CA Minakshi Ashish Katyal

INTRODUCTION; The demonetization of Rs.500 and Rs.1000 bank-notes was a policy enacted by the government of India on 8th November 2016, ceasing the usage of all Rs 500 and Rs.1000 banknotes of the Mahatama Gandhiji Series as legal tender in India from 9th November 2016.

The Announcement was made by Prime Minister of India Narendra modi in an unscheduled live televised address at 20:15 Indian standard time on November 8. In the Announcement , Modi declared that use of all Rs 500 and Rs.1000 banknotes of Mahatama Gandhi series would be invalid after the midnight of that day, and announced the issuance of new Rs. 500 and Rs.2000 banknotes of  the new Mahatama Gandhi Series.

DEMONETIZATION EFFECTS ON INDIAN ECONOMYThe government claimed that the demonetization was an effort to stop counterfeiting of the current bank notes allegedly used for funding terrorism as well as a crack down on black money in the country. The move was described as an effort to reduce corruption, the use of drug, and smuggling.

 DEFINATION: Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary wherever there  is a change of national currency.The old unit of currency must be retired and replaced by new currency unit.

REASONS FOR DEMONETIZATION: 1. To Compact Inflation

2. To combat corruption

3. To discourage cash system

4. Eliminate black money.

CIRCUMSTANCES UNDER DEMONETIZATION : As a tool for economic Surgery, it has been used elsewhere but not in the context, it has been used in India.where currency has totally  lost its value, like the Soviet Union or Weimar Republic where you had to carry sackfull of currency was abolished and new currency was created. But India is not in this situation.We have to replace the Rs 500 and Rs 1000 notes worth Rs 14.5 lakhs crore that printed over 15 years and have to replace it very quickly.That is not possible because it needs paper and ink which is laregly imported.and ink is in short supply, which is, they floated a tender few days back and take 108 days to replace old notes.and People are hoarding currency because they are not sure when the supply would be normalized.In fact our macro-economic indicators are reasonably good.But the real point is, what does this move achieve? According to prime Minister , there are two objectives.One is curbing terrorist financing and counterfeit currency and second is that black money has becomes very large and it is the source of poverty and all the problems in India but question is does demonetization overcomes these two problems As far as counterfeit notes are concerned there are only 400 per million, which is very tiny And according to RBI This is only  Rs 400 crore worth of countierfeit currency.

DEMONETIZATION EFFECT ON TERRORISM: Terrorists needs financing.so they print these fake notes and circulate it.But once they have given the money to another person, its circulating within the economy.So they have to print more and more money. That is what you have to stop.And how to stop that? Not by demonetization, because there  are state actors involved in counterfeiting. They can counterfeit the new currency notes also.Demonetization to the extent curb black money, but for limited period only.

DEMONETIZATION EFFECT ON DIFFERENT SECTOR OF ECONOMY : Demonetization will hit the different sector of economy at different level. The demonetization of the RS.500 and RS.1000 notes- the two highest currency denominations available in India will likely hit the economy hard in the short term. The surprise move is expected to grind the consumption activity in the Indian economy to virtual halt.Demonetization is not a big disaster like global banking sector crisis of 2007.

1 .LIQUIDITY ADVERLY EFFECTED : It is rightly said by Economics professor ARUN KUMAR ,One of the most widely quoted authors on black money.”IF YOU TAKE OUT 85 PERCENT BLOOD FROM SOMEBODY’S BODY AND THEN PUT FIVE PERCENT INTO IT,WHAT WILL HAPPEN TO THAT PERSON? HE WILL DIE . SIMILARLY WHEN YOU TAKE OUT 85 PERCENT LIQUIDITY FROM THE ECONOMY AND SLOWLY REPLACE IT BY FIVE PERCENT, THEN CIRCULATION OF INCOME GOES DOWN. “ Thus ,because of slow moving of cash in economy,people like small merchant,daily wage earner,who mostly deal with cash,suffer more which increase employment,poverty.We all know India has a huge and  parallel economy.Perversely,this parallel economy,run entirely on cash,has produced in term of employment,consumer demand,rural  credit,informal banking,” and money flow.This is also being projected as a Robin Hood kind of measure taking it from the rich and giving it to poor, to make poor more lasy to work and   Leave job ,result in low production and unemployment.

