This led to
an increase in the quotas and the default values. It is said that the liquidity crisis
observed in these MFIs is not structural, but cyclic. Looking at the sentiment in

the microfinance sector, the general trend reflects that of the big economy.
Micrometer (Q1 2018), a publication of the Microfinance Institutions Network
(MFIN), explains: "Because customer transactions in the microfinance sector are
laborious, Demonetization has had a significant impact on the microfinance
business in several ways, including the slowdown in growth due to the lack of
cash available for several months. “However, the situation has clearly changed
since then, and the sector has returned to preDemonetization levels, even
surpassing in comparison to some [Link] the level of loans from all
microfinance providers in Q12017 was only 0.2% higher than in Q12016, the 5
outflows of small MFIs increased by 64% those of medium and large MFIs
remained more or less the same.

EFFECTS OF DEMONETIZATION ON WOMEN VENDORS:

 Women vendors who had a bank account and Rs 500/Rs 1000 notes in cash
spent at least one or two hours trying to give away the notes

 Most of these women claimed that they had more trouble withdrawing the
money than depositing it in the bank

 Because of lack of change, the women did not buy new clothes for their
families during the period. They also avoided buying used clothes as not
everyone had enough change.

FEMALE VENDORS:

 70% Found no change in demand of things they vend despite demonetization

 68% Stated a decrease in incomes since demonetization

 50% Had no Rs 500/Rs 1000 notes with them

 65% Reported a decrease in the family’s income too

 15% Saw unemployment in family stemming from demonetization

INTERESTING REVELATIONS:
 A bank called the cops, when one of the women vendors in Ramdevnagar
who had collected some money in cash for an impending social function,
went to deposit her cash. The cops and the bank let her go home only after
she showed marriage invitation cards and convinced both that the money was
hers

 Two or three women converted their cash into gold by buying jewellery

 Some women took to buying their entire year’s grocery from big stores so as
to use their old notes. This was done to avoid long lines at banks and ATMs

 A rumour that salt and sugar will soon be in shortage led to some women
standing outside grocery stores till 11.30 pm to buy the same.

Impact of Demonetization on Foreign Education

Aspirants in India
 The effect of demonetization has been a burning topic in almost all sectors,
but it also has created a major impact in the field of Foreign Education. The
current cash crunch is has created an immediate effect for students planning
to study in foreign countries, and for those already engaged in studying
abroad. For students already abroad, India’s new monetary policy means that
it is now more difficult to exchange Rupees with financial institutions in
foreign countries.
 The education sector for international students has fallen down miserably
due to this bold move. The past few months have been a doomed phase for
all those who deal with foreign education. The ratio of students opting for
overseas education has seen a dip.
 The cost of overseas education can vary from 10 to 30 Lakhs Rupees per
annum approximately depending on the country and the program of study.
Visa approval processes for international students requires showing proof of
availability of funds for the first year of tuition and living expenses. In order
to deal with this situation, many Indian students use short-term borrowing for
visa approvals and education abroad. Most of the parents prefer 60% cash
transaction by borrowing money to sponsor the foreign education instead of
opting for bank loans with high interest rates.
 Now obviously, due to these reasons there is and there will be a huge
downfall in the students aspiring to go to foreign countries for education. A
recent report has stated the delays in student loan processing in India after
the move of demonetization. Some aspirants are of the view that the situation
will settle down in six months and if that does not happen, the foreign
education plan may get affected for a segment of aspirants. Since
unaccounted cash is largely used for living abroad, the situation will worsen
if the current atmosphere prevails even after six months.
 US and UK being the top destinations for Indian students will see a major
fall with regards to the recruitment of Indian students. India has been one of
the top international students sender and the rank may fall due to this move.
“A recent change in the Government of India policy can negatively affect the
growth of Indian students going abroad. Any major shift in the number of
students coming from India can have serious implications for international
enrollment at many American institutions.”

