DEMONITISATION and 1000 will not be under
DEMONITISATION Demonetisation of a currency is amonetary step under which the status of an announced unit is declared invalidunder legal tender.
This is generallyimposed when government issues new currency to replace the old units.On 8th November 2016government of India announced that notes of Rs500 and 1000 will not be underlegal use and they will be ceased under legal tender. That is notes will now beonly accepted on the places declared by the government. The notes can be changed in the banks as wellas post offices and can be used in petrol pumps, hospitals and other emergencyplaces. Date given to exchange old notes was till 30th Dec 2016. This was not the first time whendemonetisation happened in India, it happened earlier in 1946 when governmentbanned Rs1000 and 10000 notes to deal with un accounted money or in easierwords black money and before 2016 it happened in 1978 when notes of Rs5000,1000 and 10000 were demonetised by Moraji Desai.
Major aim of demonetisation in 2016was to deal with unaccounted money in India as well as outside India as well asmaking India a cashless economy.India is the second largest countryin the world in which 98% of transaction by the consumers is done by cash.The reason behind abolishing onlythousand and five hundred notes was because they had more share then othernotes. For example only Rs500 and 1000 notes were having 87% share of the cashand these notes were more in circulation and were most unaccountable.
Few more reasons of demonetisationcould be1) BlackMarketing2) Currencystorage3) Fakenotes in circulation4) CorruptionAbolishment of the notes of 500 and1000 notes acted as a tight slap on the black money holders. Because people whokept huge amount of unaccounted money in state of hard cash were in the stateof complete loss. The hard cash was no longer useful as it was earlier and wasturned immediately into pile of trash as he/she had to show the accountstatement, identity and description of hard cash to get it useful. On thatnote, if he/she fails to show the description or give the details, it willresult into 200% penalty or imprisonment on the situation.
People who were in the fakecurrency rackets, demonetisation turned to be a death nail to them as most ofthe fake currency was in the form of 500 and 1000 notes. All these unethicalrackets were busted at an extent. Hence, the message was clear to keep theirnotes to themselves.Huge sums of money especially inhard cash in form of 500 and 1000 notes were used to fund terrorism likeIslamic terrorists and Naxalites. After the abolishment the organisationssuffered from lack of funds and resulted attacks in state of Mizoram.
The funds were mostly used in trading of armsand ammunitions, buying arms and other facilities was a very difficult and inin sort of impossible task for them.After demonetisation onlinetransactions and transparent transactions like using of cheques , demand draftsetc were also increased. Therefore financial intelligence bureau was moreactive. It resulted in more transparency in real estate sector of India whichis one of the biggest money yielding and lending sector of India. Huge donations taken by educationas well as government sectors were also on a threat because these donations aretaken in cash but, now the question arises – What will be the solution of thedonations which are there in form of foreign money and crypto currency as wellas gold and diamond trading or in straight words laundering? It is practically or eventheoretically (in my observation or perception) impossible to run a cashlesseconomy whereas Indian government is planning to 100% cashless economy. Our government thinks that it will result ingreat transparency and our economy will be more digitised.
Government also kepta low withdrawal limit to encourage people for using more ebanks and cards.Government also suggested to enhance the use of Paytm which was linked with Kycof Adhaar Card, but on that black money or unaccounted money in form of liquidor ecash will increase because it is easier o carry one lakh in phone or thento carry in form of cash and these banks are not trustworthy because their arelot of cases registered in police stations against Paytm. Transferring moneyfrom other person’s account made much easier then it was.500 and 1000 notes were also used tocarry out illegal transactions across borders and money smuggling was alsoincreasing.
Abolishment of these notes destroyedthe bricks of hawala transactions but the government was seeing one side of thecoin, they issued 2000 notes now andThey forgot account to account hawala transactions. Hence again it was a bigmistake made by them keeping this in mind. Terrorism funding was increasedafter issuing these notes. A common man who had a lot ofworries in his life and had lot of work in home or office had to rush to thebank or any other place just to change his notes. Imagine the situation of aworker who just got his last month’s wage in a big note and his contract isover. He had to rush to the bank to changethe note and don’t work so that he could afford his necessaries. People who nothingto do with problems had to face the other problems.
