ABSTRACT The discontinuity of a particular currency fromcirculation and a replacement of it with a new currency is calledDemonetization. The government has declared demonetization across the countryon 8th November 2016. It is one of the most trending topics which occupied thecolumns of Indian newspapers in 2016. During November 2016 a bold step wastaken against the black money holders in India. Initially, implementation ofdemonetization in a populous country like India was not a cakewalk for thegovernment. The sudden declaration of demonetization in the country has created lots of chaos andconfusion among the common people of the country, but gradually everythingbecomes normal. It occurs when a particular form of money is pulled fromcirculation and a new note or coin is introduced in the market as a replacementof withdrawn form of money.
The government has different objectives behind thisdemonetization. But much before the announcement of demonetization, thegovernment has taken few steps in this direction. As the first and foremoststep government had requested the citizens to open free bank accounts under JanDhan Yojna. Again the government has asked the people to deposit theirmoney in Jan Dhan account and do their transactions through sparing moneyprocedure or proper banking procedure.
Thereafter the step that the governmentstarted was an obligation declaration of the compensation and had given October 30, 2016, due dateconsequently. This can be considered a major step by the government in theprocess of demonetization. Through this procedure, the government oradministration could tidy up a gigantic measure fund undeclared wage Regardless,there were various who still aggregated the dim money, and remembering theultimate objective to deal with them.Keywords: Demonetization, Currency, Bank INTRODUCTION:Demonetization in general is the act of stripping a currency unit ofits status as legal tender. It occurs whenever there is a change of nationalcurrency. The current form or forms of money is pulled from circulation andretired, often to be replaced with new notes or coins. The firstand foremost objective is to attempt to make India a corruption free country.
On the other hand demonetization in India is also a very well planned step ofgovt of India to earn proper tax from the citizen. Through demonetization the old currencies replaced by the newcurrency or a currency circulation is blocked. There are multiple reasons why acountry demonetizes its currency; some reasons include checking the inflationto curb the corruption and to promote the cashless transactions. Recently theIndian government decided to demonetize the biggest demonetization notes (i.e.500-1000 rupees note) is steps has been declared as a master stroke for theIndian economy by the various experts . This is not the first time in that Indiathat demonetized its currency, earlier it was done 1946 with the complete banof Rs.
1,000 and Rs.10,000 notes to deal with the unaccounted money i.e. blackmoney. Second time it was done in 1978 by the government of India. REASONSFOR DEMONETIZATION:There are multiple reasons why nations demonetize their local units ofcurrency:To combat inflationTo combat corruption and crime (counterfeiting, tax evasion)To discourage a cash-dependent economyTo facilitate tradeIn2016, the Indian government decided to demonetize the 500- and 1000- rupeenotes, the two biggest denominations in its currency system; these notesaccounted for 86% of the country’s circulating cash. With little warning, thegovernment announced to the citizenry on Nov. 8 that those notes wereworthless, effective immediately – and they had until the end of the year todeposit or exchange them for newly introduced 2000 rupee and 500 rupee bills.
MERITS OFDEMONETIZATION:1. Increases Deposit Base & Savings:Currency demonetization increases deposit base and savings as individuals willdeposit more and store less physical currency at home.2. Improves Monetary Transmission & ReducesLending Rates: Currency demonetization, there will be a movement of currencyfrom individuals to banks and Financial Institutions. The rise in deposit rateswould put all of this money into circulation.
The cost of funds will reduce forBanks/ FIs, and the overall lending rates for various trade, business andcommerce activities would reduce.3. Creates Room for Monetary Accommodation:Improved monetary transmission will be space for a far more liberal monetarypolicy, which would result in a further reduction of interest rates in thefuture. Most analysts are already projecting a lower repo rate in the comingmonths.4. Direct Boost to The Jan Dhan Yojana :Jan Dhan Yojana accounts have a very high number of dormant or unused accounts.These accounts have suddenly seen a spike in usage, and individuals who’ve hadthese will finally start using them and it might help them in inculcatingbanking habits.
5. Added Support for Government Finances:The Government will significantly benefit from the additional cash that ispushed into the economy. There will also be a much higher collection of incomeand other taxes by the Government.
6. GDP Growth Potential: More than shortterm benefits, there is an angle of long term GDP growth as well, which weshould be able to observe over the next few years. This move could positivelyimpact the GDP figures of our economy by around 2018.7. Long Term Benefits: A few mightcriticize this move at present, but it will bring multiple long-term benefitsfor the nation’s economic health. This entire exercise might be slightlydiscomforting, but demonetization will definitely have long-term benefits andimplications. DEMERITSOF DEMONETIZATION:On the other hand, the critics ofdemonetization have a completely different opinion about the effect ofdemonetization on the Indian economy.
· The biggest disadvantage of demonetization has beenthe chaos and frenzy it created among common people initially. Everyone wasrushing to get rid of demonetized notes while the inadequate supply of newnotes affected the day to day budgets of citizens. Banks and ATM’s witnessedlong queues while small businesses suffered temporary financial losses. Thesituation was even worse in rural India where people struggled to exchange andwithdraw cash due to lack of enough number of banks and ATM’s in their vicinity· Destruction of old currency units and printing of anew currency units involves costs which has to be borne by the government andif the costs are higher than their benefits then there is no use ofdemonetization · Another problem is that this moved the targeted theblack money, but many people who have not kept cash as their black money androtated or used that money in other asset classes like real estate , gold and so on where not affected by thedemonetization. It turned out that more than 99% of demonetized currency comeback to the RBI and was accounted for. Therefore, the government’s claims aboutblack money fell on its face.· Many poor daily wage workers are left with no jobsand their daily income has stopped because employers are unable to pay theirdaily wage.POSITIVEIMPACTS OF DEMONETIZATIONFor banks:Increase inCASA deposits, CASA means large amount of deposits are in current and savingsaccount.
This way the banks get funds at no or very low cost (interest). Banksdo not pay interest on the current account deposits and pays a very low % ofinterest on savings account deposits. As the deposits with the banks willincrease so will increase the CASA, which will increase the Net Interest Incomeand the Net earnings of the banks. However, this will not be abnormally highsince the RBI has increased the CRR in the short term to mop up some of thisliquidity. As the banks get a lot of liquidity in their hands, they areexpected to enhance the borrowing cycle by lending the money at a lower rate ofinterest and hence the interest rate on borrowing will lower down.Forpeople:One ofthe biggest demonetization benefits of this move is that it is going todrastically affect the corrupt practices. People who are holding black money incash will not be able to exchange much as they would be in a fear of gettingpenalised and prosecuted by the authorities.
Enemies of the countries which areinvolved in counterfeit currency and terrorism will not be able to continue itfurther for quite some time at least. The smuggling of arms and dealing withthe terrorist will not sustain further as all of the money will be on recordnow.NEGATIVE IMPACTS OF DEMONETIZATION For BanksTherewill be an added replacement costs of currency. The increased cost of operatingATMs need to be refilled more often and also it will be a large burden ofmarks.
Initially , it is very difficult to create a cashless society as morethan 50 percent of Indian population is not well versed with card transactions.Also for these initial months, it will be very difficult to make cashtransactions of a higher amount. But the government is taking steps to improveliquidity into the system and reduce inconvenience as much as possible.For people:Theliquidity squeeze caused by demonetization will be negative across sectors withhigh level of cash transactions. Real estate, jewellery, retailing,restaurants, logistics, consumer durables and luxury and luxury brands, cementand some segments will be facing short term instability. Those companies withhigh level of debt will face more pressure and can face loan defaults. Conclusion: It could be clearly seenthat demonetization is the urgent needs of the hour in India.
In order toenhance the money value and regulation of black money circulation, the effort takentoward demonetization is very essential in Indian context. Accountable money transaction is mostimportant aspect of monetary reforms , due to lack of proper accountable system; one can find accumulation of incomeand wealth in the hands of a few individuals . This situation result in incomeinequality among different segments of population. Demonetization is welcomedfor efforts of the government on the part of the honest tax payers. In India, thegovernment employees are the honest tax payers as their tax is dedicated fromtheir salaries itself on the other hand a large number of industrialist andbusiness men are not the perfect tax payers and they evade tax by utilizingvarious loop holes in the legal systems. The income generation from industrialand business activities regulated.