Demonetisation Effect’s on International Trade:

Demonetisation has given short term shocks to the economy across many sectors.
One of them is the EXIM trade of India. The sceptical economists have argued
that such a shock therapy to reinvent unaccounted wealth has given a shot in
the arm for India’s exports, whereas the imports suffer reduction too,
bringing joy for India’s balance of trade. Let us look at the short term effects
of the demonetisation scheme on Indian exports and imports. We are discussing
only the short term effects because the long term effects on the economy are very
dynamic and depend on multiple factors which cannot be predicted at this nascent
stage.
Demonetisation’s Effect on Exports:
 In the short run, the overall exports may suffer due to lower liquidity in
the market. Lower liquidity means lower purchasing capacity of the
exporters. An exporter would find it difficult to arrange the factors of
production due to liquidity crunch, leading to lower productivity and hence
lower volume of exports. All this is happening in the midst of a situation
when Indian exports became competitive in the international market due to
Chinese slowdown and lower crude oil prices.
 Exports from the primary sectors of the economy such as agriculture, animal
husbandry among others would find it difficult to market and service their
production for exports in the international market despite ample steps taken
by the Government. Liquidity crunch would force them to sell at below
market price in the domestic markets funnelling them into an enigma rural
distress.
 The informal middlemen such as traders at the borders who procure the
finished goods for export in the international market will find it difficult to
procure such goods due to unavailability of liquid cash (an economy that
works mostly on black money) and it would be difficult for them to honour
their previous commitments, which would further lower the trust on Indian
markets.
Unavailability of liquid cash in the market will bring the price of rupee
into a stable frame due to lower demand of foreign currency in the
international market. This would be a boon for Indian exports in the long
run, contain inflation in the short run and improve India’s balance of trade in
value terms.

 Lower exports in the short run would enable the competitive economies like
Bangladesh, Vietnam to penetrate deep into the international markets and
replace Indian exports as a sustainable and committed mode of supply. This
might lower down trust in Indian exports.
 Micro and small industries that thrive on export business would be the worst
hit because many of them are isolated from formal banking channels and the
liquidity crunch is bound to hit them the most.
 Exporters who thrive on procuring finished goods from a least developed
country (LDC) and exporting the same at a higher price after value addition
to a developing or developed country would find it difficult to sustain their
business due to unavailability of cash in the system and thereby lowering
down their ability of procurement.

Demonetization’s Effect on imports:

 In case of imports also, they would fall down because of usual cash crunch.
Currently, the domestic economy would start hoarding cash again (i.e. in
savings mode) and the people would not be willing to spend money freely
which would reduce demand of domestic as well as international products.
 Lowering down of imports would save India of its precious foreign
exchange, hence accelerating India’s foreign exchange currency
basket. This would mean stability of rupee and possible appreciation of the
currency.
 In case there is an appreciation of the domestic currency, it would make our
exports costlier and seize off the tag of price competitiveness of our exports
in the international markets, hence affecting the overall exports from India.
 Decrease in essential imports like plant and machinery would seriously affect
business expansion plans of Indian companies due to unavailability of
technology required to start and expand a business. Note – Plant and
machinery is one of the major component of various factors of production.
 Businesses in India that thrive on procurement of raw materials from outside
and production of finished goods inside India would suffer a major blow in
the short run due to unavailability of cash. Hence, this cash crunch might
force them for a temporary shutdown and lower productivity in the near
term.
 Again, those exporters who import finished goods from a least developed
country (LDC) to be further exported to a developing or developed country
would find it difficult to import the goods due to unavailability of cash in the
market therefore, hurting the entire chain of value addition business.
 The losing sheen of the Indian market and declining imports by India might
push few major business conglomerations outside India because of business
losses to explore other attractive markets. This would be a big blow to
‘Make in India’ dream.

