DEMONETIZATION 2016& ITS IMPACT

Akarshan SananAnshita BansalAgostinho Ntawle JuniorAkshat Kumar

WHAT ALL WE WILL COVER UP TODAY Demonetization in the past

Background

What is demonetization and how was it introduced ?

Impact and consequences

Reaction , support and criticism

Conclusion

DEMONETIZATION IN 1946 & 1978The first instance was in 1946 and the second in 1978 when an ordinance was promulgated to phase out notes with denomination of Rs 1,000, Rs 5,000 and Rs 10,000.

In 1946, RBI governor was skeptical of government’s move to strip currency of legal tender characteristic at short notice.

s 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

DEMONETIZATION IN 1946 & 1978The 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 an attempt to contain the volume of banknotes in circulation due to inflation.

Old Note Rs 10 000

BACKGROUND

BACKGROUND Corruption is one of the major issues in India today, an evil so deeply rooted in our country that eradicating it is as humongous a task as building a nation from scratch. It holds back our economy, widens the gap between rich and poor, intensifies equitable distribution of income, funds terrorism, etc, among many others. Needless to say, it needs to be done away with as quickly as possible.

However, it’s not as easy a task it seems. Indian still rates 76 in the global corruption perception index, out of 168 countries. Being as big an obstacle to our success as it obviously is, it was high time a drastic, if even painful, method was taken to remedy the situation.

BACKGROUND If hindrance of growth and national dignity aren’t reasons enough, consider this- corruption has been proved to fuel terrorism. Patrons may use secret companies and transfer funds illegally in order to support organized crime and terrorist groups. For example, Al Qaeda has allegedly been known to set up a charity as a front for their finances. Traffickers, corrupt politicians and terrorists need ways to raise, move, conceal and spend money. The shadows of corruption provide them with the perfect opportunity.

In 2016 itself, there were six terror attacks in India. The citizens have become restless and merely scaring the terror organizations is not going to help for long. The best solution is to cut off the root of the problem, i.e., stop the funding. No funding, no arms, not terror attacks. Simple.

BACKGROUND Even keeping that out of the picture, it is important to understand that black money constitutes a major part of the GDP in India. The situation doesn’t seem so dire because black money acts as a catalyst that keeps the demand going. However, in reality, the problem is that investment is not taking place in the economy and the rate of growth of capital formation is down. The only way to bring this up is to divert more funds into investments which will happen when the cost of capital comes down.

By banning the 500 and 1000 rupee notes, all three major problems were aimed to be tackled at once- parallel economy, counterfeit currency in circulation and terror financing.

WHAT IS DEMONETIZATION ?

WHAT IS DEMONETIZATION ? Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as a official mode of payment. According to Investopedia, demonetization is the act of stripping a currency unit of its status as legal tender

WHAT WAS THE REASON ?

WHAT WAS THE REASON ?The reasoning given by our Prime Minister was:

1. To tackle black money in the economy. 2. To lower the cash circulation in the country which

"is directly related to corruption in our country, " according to PM Modi.

3. To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India.

4. The move is estimated to scoop out more than more than Rs 5 lakh crore black money from the economy, according to Baba Ramdev, a staunch Modi supporter.

WHO ALL NEED TO WORRY ?

WHO ALL NEED TO WORRY ?Not the honest taxpayers. Even if you have Rs 10 lakhs as cash with you and you can prove its legitimacy, you don’t need to worry.

The surprise move by government is a disaster for people who have accumulated lakhs and crores of unaccounted cash under their pillows and mattresses. The winter is coming and these worthless pieces of paper can provide the corrupt some ephemeral warmth.

IMPACT & CONSEQUENCES

IMPACT & CONSEQUENCES Since our economy is heavily dependent on cash, as only less than half the population uses banking system for monetary transactions, demonetization has hit trade and consumption hard. With people scrambling for cash to pay for goods and services, the move is likely to take a big toll on the country's growth and output during the current fiscal. Consumption makes up for around 56% of India's GDP , hence, a drop in spending will pull down growth. The current step could also lead to behavioural changes in households' savings and their consumption pattern, say economists.

IMPACT & CONSEQUENCES The liquidity squeeze caused by demonetization will be

negative across sectors with high level of cash transactions. Real estate, jewellery, retailing, restaurants, logistics, consumer durables and luxury brands, cement and some segments in retail/SME lending space will be facing short term instability. Those companies with high level of debt will face more pressure and can face loan defaults.

Secondly, there will be an added replacement costs of currency. We cannot ignore the increased cost of operating ATMs need to be refilled more often and also it will be a huge burden on banks. Initially, it is very difficult to create a cashless society as more than 50 percent of Indian population is not well versed with card transactions. Also for these initial months, it will be very difficult to make cash transactions of a higher amount. But the government is taking steps to improve liquidity into the system and reduce inconvenience as much as possible.

