DEMONETIZATION

Dr. VINOSH PETER K . V

History of India’s Demonetizes CurrencyThe Indian rupee (INR) is the official currency of the Republic of India. The rupee is subdivided into 100 paise (singular paisa), though as of 2011 only 50 paise coins are tender. The issuance of the currency is controlled by the India. The Reserve Bank manages currency in India and derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. The rupee is named after the silver coin, rupiya, first issued by Sultan Sher Shah Suri in the 16th century and later continued by the Mughal Empire.In 2010, a new symbol was officially adopted. It was derived from the combination of the Devanagari consonant “ र (ra) and the Latin capital letter “R” without its vertical bar (similar to the R rotunda). The parallel lines at the top (with white space between them) are said to make an allusion to the tricolor Indian flag. and also depict an equality sign that symbolizes the nation’s desire to reduce economic disparity. The first series of coins with the new rupee symbol started in circulation on 8 July 2011.

In a major step to check undeclared black money, the Government of India on the 8 November 2016 announced demonetization of Rs 500 and Rs1000 banknotes with effect from the same day’s midnight, making these notes invalid. Apart from combating black money, the stated purpose is also to check fake currency (used to finance terrorism) and corruption. A new redesigned series of Rs500 banknote, in addition to a new denomination of Rs 2000 banknote is in circulation since 10 November 2016.

History and Background

The sudden move to demonetize Rs 500 and Rs1,000 currency notes is not new. Rs 1,000 and higher denomination notes were first demonetized in January 1946 and again in 1978.

The highest denomination note ever printed by the Reserve Bank of India was the Rs 10,000 note in 1938 and again in 1954. But these notes were demonetized in January 1946 and again in January 1978, according to RBI data.

Rs 1,000 and Rs 10,000 bank notes were in circulation prior to January 1946. Higher denomination banknotes of Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954 and all of them were demonetized in January 1978.

The Rs 1,000 note made a comeback in November 2000. Rs 500 note came into circulation in October 1987. The move was then justified as attempt to contain the volume of banknotes in circulation due to inflation.

Here is the list of Countries where Demonetization was a Big Disaster for Government

Soviet UnionIn the year 1991, Mikhail Gorbachev Government banned the currency note of Ruble 50 and 100 in Soviet Union to end black money in the country. Government expected that it will decrease the market of black money and give a proper life to common people. But this decision of Gorbachev took a very wrong turn and people started doubting on government and because of this he also faced the problem of change of government.

GhanaIn 1982, government of Ghana demonetized currency notes of Cedi 50 to control black money in the country. But after this people lost their faith from the economy policies of the country, and after few days, when time period of exchanging notes ended then crores of money were found on roads. 

CongoDictator Mobutu Sese made some changes with currency of Congo for the smooth running of economy during 90s. However, these changes didn’t give any better result of it in economy. Resultant prices of necessity goods increased and share market saw a heavy downfall.MyanmarMilitary government discontinued currency notes in Myanmar in 1987 with the same thought of end of black money and corruption. But this led political dispute among government and resultant thousands of people died because of this. And so, demonetization came to an end.NigeriaIn 1984, Muhammadu Buhari was the President of Nigeria, that time he started new currency notes with design and colour to bring economy in stable position. But it didn’t bought any changes in the economy and resultant Buhari resigned from his position. It took long 21 years for him to become President again.

North KoreaIn 2010, dictator Kim Jong-2 changed made some changes with currency to lower down the market of black money and to improve the economy of the country. But this decision of Kim Jong saw opposite face of it in economy. Price of necessity goods increased and this led people to become angry on this decision and resultant Kim Jong murdered finance minister and asked for apology.

Demonetization on Kerala EconomyThe committee to study the impact of demonetization on the state economy of Kerala appointed by the Kerala State Planning Board and Submitted its interim report. The interim report points out that demonetization have brought about a huge cash shortage, with severe restrictions on access to currency. The shortage has a significant impact in the Indian economy, which has a relatively high cash-to-GDP ratio and in which more than 90 percent of transactions are estimated to be in cash. The immediate consequence of the cash crunch has been a severe curtailment of effective demand.

A number of features of Kerala’s economy have made it particularly vulnerable to the adverse impact of the poorly planned and implemented demonetization exercise.

First, cash transactions are predominant in the state’s economy. Secondly, some of the major contributors by sector to the state’s economy are in the informal or unorganised sector, where cash transactions dominate. Millions of people in Kerala are dependent on incomes gained in the traditional sectors of fisheries, coir, handlooms, and cashew processing as well as in crop and plantation agriculture. More than a two and half million migrant workers work as wage labourers in the state. Thirdly, the three-tiered cooperative banking structure, with PACS at the bottom of the pyramid, is an overwhelmingly large part of the financial structure. Fourthly, outside of the financial structure, Kerala has a cooperative sector that is an important component of manufacturing and services activity, which banks substantially with the cooperative banking sector.

Fifthly, earnings from tourism are an important share of Kerala's state income. Lack of access to cash deals a blow to tourism.

Sixthly, remittances play an important part in Kerala's economy, and the economic constraints caused by the present policy can cause disruption in the flow of remittances. These features, inter alia, contribute to the intensity of the impact of the demonetization on the state’s economy and its people.The impact of the demonetization in terms of the cash deficit and its consequences has been particularly severe in Kerala also because of the distinct character of its banking sector, in which the cooperative sector and the Primary Cooperative Societies play a central role. Overall, the cooperative banking sector is much more active and vibrant in Kerala than elsewhere. As a result, over 70 percent of the deposits in PACS in India come from Kerala; over 70 percent of the non-agricultural loans and advances made in India are made in Kerala; and over 15 percent of the agricultural loans and advances disbursed in India are disbursed in Kerala.

Thus, the notifications issued by the Reserve Bank of India after the November 8 withdrawal of 500 and 1000 rupee notes (especially on November 14), which kept the cooperative banks and societies out of the note exchange process, was particularly damaging for Kerala.

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