Impact of Demonetization and how it boost the union budget:

Government’s preparation of union budget 2017-2018 nearing its climax and its
expectations are being raised. Predictions are made. Whatever may be the
predictions and hope for this budget cannot be analyzed without the impact of
demonetization on it. It has already affected many industries and its financial
impact has mostly been adverse for them. Communications, construction, real
estate, transport , retail, hospitals and other allied sectors have been affected by
demonetization. Many government officials have reported that revenue collection
in the form of tax had came down due to demonetization. All this will be seen in
the union budget. Lets see the adverse effect of demonetization affects the
economy in preparation of budget.
Commercial vehicles and two wheelers shows a decline in sales by over 10% this
year when compared to last year.
Retail and jewellery sector shows a poor performance which affected the
collection of factory duty tax negatively.
The government has also partially postponed its plan to hike wages of its 10
million employees and pensioners to bring down its expenses.
The sale of stake in big companies made the government to miss the revenue
target of Rs.56,500 crores big margin.
Commercial tax collection wasRs.1267 crores in October, came down to Rs.1167
crores in November and further fall in December as 1094 crores.
The government had set a revenue target of Rs.3300 crores to be collected
through excise duty. However, high authorities have predicted it is most likely to
miss due to liquor consumption in post demonetization.
In the same way, mines department is going to miss the revenue target of
Rs.6700 crores for current fiscal years by a huge margin as it has collected only
Rs.2900 crores by the end of December.
Own tax revenue collection fall by 11% in December and it may fall further in
the month of January and Febuary.
Infrastructure and other social sectors affect by demonetization, which affect the
revenue generation in making delay in further projects.
Fiscal year’s economic growth rate is expected to go below the previous year
revised estimate of 7.1%. It has estimated by the Government that only 5-10% of
cash will be worthless which raised the question of entire exercise which was
billed as a attack of parallel economy.
The GST (goods and service) tax which affects the business largely, where the
objective is to replace all the tax levied by the federal government and the states
with one central tax.
 What the economy has gained financially from this
demonetization:
During the fiscal year, the government and other related efforts have resulted in
overall increased tax collection.
VAT and CST collection till December has been reported to be Rs.8759 crores for
the ongoing fiscal year which is 13.3% higher than the collection during the same
period last year. The fiscal deficit is lying 2% which is comfortably below the
permissible limit of 3.5%.
Another positive effect of demonetization is observed as the state debt to GSDP
ratio which is currently at 14% is well below the permissible limit of 25%.

Demonetization and other schemes boost the union budget 2017-

2018:
Government launched this scheme on November 8th 2016, in order to achieve
several objectives. The major objective was to demolish the black money and
parallel economy. After the concept came in to effect, many common people
started to deposit their money in bank accounts. The main motive of
government is to avoid corruption and make our country free from all ill legal
activities. It is expected that 5lakh crore rupees will be vanished from the
system, but later on the estimate was revised to 2 lakh crore rupees. This
scheme would have to make our country a digital economy. All the government
schemes came in to effect in order to make the people to use all kinds of
electronic systems well in order to make our country a digitalized nation even
those who are living in rural areas have to know the idea of using all such cards
like debit and credit card, etc….. Impact of budget The government could add
this amount to the budget and spend on infrastructure. In this the budget
numbers remains unchanged with higher allocations matched by spending. The
government will have expenditure commission for the next year in the form of
pay commission and arrears. There can be some programmes for low income
groups. Another possibility is to increase the oil price. If it so happened there
would be pressure on the subsidy levels in the financial year 2018. States have to
get compensated for GST.
SHORT TERM AND LONG TERM EFFECTS OF
CURRENCY DEMONETIZATION FOR INDIAN
ECONOMY:
The demonetization effort being led by PM Modi in India is appreciable to an
extent but follows positive as well as negative aspects. The aim is to wash the
stock of “black money” out of the economy and get it into the banked and taxable
part of the economy.

“Cleaning of the black money is a very positive step. However, certain things will
happen as a result of this. Transactions will now begin to move to white economy
through the banking system which means there will be surge in bank deposits.
Even savings in terms of deposits will go up.”

