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Impact of demonetisation in India


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By Anirudh Saligrama for The SoftCopy



Bangalore, 17 Jan: Demonetisation is a process of paralysing legal tender of currency unit status as no longer valid. Demonetisation is generally done in case a country wants to replace its old currency unit with a new one. For example, Countries under European Union decided to opt for a new currency “Euro” by demonetisation of their respective countries old currency unit. Some of other countries that demonetised its currency unit include North Korea, Republic of Congo, Ghana, Nigeria, Zimbabwe among others.


Demonetisation in India:
In the year 1978, the Indian Government, under the Prime Minister tenure of Morarji Desai, The Government had demonetised notes of Rs 1000, Rs 5000 and Rs 10000. 

Prior to this demonetisation, the Reserve Bank of India demonetised the circulation of Rs 1,000 and Rs 10,000 notes in 1946.
On November 8, 2016, Prime Minister Narendra Modi made an unanticipated announcement that Rs 500 and Rs 1,000 notes in circulation to be demonetised. The step was initially welcomed by several citizens, however was heavily criticized by opposition party members and also staged protest against the move. 

The banks were shut for the next day and the ATM’s across the country were shut for the next two days for the process of recalibration with the new Rs. 2000 and Rs 500 notes. Further the withdrawal limit from ATM was reduced to Rs 2000 per day, which the withdrawal limit was extended to Rs. 2500 per day. 

The exchange limit in bank was Rs. 4000 per day which was extended to Rs. 4500 per day. The latest development was the exchange limit is set to Rs 2000 per day from November 18. On 31st of December 2016, Reserve Bank of India (RBI) announced that the ATM withdrawal limit is extended to Rs 4500, effective from January 1, 2017. Further, the ATM withdrawal limit was extended to Rs. 10,000 per day and bank withdrawal limit was extended to Rs 50,000 per day.

The initiative was taken in order to curb black money, stop more number of unaccounted money and to stop Islamic militants and other groups from supplying fake currency to the country, which is impacting the country’s economy. In a nutshell, Modi Government wanted to curb corruption.

The Modi government also informed that the old notes can be exchanged from banks by December 30, 2016. The government also imposed fine of Rs. 10,000 for those who were holding the old currency notes.


Impact of demonetisation in India:
Although there were several positive stories that broke because of demonetisation such as increase in digital payments, cashless transactions, increase in demand for credit card swipe machines (as reported by Bloomberg Quint) among others, there were several others impact that created a major concern across the country.


Economy Cost:
report published by India Ratings, a research firm on December 1, 2016,shows that the economic cost of demonetisation will be around Rs 1.5 trillion for FY-2017 and that the step taken (demonetising Rs 500 and Rs 1000 notes) will curb only 12 percent of the black economy. Which means, 88 percent of the black money would still remain.


GDP Growth to slide down to three year low:
The India Ratings report also lowered its GDP growth forecast for FY17 to 6.8, 97 basis points (bp), lower than its earlier projection. The analysis also states that the GDP component that would be the worst hit was the Gross Fixed Capital Formation (GFCF) and the same is expected to grow at two percent, 305 bp lower than the research firm’s earlier projection.


Consumption growth hit hard, Retail Inflation Tanks Sharper:
The report cash crunch is taking its toll on consumption demand, due to which Private Final Consumption Expenditure(PFCE) is now expected to grow at 7.5 percent, down 89bp from the reach firms’ earlier projection. 

On the other hand, the reach company projected the industrial and services GVA to grow at 5.0% and 9.2 percent, lower by 222bp and 21 bp, respectively on the consumption side from the company’s earlier projection.

report published by Edelweiss, a research company, stated that the consumer price inflation hit a record low at 3.63 percent in the month of November 2016, compared to October 2016, which was at 4.2 percent. Food Inflation also had witnessed landslide in the Edelweiss report with a decline of as much as 60 bp. While the Reserve Bank of India (RBI) kept the rates unchanged in its monetary policy review in December, 2017, the report further predicted that the RBI may keep things unchanged till its next monetary policy meeting which is scheduled in February 2017.


Additional risks for microfinance sectors:
On November 17, 2016, Bloomberg Quint reported that microfinance companies faced increase in risk of over-leveraged borrowers, according to a new report that was published by India Ratings, and that the government’s demonetisation move could get things even worse in the short-run.


Cash Crunch in ATM’s and Banks:
Several ATM’s across the country went out of cash although RBI informed that there is sufficient cash that every bank was allocated for. Many ATM’s either ended up only by having Rs 2000 notes or was completely out of cash. Maximum reports of cash crunch in Banks were also reported the initial days of December 2016, as many people headed to bank to withdraw money as salary was credited into their accounts. The news was reported by several media such as CNBC TV 18, CNN News 18 among other regional and national news television channels. The reports were also published in newspapers as banks went out of cash. There were also reports on violence in few places across the country as the banks and ATM’s went out of cash, particularly in the first week of December 2016 (the time during which salary is credited for majority of workers).


Depositing Black Money in Jan Dhan Accounts:
Reports broke by various media companies where in the Jan Dhan accounts became hyper active post note ban. Business Standard reported that the deposits have increased more than 50% in Jan Dhan accounts. An Odisha based media channel, Odisha Television Ltd., reported on police confirming that black money were being deposited in Jan Dhan accounts.


Reports of arrests of people withholding black money:
Several reports broke out on arrests of various people by Enforcement Directorate (ED) with related to black money laundering and that ED and CBI recovered several old notes.


Forceful wedding cancellations:
December, being the season of weddings, witnessed a lot of cancellation of weddings due to demonetisation. Economic Times reported on how weddings plans went in vain. Several other broadcast channels like CNN news 18, CNBC TV 18 among others also gave a ground report on how weddings were impacted due to demonetisation.


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