IMPACT & CONSEQUENCES One of the biggest benefits of this move is that it is going to

drastically affect the corrupt practices. People who are holding black money in cash will not be able to exchange much as they would be in a fear of getting penalized and prosecuted by the authorities. Enemies of the country which are involved in counterfeit currency and terrorism will not be able to continue it further for quite some time at least.

it will reduce the risk and cost of cash handling as soft money is safer than hard money. It will also reduce government liability. Since every note is a liability for the government, the old currency will become worthless for those people, who choose not to disclose their income. Thus, this will extinguish government's liability to that extent. It is expected approximately Rs 5 lakh crore may come to the government in the form of extinguished RBI liability, taxes and penalties. This amount is enough to take care of India's entire fiscal deficit for one year or more.

IMPACT & CONSEQUENCES It will also reduce tax avoidance. Whatever money will be

deposited or exchanged, authorities will keep a track of it and they will be extra cautious in this period. Dealing in this period in sectors like jewellery and real estate will be on radar and those entering into Loan transactions may also undergo tax scrutiny. Search and Seizure activities of the IT Department will also rise to curb such malpractices. Limits have already been prescribed for reporting to the IT Department those bank accounts in which excess cash deposits are being made in this 50-day window (Rs 2.5 lakh in case of individuals and Rs 12.5 lakh in case of firms).

Importantly, in the longer run, tax and interest rates on loans are expected to come down as higher income tax collections arising from better compliance would offer scope to reduce rates over the long term. This, in turn, will drive up disposable income. This can give a positive impact on consumption demand in long term.

IMPACT & CONSEQUENCES India is certainly going to experience "Acche Din" in Modi's regime. The decision of this surgical strike on black money was not taken in a day or two. Rome was not built in a day and similarly, this plan is the result of Prime Minister's meticulous planning and never ending fight against corruption. As a result, he has successfully made the right stroke at the right time.

REACTIONSUPPORT AND

CRITICISM

REACTION- SUPPORT AND CRITICISMSO HOW IS INDIA RESPONDING ?Lineups at banks and ATMs are long

Tourists facing problems with currency exchange

Black Market Charging tax to change money

Illegal practices forcing government to take action

REACTION- SUPPORT AND CRITICISM

REACTION- SUPPORT AND CRITICISMBijendra Kumar Srivastava: I am fully in support of this move of demonetization… The hardship is for few days. The real pain is to politicians, doctors, engineers ,contractors, big farmers & top bureaucrats.Gaurav Gangwal: Really appreciating efforts by govt. Now people are fearing to keep black money. Most business men are saying now they will earn less but whatsoever will be in whitewww.thewire.in post:On Wednesday 16th November, the founder of Microsoft Bill Gates had described demonetization as a “bold move” and an “important step” in moving away from a shadow economy.

(http://www.youthkiawaaz.com/2016/11/demonetisation-public-opinion/)

REACTION- SUPPORT AND CRITICISMAjay Shah notes:Controlling corruption is not about blocking access to a non-traceable store of value. There will always be precious metals, US dollars, bitcoin, and jars of Tide…. Solving the problem of corruption requires deeper changes to institutions.Amit Varma argues:…most truly rich people don’t keep their wealth in the form of cash, but in the form of real estate, gold, deposits in foreign bank accounts and other benami investments. They will be largely unhurt…it is the poor who will be hurt the most by this.www.thediplomat.com post:On November 15th, the Supreme Court sat down to hear multiple petitions and four Public Interest Litigations regarding this move – some of which requested a complete rollback of this policy due to its severe impact on everyday citizens. The court decided not to stay the decision right then and instead will examine its legal validity before making a decision

WHAT EXPERTS THINK?Almost all the stalwarts of the banking sector including Deepak Parekh, Chanda Kocchar think that the move will help curb black money in the economy.

According to MD & CEO, ICICI Bank Chanda Kochhar who told ET Now, "this move will definitely bring about a whole amount of transition to no cash or low cash kind of transactions,".

"A parallel black economy will collpase," one of the leading lawyers in taxation laws, Harish Salve told ET Now.

Narayana Murthy, founder of the Infosys, welcomed the government's move in its fight against corruption. Murthy also added that "the dishonest will have to suffer, absolutely that is the right thing."

WHAT EXPERTS THINK?HDFC Chairman Deepak Parekh anticipated that the Land will become cheaper and "one expects that real estate price will come down in medium term."

But with all the positives, government has not been able to explain anything for the people who don't have a bank account.

CONCLUSION Central government’s recent decision to demonetize the high value currency is one of the major step towards the eradication of black money in India. The demonetization drive will affect some extent to the general public, but for larger interest of the country such decisions are inevitable. Also it may not curb black money fully, but definitely it has major impact in curbing black money to large extent.

THANK YOU