Many renowned personalities like politicians, businessman, and so on have huge

reserves of black money either in India or abroad. All the notes of are in high –
value denominations. Now with the news of demonetization they will be forced
to deposit their black money into the banks, after submitting their PAN or Adhar
or Passport number, to get new currencies. This will help the government to catch
the culprits and keep an eye on all the fraud people who are helping them in
converting their black money into white money.

Though this move causes some difficulties for the common people because banks
and post offices do not have sufficient amount of cash. People are facing lot of
problems with the old currencies. They have to make long queues either to
deposit their money or to exchange them. Moreover the ATMs are not updated
yet. The shopkeepers and the others are refusing to take 2000 rupee note because
they don’t have sufficient amount of small denomination currencies. The
government is taking necessary steps to upgrade the ATMs and printing new
currencies at a very high speed so that it reach the people without making any
more chaos in the market.

The sudden stop in the availability of currency has led to a liquidity shock to the
people in the nation. Lack in currency of Rs.500 and Rs.1000 has disturbed
economic activities such as consumption, investment, production, employment
etc. In this context, a number of short term and long terms impacts can be seen on
the Indian economy.

Short-term impacts:

 GDP formation will be effected with the reduction in consumption demand.

Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax revenue
↓
 Certain sections of the society namely agriculture sector, small traders,
households, SME’s, daily wage earners etc. will face short term disruptions
due to absence of liquid cash.
 Money supply will reduce in the short-run until the new 500Rs. & 2000Rs.
gets widely circulated in the market.
 Negative impact on disposable income and the consumption patterns of the
people is expected.
 Less currency circulation will reduce inflation.
 Short term recession in sectors like real-estate, construction material, textile,
handicrafts etc.
 Its impact will be seen on farmers as this is the harvest time and farmers
generally deal in cash.
 Rate of capital formation growth will go down as no investments will take
place.

Long-term impacts:

 Government revenue will boost up as more earnings would be declared. The

unbanked people will move to banking like Jan-dhan contributing towards
government’s efforts of financial inclusion.
 Demonetization will set accountability in motion as service/sales tax is not
paid by people like local photographers, tailors etc. and thus their income goes
unaccounted.
 Collection of higher taxes will help in nation building like development of
roads, infrastructure, transportation and many others.
 Increase in nation developmental projects will demand more labor and other
skilled manpower which will give rise to employment opportunities.
 It will bring more business in taxation i.e. GST benefits.
 Cash in system will boost educational loans and business loans thus bringing
more opportunities.
 It will lead to better business environment, less corruption and transparency.
 Substantial increase in the demand of Digital transactions system, E-wallets,
usage of plastic money, online transactions using E-banking etc.
 Gold imports will be reduced because of the investments in gold by people as
an alternative to cash deposit in the bank.

The IMF managing director also said that the IMF sees an
upswing potential for India's growth:

On the eve of the Union Budget 2020 on February 1, the Managing Director of
the International Monetary Fund (IMF), Kristalina Georgieva, said, "The Indian
economy witnessed an abrupt slowdown in 2019 due to turbulence in non-
banking financial institutions and major reform measures such as GST and
demonetisation, but it is not in a recession." Talking about the recent growth
projections by the IMF, Georgieva said, "The Indian economy indeed has
experienced an abrupt slowdown in 2019. We had to revise our growth
projections, downwards to four percent for last year. We are expecting 5.8 per
cent (growth rate) in 2020 and then an upward trajectory to 6.5 percent in 2021."
She stated that the primary reason for the slowdown was the turbulence in non-
banking financial institutions. The Indian economy grew 4.5% in September
quarter last year, marking the slowest fall in six years. Last month, the
government data pegged 5% GDP growth rate for 2019-20, the slowest in 11
years. The Economic Survey for 2020-21 also predicted the GDP to grow
between 6% and 6.5% during the financial year 2020-21.
Describing the current scenario, Georgieva said that the ongoing economic
slowdown cannot be described as a recession. She also claimed that the
consumption in India slowed down which in turn led to the overall slowdown in
the economy. Sharing her expectations from the Union Budget 2020, Georgieva
said that the IMF is keen to see what India does to get sound macroeconomic
fundamentals that can pay off in terms of better growth trajectory.

