NEW ECONOMIC POLICY - PART 8 (DEMONETISATION)

CHAPTER – 3

ECONOMIC REFORMS IN INDIA SINCE 1991

PART - 8

DEMOMETISATION

Demonetisation - It is the process of stripping a currency unit from its status as legal tender in the country. Demonetisation results change in national currency. The present currency in circulation is pulled off and new currency is circulated.

Legal tender – All coins and paper currencies, which cannot be denied to accept. If any person is denying to accept, legal action can be taken against the same. (Coins of denomination 50 Paise, 1, 2, 5 and 10 Rupess and All currency notes i.e. Rupees 1, 2, 5, 10, 20, 50, 100, 200, 500 and 2000 are legal tender in India)

 

Types of Demonetisation - 

(i) Total Demonetisation

(ii) Partial Demonetisation

 

Purposes sought by Demonetisation –

(i) Stripping corruption

(ii) Combating inflation

(iii) Curbing counterfeit currency

(iv) Combating tax evasion

(v) Increasing performance of economy

 

History of Demonetisation in India - 

(i) On 12/01/1946 all notes of denominations of Rs. 500 and Rs. 1000 were demonetised with a time limit of 10 days to exchange demonetised notes. Its purpose was to catch tax evaders.

 

(ii) On 16/01/1978 all notes of denominations of Rs. 1000, Rs. 5000 and Rs. 10000 were demonetised with a time limit of 3 days to exchange demonetised notes. Its purpose was to catch corrupt leaders and officials in predecessor governments.

 

(iii) On 08/11/2016 all notes of denominations of Rs. 500 and Rs. 1000 were demonetised with a time limit of 50 days in exchange demonetised notes from banks and some essential service stores.

 

Process of Demonetisation of 2016 –

(i) On 8 November 2016, the Government of India (Prime Minister) announce that the demonetization of all Rs. 500 and Rs, 1000 banknotes of the Mahatma Gandhi series.

(ii) Rs. 500 (new series) and Rs. 2000 notes were introduced.

(iii) 50 days time limit has given for exchange of demonetised notes.

(iv) Limits were put on exchange per day and withdrawal per day (and week) during this time.

(v) Mixed reaction by public but strongly criticized by Opposition.

 

The specified Bank Notes (Cessation of Liabilities) Ordinance 2016 was issued on 28.12.2016.

Again on 01 March 2017, for those people who are staying outside of India from 09 November 2016 to 31 December 2016, The specified Bank Notes (Cessation of Liabilities) Ordinance 2017 induced and its replaced the old one.

 

Time  Line –

Exchange of Demonetised Notes –

08 – 13 November 2016 –  Rupees 4000 per day

14 – 17 November 2016 – Rupees 4500 per day

18 – 25 November 2016 – Rupees 2000 per day

 

ATM Withdrawal

08 – 14 November 2016 – Rupees 2000 per day

15 Nov. – 31Dec. 2016 – Rupees 2500 per day

01 Jan. 2017 – 15 Jan. 2017 – Rupees 4500 per day

16 Jan. 2017 – Rupees 10000 per day

 

In addition to this, Fuel, Hospitals, railways, Airlines, Ration Shops allowed to accept demonetized notes till 02 Dec. 2016.

 

EFFECTS OF 2016 - DEMONETISATION

 

1. Pushed India towards cashless economy  - The push for digital payment was one of the stated intention of demonetization. Due to shortage of cash there is jump in digital payments in November and December 2016. During shortage of cash digital payments and means of digital payment increased but after availability of cash it had been modest. 

 

2. Bank Notes in Circulation- On 28.10.2016, total bank notes in circulation were valued at Rs. 17.77 lakh crore. Before demonetization there were bank notes of Rs. 17.97 Lakh Crore in circulation. The demonetized bank notes constituted 86.40% of it.

28 October 2016	8 Nov. 2016	March 2018	Sep. 2018	March 2019
17.77	17.97	18.03	19.50	21.14

 

3. Brought an end to black money – The government estimated that approximately 3 lack crore (20%) of the demonetized notes would be permanently removed from economy. But as per RBI report in 2018, 99.3% of the demonetized notes (15.30 Lakh Crore out of 15.41 Lakh Crore) were deposited with the bank system. Only Rupees 10720 Crore were not deposited with bank system. The government failed to achieve this objective.

 

4. Counterfeit Bank Notes – Counterfeit currency is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. After demonetization, there was an increase in the number of counterfeit Rs. 100 and Rs. 50 notes. In 2016-17 there is an increase in the number of counterfeit Rs. 1000 and Rs. 500 banknotes. In 2017-18 there was an increase in counterfeit Rs. 2000 and Rs. 500 banknotes (new version).

 

5. Tax Collection / Raised Tax Payments / Increase Number of Tax Payers –

* Income tax collection increases due to Income Disclosure Scheme 2016.

* The tax-GDP ratio has increased due to expanding tax base.

* Number of tax return filing increases but most of them were from salaried and non-business class.

* An analysis shows that there is no substantial increase in number of tax payers and direct tax collection due to demonetization.

 

6. Curbed terrorist funding  - Initially there was a decrease in the activities and attacks, which was attributed to lack of finance. The surrender rate reached its highest. The activities returned within few months. 

 

7. Transportation – Due to non availability of cash, many trucks stranded at highways. Later on Ministry of Highways announced suspension of toll tax up to 2^nd December and acceptance of demonetized Rs. 500 banknotes till 15 December 2016.

 

8. Stock Market – The stock market dropped to a six month low in the week following the demonetization. It had a negative impact on stock markets.

 

9. Industrial Output – There is a reduction in the industrial output due to shortage of cash. The growth in eight core sectors such as cement, steel and refinery products was only 4.8% as compared with 6.6% in November 2016.

 

10. Agriculture – Transaction in the agriculture is heavily dependent on cash and were badly affected by the act of demonetization. The shortage of cash led to plunge in demand which in turn led to a crash in the prices of crops. Farmers were unable to recover their cost.

 

11. Real GDP Growth Rate – Real GDP growth rate decreases from 8% in 2015-16 to 7.1% in 2016-17 and 6.5% in 2017-18.

 

12. Employment – There was a loss of jobs and a decline in wages due to demonetization, particularly in the unorganized an informal sector and as well as in small enterprises.

 

13. Cost to Banks – Spending on printing notes and dividend to the government.

Year	2015-16	2016-17	2017-18
Cost of Printing	3421	7965	4912
Dividend	65876	30659	50000

 

14. Welfare Schemes – Demonetisation affected various social welfare schemes especially to the Mid Day Meal. 

 

15. Deaths – Several people were reported to have died from standing in queses for hours to exchange their demonetized banknotes.

 

REFERENCE VIDEO

New Economic Policy / Economic Reforms 1991 – Part 8

(Demonetization)

https://youtu.be/N16Iv6ixpL4