2.EFFECT ON INDIA’S GDP: Ambit Capital,a respected Mumbai based equity firm, has officially estimated that the demonetization drive cash, will result in GDP growth crashing to 0.5% in sound half of the financial year 2016-17.This means the GDP growth for 6 months,from October to march 2017,could decelerate to 0.5% down from 6.4% in the previous 6 months thus showing negative growth. And this disruption will also crimp GDP growth.For economics are complex things with many moving parts ,have already pointed out that the inflow of money into bank accounts will reduce interest rates and that has a stimulatory effect upon economic growth.And we are reducing the budget  deficits ,as some the black gachets taxed,which will reduce inflation—again beneficial But yet one more thing we need to consider that is effect upon the money supply.

3. EFFECT OF DEMONETIZATION ON REAL ESTATE: For real estate brokers across the country,the past few days have been very tough.”No deal are happening….Real estate is expected to be one of  the worst hit sectors as cash forms a major component in most transactions in the sector.Though initially ,in the short term,the government bold move will hit the senitement of real estate market,already realing under recession,in the medium to long term,the sector will reap the benefit of the greater transparency ushered in, by government’s” Surgical strike” against black money.As the real estate sector has significant consumption of black money ,the impact of government’s crackdown will be felt here more.There is cash component of 20 to 30 percent in property transactions,largely due to difference between collectorate rate and market rate of property.And since corruption and approvals bottlenecks are major factors responsible for price inflation,demonetization coupled with the government’s next big reform to intoduce a single window clearance system will make property affordable for the masses.In long run Price of property would come down and Common people afford to have their own property.

4. EFFECT OF DEMONETIZATION ON INDIAN STOCK MARKET: It ‘s actually impacting. Market ideally should not get impacted with this event however its work more on investors sentiments and it is chain reaction,People are moving funds to save it from the market and causes this drop more.It is dramatic and remarkable move.Normally such a measure will happen in a country in amacroeconomic crise and facing hyperinflationary problem.

5.EFFECT OF DEMONETIZATION ON AGRICULTURE:”Report of stress in agriculture have begun to appear because of demonetization.Cash is primary mode of transaction in agriculture sector which contribute 15% to India’s total output… Agriculture is impacted through the input-output channel as well as price and output feedback.India’s RS.17 lakhc crore agricultural and food market,from the mandi to the neighbourhood grocer,are at a standstill.demonetization has vaccumed liquidity from its virtually , only economy that provide livelihood to half the population.Prices have crased and Fresh  produce lies rotting.The situation indeed appears dire.Business is forecast to revive only after people in 7500 plus mandis and 600000 villages are restocked with new currency.Yet those with the courage to look beyond this doomsday, scenenario can spot the proverbial rainbow.On ther hand Farmers now have the option to store their produce in modern warehouses for market driven rent and take a bank loan against them.It is true that the small and marginal farmer who sell off their produce in village itself are hurt by demonetization.

6.EFFECT OF DEMONETIZATION ON TEXTILES SECTOR: If the rupee forex value goes down it will be good for textile exporters ,as it will lead to greater margins on export orders in progress and will make exporters more price competitive in international market.The Organised textile sector welcomed  the demonetization decision and increase the usage of electronic clearing system for making payment and would reduce the black transaction significantly.On the contrary this decision is setback for unorganized textile sector of the country who is dependent on domestic market for revenue generation.Restriction of withdrawals from bank is expected to impact the weekly payment to contractual workers in textile sector.Addtionally constraints on cash withdrawals would negatively influence the procurement of new cotton,yarns and fabric in India.

7.EFFECT OF DEMONETIZATION ON BANKING SECTOR: The biggest beneficiary from this policy will be the banking sector.The reason behind being called the beneficiary is very obvios because as lot of people are depositing cash in banks,there will be a lot of liquidity with banks.As the deposits with the bank increases so will increase the CASA,Which will increase the Net interest income and net earing of the banks.As the banks get a lot of liquidity in their hands,they will lend the people at a lower rate of interest.Hence the interest rate on borrowing will lower down.From the stock market point of view,yes,it can be good apportunity to invest in Banking stocks for long term.

ROLE OF CHARTERED ACCOUNTANT UNDER DEMONETIZATION: Chatered Accountant is a partner in National building of our country.Though decision taken by honourable Prime Minister is taken for development and in interest of our Nation but not successfully implemented and not properly planned. Here different  class of people had to suffer eventhough, they  are not curprit. The poor people who live and earn on dialy basis had to stand in bank que, not having any savings or black money,they lose employment because of close down of many factory, largely depend on production which reduce due to decrease in demand ,on other hand middle class having small saving for their need in time had to suffer.and had to deposit in banks whereas real people who hold black money ie undisclosed income had already make arrangement of disposing black money without going to bank by Investing in gold forthnight of declaration,purchasing dollar,change currency on commission basis,deposit jadhan account of employse,advance payment of wages for 6 month so large crocodile escape and small fish caught in tank.and main objective of demonetization fail to  curb black moneyholder. instead, the chartered Accountant shoulb suggest his client to pay more and more tax  for the benefit of our nation.some of important laws to be followed for the benefit of nation

1. To make direct law simple and favourable to person that each and every person is ready to pay tax and cover under income tax

2. To make client aware of importance of taxation and its benefit to nation through proper tax planning

3. To explain importance of tax planning in which different investment are made in which exemption and deduction of income are given under income tax law and nation is also benefieted through such Invesment.