One thing that is important for India is that budgetary revenue has been below
target, Georgieva said, adding, “The country knows that. The finance minister
knows it. They need to increase budgetary revenue collection so they can
improve their fiscal position. I said it's tight on the spending side, but I also want
to stress that there is room to improve collection on the revenue side”

CHAPTER-2.- LITERATURE REVIEW:

P. Patnaik, (2016), stated that the black money is generated through evasion of
taxes on income from lawful activities and money created from illegal activities.
In the absence of steps to control and curb the generation of black money,
Demonetization is a futile exercise. Demonetization has been effected is leading
to a riot such kind of situation in the nation. We demand that the Government
ensure that common people have immediate access to enough money to pay for
their daily needs and health emergencies. Failing which we demand the rollback
of demonetization or suspension of demonetization to enable the common person
to make adequate arrangements for daily needs. The Government role behind it,
is to undertake honest tax administration and not to treat the common person like
a criminal making him/her stand in line and filling forms to access his/her own
legitimate money.
P. Kumar Vijay, (2016), in his study reviewed that the term demonetization is
not new to the Indian economy. The highest denomination note ever printed by
the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But
these notes were demonetized in January 1946 and again in January 1978,
according to RBI data statement. The Reserve Bank of India manages currency in
India and derives its role in currency management on the basis of the Reserve
Bank of India Act 1934 and a new redesigned series of Rs 500 banknote in
addition to a new denomination of Rs 2000 banknote is in circulation since
November 10, 2016. The decision was taken to curb the illegal use of high
denomination currency which was used for corruption in the country.
Varshith J. R., (2016), in his study has stated that the move to demonetize Rs
500 and Rs 1,000 currency tenders by the union government of India during the
year of 2016 was a laudable and historic effort to clean up the decade’s long
corruption and black money. As Indian citizens we all should be proud of the fact
that we elected a government which was capable of taking such brave decision
for the long-term betterment of the country’s economy. In the present economic
situation black money has inflated prices in real estate, gold and a few other
sectors, making it a challenge for a common Indian citizen to invest. However the
government’s attempt to curb black money will significantly lower the prices in
the country.
V. Gupta (2016), he points out that the main objective of this move was to curb
the black money, corruption and fake money menace. All the people but those
who were indulged in malpractices welcomed the move. The new currency which
replaced the old one is of denomination of 500 and 2000 notes. Though the
people faced a lot of inconvenience owing to shortage of funds they did not
criticize the government for the move. Even they lauded the currently (2016)
Prime Minister of India for this big move. Prime Minister also addressed the
people many times telling the people that it was a mahayajna and they must offer
their own ahuti in it. Moreover, further said Modi was aware the hardships,
people would suffer from but he sought only 50 days for setting the things right.
He jibed at the chief political leaders who have stashed big amount of money and
now joined hand to force government to take the decision back. The most
interesting thing regarding the demonetization is that people are devising various
unique methods for transforming their black money into white one. Some of these
methods are as follows:-
➢ Depositing money in the accounts of their poor relatives and friends.
➢ Enticing the people with some percentage of money for exchange.
➢ Asking their employees to stand in the long queues in front of Banks and
ATMs for getting money exchanged.
➢ Hiring labors for some Rupees ranging from Rs 500/to 700/for becoming the
part of long queues in front of banks/ ATMs.
➢ Converting black money in to gold.
➢ Paying a few months salaries in advance.
➢ Paying back loans forcibly.
➢ Using their influence / links with bank employees and so on.
Areendam Chanda (2016): noted some shortcomings in terms of dealing with