And their are people like Mr. Mukesh Ambaniwho sponsored free internet for whole India to cover his black money. That’s great! The currency was sucked out themarket along with Trumph’s victory the situation of the stock market turned completelyclumsy.
General trade was affected because sensex lost 1600 points in one go.There are ministers and administratorsin our country, but the ministers in our houses are much bigger and they arethe housewives. Indian housewives are in a habit to save money secretly so itcould be used later in an emergency or urgency. That money was of no use afterthe abolishment and the ladies were given a higher limit to exchange the oldcurrency, so many people made their money in notice illegally using this noteas a shield.Demonetisation provoked short terminflation in the country as well. Due to the shortage of money in market itlead to a short term cost push in the market.
The price of gold was hitting the roofs and the costs of basicnecessities were on a peak. December isa marriage season in India and it was difficult for the families who hadweddings and people who had marriages in homes just had to submit a card inbanks and they could exchange whatever the amount they want, and this was againa good decision made by the government so that the black money holders who gavethe party funds, etc could exchange their amount easily. Expectations of issuing of new 2000and 500 notes and banning the old notes of 500 and 1000 to remove the blackmoney as the owners will not be able to exchange the money. They forgot thatwhen it comes to innovation Indians are the top rankers! The government left alot of techniques and cons in their demonetisation project to completely flushout the black money or unaccounted money; I think the reason behind this is thepeople who are the part of the system and want to be safe out of this step bythe government. When older notes were incirculation the cash flow was going alright but, after the old notes beingscraped there was a difficulty and in easy words impossibility in the moneysupply on a short run. To the extent that black money (which is a counterfeit)does not re-enter the system, reserve money and hence money supply willdecrease permanently.
However gradually as the new notes got circulated in thesystem and the money will pick up. But the issuing of 2000 notes lead to newproblems, and talking about black money and unaccountable money it is increasedbecause carrying or hiding a 2000 note is easier than that of 1000 note (commonsense). On an extent overall demand wasalso affected. The demand in consumer goods, real estate or property, gold andluxury goods and automobiles was impacted. All these sectors faced a moderationin demand from consumer side; they owed a significant amount of cashtransactions. The price level was expected to golow but they got risen up. Anyways supposeif it went down then consumer goods would have been fallen only marginally dueto moderation in the demand as use of e-banks, cheques and cards would becompensated for some purchases. Prices in real estate sector were fallen aswell as major transactions in this sector are done in cash.
GDP was impacted because of theabolishment of the value there was a reduction in the consumption demand but,the recent rise in the festive demand was expected lower ten it was.Moreover, this expected impact wasonly an expectation. It came out totally different and opposite.
Cashtransactions were at minimal usage and the other alternative forms of paymentwere on the surge in demand and also more transparency in the finance sector. Demonetisation slowed down India’s growth ratein short term and, people had less money in hands so it also slowed growth inmedium term. The growth rate was hampering as the demand was low but when soonpeople got money in their hands markets were back on track. It was said that it is beneficiaryas the government will have more revenue but I observed it turned out as anelectric shock for the economy of India as businesses and common peoplesuffered more and debts were increasing because of shortage of currency in theeconomy, if this stage was continued for a longer time period economy mighthave ended in a state of economic coma.Demonetisation temporary decreasedliquidity in the economy of India because India is cash based economy.
Decreaseddemand was faced because of decreased liquidity and resulted in decreaseddemand. Sudden demonetisation resulted in panicking the citizens and it alsoresulted in people saving more money as cash.The advantages were dominating andit worked well in long term interest of our country. If government took allnecessary steps and precautions for the currency’s smooth flow in exchanging. Itmade a massive change in our economy and to cover the loss from it thegovernment passed another project named GST.
I congratulate the government ofIndia and the master brains of administration and ministry who put this idea inworking. ThankYou!AbhinavRathi MBA 3c(AUD 7928)