4. To appoint Lokpal to bring about accountability in the system.Businessmen, politicians, bureaucrats, police and judiciary are not accountable and If you can bring about accountability of thes section then you can slove the problem of black money. So RTI for political parties is essential but they do not agree.

5. Whistleblowers are very important because they are the ones who expose the scams-be it vyapam or Adarsh etc.But instead of strengthening the whistleblowers Act it is sought to be diluted.

6.Intelligence agencies tab Hawala on daily basis but government are not doing anything about it as laws are there to take action on it aaryd it targeted the three percent of people who indulge in black money.

7. Voluntary disclosure scheme has been implemented six times in India and discontinued the scheme ever again, the reason being that  it is unfair to the honest  person.The honest businessman’s capital is rising slowly because he is paying full tax. The dishonest businessman’s capital is rising fast.so the honest s one say let me also become dishonest.,although IDS OF 2016 was also like this.

CONCLUSION: Its rightly said that It’s very basic genetic structural reforms and which means gradualism.Because reforms can’t come without gradualism.Like Chandrarashekar had to mortgage gold as that was a crisis sitation.Even  some extent wheat control orders of Indira Gandhi in1972 were passed during shortage times.Prime Minister Narendra Modiji had taken great step to eradicate black money but not properly planned result in corruption, black money holder escape, poor suffer, unemployment increase, farmer suffer, people in rural area suffer due to non availability of bank in near by area, GDP decrease, demand decrease. Hope in near future every thing will be on right path and economy become cashless .Proper knowledge should be giving regarding use of digital system among the people in rural area, more banks should be open, and importance of cashless economy.

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One response to “Demonetization Effects on Indian Economy”

  1. Ashok T Jaisinghani says:

    ★★★★★REAL GDP of India has FALLEN by MORE than 10%!!★★★★★

         In spite of the massive NEGATIVE effects of DEMONETISATION, the TALL CLAIM of Prime Minister Narendra Modi and Finance Minister Arun Jaitley that India’s GDP has increased by 7.1% is ABSOLUTELY FALSE. Such an achievement is IMPOSSIBLE and the TALL CLAIM is TOTALLY BOGUS and WRONG!!

    ★★Not even ONE HONEST TOP ECONOMIST of the WORLD can PROVE the two fellows right!!★★

       Due to the FAULTY DEMONETISATION of the old notes of Rs1000 and Rs500, there has been a reduction, or NEGATIVE GROWTH, in the GDP of India, which has been caused by the MASSIVE CONTRACTION in the TOTAL PRODUCTION of goods and services. Do Narendra Modi and Arun Jaitley believe that they had performed the GREAT ECONOMIC MIRACLE of increasing the REAL TOTAL GDP while the unlicensed and illegal businesses had closed down due to the DEMONETISATION, which is a GREAT FEAT that nobody had ever succeeded in performing in any country at any time in the world’s history? 

         However, Narendra Modi has been openly BOASTING that he had performed the world’s GREATEST ECONOMIC MIRACLE, which has given him the DIVINE RIGHT to make GREAT FUN of Dr Amartya Sen, former Prime Minister Manmohan Singh and other TOP SCHOLARS and ECONOMISTS of the world. 

    ★★Prime Minister Narendra Modi firmly believes that he is MUCH MORE INTELLIGENT than any NOBEL PRIZE WINNER like Amartya Sen, and his HARD WORK is MUCH MORE POWERFUL and MORE IMPORTANT than the work of any PROFESSOR of Harvard University. Is there anybody who can claim to be MORE INTELLIGENT and MORE HARDWORKING than Narendra Modi, who insists that he knows more than any ECONOMISTS like Amartya Sen and Manmohan Singh!!
    ★★Even the HIGHEST DEGREE, which can be given by any TOP UNIVERSITY of the WORLD, is NOT WORTH MUCH before the knowledge of this self-proclaimed GREATEST GENIUS known as Narendra Modi!!

    ★★★GDP CANNOT Increase in a CONTRACTING ECONOMY★★★

        It is absolutely CRAZY for Narendra Modi and Arun Jaitley to believe that they have succeeded in performing the GREATEST ECONOMIC MIRACLE of increasing the REAL TOTAL GDP at the same time when they have caused a MASSIVE DRASTIC FALL in the UNRECORDED ILLEGAL EARNINGS in the SHADOW ECONOMY of India. It is an IMPOSSIBLE ACHIEVEMENT based on TOTALLY BOGUS CLAIMS.

        This belief is a CONTRADICTION in itself! Such a belief is CONTRARY to FACTS because it is based on IGNORING the REALITY! How can the REAL TOTAL GDP be made to INCREASE, instead of falling, when the unlicensed and illegal businesses are DESTROYED and the BLACK UNDECLARED INCOMES are drastically REDUCED? 

        Based on the official incomes and the SECRET black incomes:

       TOTAL EARNINGS = Official Recorded Earnings
                                          + UNDECLARED EARNINGS

       REAL TOTAL GDP = Official GDP 
                                          + HIDDEN PART of GDP

         Even though there are no official records kept by the Government about the production by the illegal and unregistered firms, their undeclared earnings provide jobs and incomes to crores of people who also help in adding to the REAL TOTAL GDP, which is MUCH HIGHER than the OFFICIAL GDP declared by  the Government of India. 

         All the bribes, kickbacks, commissions and HAFTAAs, which are taken by the CORRUPT leaders, ministers, political parties, bureaucrats, judges, police officers, tax collectors and other Government officials from the contractors, businessmen, industrialists, exporters, importers, tax evaders, money lenders, land grabbers, criminals, gangsters, bootleggers, etc, can also be considered as a large part of the REAL TOTAL GDP. 

        All the undeclared and illegal contracts, black marketing, hoarding, profiteering, kidnapping, human trafficking, smuggling of drugs, arms and ammunition, etc, contribute to the REAL TOTAL GDP. 

         Even the undeclared capitation fees paid to the schools, colleges and universities, and the undeclared DONATIONS given to the TEMPLES and other RELIGIOUS PLACES, form a part of the REAL TOTAL GDP. 

         While determining the REAL TOTAL GDP, the ECONOMISTS should NOT be BLIND to REALITY and IGNORE FACTS due to any issues of political propriety, morality, ethics, etc. It is NOT the DUTY or responsibility of the HONEST ECONOMISTS to IGNORE the production of goods and services in the BLACK SHADOW ECONOMY. For the RENOWNED ECONOMISTS, political propriety, morality, ethics and legalities CANNOT be relevant when they are calculating the REAL TOTAL GDP. Why should the REAL TOTAL GDP be falsified while determing its true value? 

    ★★★Amartya Sen should REDEEM his REPUTATION by EXPOSING the BOGUS CLAIMS of Narendra Modi★★★

         Due to the sudden FAULTY DEMONETISATION ordered by Narendra Modi, there were massive losses of jobs and incomes, which were caused by the closing down of unauthorsed businesses of the unlicensed firms and unregistered companies. Many persons committed suicides or died suddenly due to the unbearable massive losses of money and jobs in unauthorised businesses.  

    ★★About 40% of the incomes in India are believed to be from the SHADOW ECONOMY. Even if half of the SHADOW ECONOMY is destroyed due to the DEMONETISATION, there will be about 10% to 20% fall in the REAL TOTAL GDP of India.★★

         Nobel Prize Winner Amartya Sen should redeem his prestige and reputation by writing about the huge fall in REAL TOTAL GDP due to the massive losses suffered by the unregistered or illegal firms, which got disrupted by the sudden DEMONETISATION,
    as their businesses were mainly based on cash transactions. They could not do anything as they were conducting unauthorised businesses without proper licences, and as they were NOT paying any taxes or all the taxes. Eminent ECONOMISTS like Amartya Sen must BOLDLY, HONESTLY and FEARLESSLY write about the DRASTIC FALL in the REAL GDP due to the massive losses in the PARALLEL or UNDERGROUND  ECONOMY.

    ★★What was the PURPOSE of DEMONETISATION?★★

         If DEMONETISATION did NOT CAUSE any FALL in the GDP by destroying a large part of the SHADOW ECONOMY and by causing the drastic fall in the BLACK INCOMES, then what was the PURPOSE of DEMONETISATION by the SMART FELLOW called Narendra Modi? 

         How could there be 7.1% growth in the GDP, when the TOTAL PRODUCTION, both legal and illegal, had FALLEN DRASTICALLY in the country, resulting in heavy losses in unauthorised businesses and also the loss of MILLIONS of JOBS in such businesses? How can the GDP increase in a CONTRACTING ECONOMY? 

         The FAULTY DEMONETISATION must have started the RECESSION, which is still continuing and can become WORSE!!

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