the shortage. The study described that there were some other criticisms such as
the near term decline in economic growth particularly when the Indian economy
was doing well.
Economic Survey (2016): A number of follow-up actions would minimize the
costs and maximize the benefits of demonetisation. These include: fast, demand-
driven, demonetization; further tax reforms, including bringing land and real
estate into the GST, reducing tax rates and stamp duties; and acting to allay
anxieties about over-zealous tax administration. These actions would allow
growth to return to trend in 2017-18, following a temporary decline in 2016-17.
HDFC Bank Investment Advisory Group (2016): From an equity market
perspective, this move would be positive for sectors like Banking and
Infrastructure in the medium to long term. This could be negative for sectors like
Consumer Durables, Luxury items, Gems and Jewellery, Real Estate and allied
sectors, in the near to medium term.
[Link] and Ms Sawarkar (2016): The RBI will issue Two thousand
rupee notes and new notes of Five hundred rupees which will be placed in
circulation from 10th November 2016. Notes of one hundred, fifty, twenty, ten,
five, two and one rupee will remain legal tender and will remain unaffected by
this decision. This measure has been taken by the PM in an attempt to address the
resolve against corruption, black money and counterfeit notes.
Syamsundar Palanisamy (2016): Considering the importance and the influence
of Indian economy in the global financial markets and the growth rate of India’s
GDP, this article attempts to document the historical importance of the
demonetizations and their impact on the export and import. The study revealed
that, India will achieve a significant growth by adapting the demonetization
strategy and it will create a huge positive impact on the entire economy.
Tax Research Team- National Institute of Public Finance and Policy New
Delhi (2016): The argument posited in favor of demonetisation is that the cash
that would be extinguished would be ―black money‖ and hence, should be
rightfully extinguished to set right the perverse incentive structure in the
economy. It is imperative to evaluate the short run and medium-term impacts that
such a shock is expected to have on the economy. Further, the impact of such a
move would vary depending on the extent to which the government decides to
demonetize.
According to Ahram and Karwowski (2018), demonetization is an extreme
step and it does not happen without a purpose or neither happens in a vaccum.
However, to understand the term demonetization, it is necessary to understand
what is meant by money. While there is no universal definition for money, but it
is a known as a mode of payment. It is the lubricant that facilitates exchange.
While the monetization is the process through which money is effectively serving
as a medium of exchange, on the contrary, demonetization connotes the
withdrawal of the currency in circulation in terms of making it legally ineffective
in the transactions. Demonetization indicates that the legally banned currencies
cannot be used for customers or businesses in any form of transactions or be
stored for value in the future.
CHAPTER 3.- RESEARCH METHODOLOGY:
OBJECTIVE OF STUDY:
 To study the influence of demonetization on Banks operations in the areas of
bhiwandi.
 To find out positive and negative results of post demonetization on banking
operations.
 To determine the impact demonetization on bank employees.
 To examine the challenges and effects of demonetization.
HYPOTHESIS:
 Null Hypothesis Ho – There is a no significance impact of demonetization
on banking sector within bhiwandi.
 Alternate Hypothesis H1 – There is a significance impact of
demonetization on banking sector within bhiwandi.
DATA COLLECTION:
 PRIMARY DATA : For this study, Primary data has been collected through
questionnaire method and survey method.
  SECONDARY DATA: Secondary data has been collected through internet,
newspapers, articles, etc.
 SAMPLING UNIT:
The Samples are collected from students, working women, businessmen, and
common people.
 TARGET AUDIENCE: The questionnaire is filled out by the respondents
of the age between 18 – 70.
 SAMPLE SIZE: The total sample size of the study is 100.
 SCOPE AND LIMITATION OF THE STUDY:
The samples are collected within the area of bhiwandi.

CHAPTER 4. - DATA ANALYSIS, INTERPRETATION

AND PRESENTATION: