Demonetisation

This is a queue in an ATM rather than a queue to

get a ticket for Vijay, Ajith Film
Ice Breaker 1
What comes in the Dash?
16, 06, 68, 88, ----, 98
?
 Answer is 87.

And the logic is, it is not

16, 06, 68, 88, ---, 98
series is numbers being inverted
Its actually
86,87,88,89,90,91
 At the stroke of midnight of 9th
November 2016, India lost 86% of its
monetary base
Total number of notes estimated = 24,023 billion notes
44% notes were Rs. 1000/-
56% notes were Rs. 500/-
• As per RBI estimates, 15billion notes of 500
denomination (approx. Rs. 7853.75 billion) and 6
billion notes of 1000 denominations (approx. Rs.
6325.68 billion)
1. The first demonetization took place in 1946 and
Rs 1000 and Rs 10,000 notes were demonetized.
2. Later in 1978, Rs. 1000, Rs. 5000 and Rs. 10,000
were demonetized.
3. This is the third time demonetization that has taken
place.
S.No. Year Currency % in GDP

1 1960 (1946 Data 2.5 %

not available)
2 1978 .5%

3 2016 86%
1. The RBI will issue new Two thousand rupee notes and new
notes of Five hundred rupees which will be placed in
circulation from 10th November 2016.
2. Notes of one hundred, fifty, twenty, ten, five, two and one
rupee will remain legal tender and will remain unaffected
by this decision.
3. November 8, 2016 demonetization announcement involved
the task of replacing more than 22 billion pieces of Rs.500
and Rs.1000 notes for 1.3 billion citizens through 1.3 lakh
branch outlets was a hurculean task.
4. The Finance Minister announced that this currency swap
would nudge the economy in the direction of cashless
economy the move was part of a larger agenda to move
India into a digital economy.
In this single move, the Government has attempted to
tackle all the three issues in a short run affecting
the economy i.e.

a parallel economy,
counterfeit currency in circulation and
terror financing (National Security Concern).

There is no doubt that Prime Minister has pulled out

a major coop and substantially enhanced his
reputation as a strong leader.
Only two motives behind
demonetisation in the long run

1. Cashless Economy
2. Digitalization
Black Money or Parallel Economy
It refers to illegal money earned from illegal sources which
has not been disclosed to the government. It refers to funds
earned on the black market, on which income and other
taxes has not been paid. Usually untraceable, and hence
untaxable. Indian unaccounted wealth both at home and
abroad is been estimated as $1,456 billion nearly
76,00,000 crores.

Sources of Black Money are Gambling, Undervaluation of

Asset and Over Valuation of Liabilities, False Income
Statement, Drug trafficking, Weapons trading, Terrorism,
Prostitution, Selling counterfeit and through any other act
forbidden by law.
Various approaches to control Black Money:
1. Establish identity of persons (through PAN Card, Aadhar Card etc.)
2. Enable low cost direct bank transfers (Implementation of
NEFT/IMPS/RTGS and other formats)
3. Enable electronic register of assets (Underway through electronic
land records, digitilisation of revenue records)
4. Reform tax system so that cost of compliance is lower than cost of
tax evasion. (through initiatives such as Saral forms, e-filing, self-
declaration etc.) Indirect tax system through simplification (GST).
5. Regulations that increase costs for black money creating activities.
(Prevention of Corruption Act etc.)
7. Create e-trails of both incomes and expenditure.
9. Control on holding of cash and physical money including
Indian and foreign money. (FEMA, Demonetisation)
 Movement of ‘Black Money’ - By Hawala system.

Hawala works by transferring money without actually moving it.

For example, Chinappa is a taxi driver staying at US. He wants to
send some money for his family in India. Chinappa cannot
approach an authorized money transfer agent/bank there as he is an
illegal immigrant in the US. Thus Chinappa finally lands up at a
hawala operators office. Chinappa then hands over the cash to the
US hawala operator. The US hawala operator then calls his Indian
counterpart and asks him to deliver funds to Chinappa’s family
member. Any member of Chinappa’s family can now collect cash
from the Indian Hawala operator, after deduction of commission
charges and on producing an authentication code, which is
generally used in all hawala transactions.
Fact: If the total Black Money is recovered then every Indian
can have one Tata Nano car and every new born baby can
be gifted with the same for next 1 year. (Total Population of
India 1.27 Billion or 1,271,702,542 as on Jan 15 2015 – Per
year number of children born is 1,55,31,000.)

Fact: If the black money is retained the Government will have

enough money to run the country for 30 years

Fact: Once the huge amount of black money and property

comes back to India the entire foreign debt can be repaid in
24 hours. – US$455.9 Billion – Ref: Ministry of Finance
Ice Breaker 2

What comes next in the series?

3,3,5, 4,4,3,5,5,4, ----

?
Answer: 3

Logic is

One -3, two-3, three-5, four-4, five-4,

six-3, seven-5, eight-5, nine-4, ten-3
Effects of Demonetization in general
1. The alternate platforms – cards, internet banking, mobile
banking, PoS terminals have further gained momentum
post the demonetization announcement.
2. However, there is heavy disruption to the business due to
which growth expectations have reduced. India’s GDP
growth reduced to 6.9% for the financial year 2017.
3. It has already lead to reduction of money circulation in
the economy and this may result in deflation
4. A lot of cash which are legally earned will be deposited in
the banks and now the banks with more deposits will be
able to do more lending and the rate of lending may
come down
5. Accessibility of loans will become easier and as interest
rates reduce economic activity will be boosted.
 Demonetisation – Effects on Economy
1. Reduction in Money Supply and increase in Price:
The demonetization has resulted in a very severe
contraction in money supply in the economy. This
contraction, by wiping out cash balances in the
economy, will eliminate a number of transactions for a
while, since there is no or not enough of a medium of
exchange available. The effect would be more severe
On individuals who earn incomes in cash and spend it
in cash. while generally people seem to expect prices
to fall, it is quite possible that prices would instead
rise.
2. Effect On GDP:
Downward trend of GDP Growth. The sudden
decline In money supply and simultaneous increase
in bank deposits is going to adversely impact
consumption demand in the economy in the short
term. Lower Money Supply has a Deflationary
Effect, With the older 500 and 1,000 Rupees notes
being scrapped, until the new 500 and 2,000
Rupees notes get widely circulated in the market,
money supply is expected to be reduced in the short
run.
 3. Effect on Black Money:
It is expected to remove black money from the
economy as they will be blocked considering the
holders will not be in a position to deposit the same
In The banks, temporarily halt the circulation of
Large Volumes of counterfeit currency and curb the
Funding for antisocial elements like smuggling,
terrorism , espionage, etc.
 4. Effect on Banks
• ATMs stopped functioning even one day one after the two-day
recess. Banks need time to calibrate technology of ATMs for
rolling out new currencies, systemic correction (calibration)!
• Deposits increased, After all, when you withhold withdrawal and
allow only deposits would not the deposits increase.
• Demonetisation will automatically lead to more amounts being
deposited in Savings and Current Accounts of commercial banks.
which will be utilized for lending purposes.
• Bank Deposit Rates to get decreased. This is structurally positive
for banks, reducing banks higher cost borrowing.
• Investors in the short term will now believe that Cash is not the
safest asset and there is little point in holding it. This will shift
them from physical asset to financial assets where returns are also
higher. People will try to save not in cash but in mutual funds
and other financial products.
5. Impact On Consumption Sectors:

Consumer goods
Real Estate and Property
Gold and luxury goods
Automobiles (only to a certain limit)

All these mentioned sectors are expected to face

certain moderation in demand from the consumer
side, owing to the significant amount of cash
transactions involved in these sectors.
Real Estate: The real estate sector will definitely be
affected by the demonetization exercise, as it has
traditionally seen a very high involvement of black
money and cash transactions. There has been a
demand to bring transparency in the sector so that the
It becomes more organized, and cash dealings must
necessarily be the first symptom of the disease to be
dealt with.
Auto Industry: Vehicle sales in the rural markets
could be affected in the coming few months by the
government's decision to ban Rs 500 and Rs 1,000
notes, because a the market is driven by cash.
Motorcycle sales in the rural areas could also slow
Down as two-wheelers here are bought with cash.

Durable Sales: Sales of White Goods like TV,

Refrigerator & Washing Machine could slump as
much as 70% as a good portion of the market
is driven by Cash.
 6.Effect on various economic entities:
With cash transaction lowering in the short run, until the new
notes are spread widely into circulation, certain sections of the
society could face short term disruptions in facilitation of their
transactions. These sections are:
1.Agriculture and related sector
2.Small traders
3.SME
4.Services Sector
5.Households
6.Political Parties
7.Professionals like doctor, carpenter, utility service
providers, etc.
8.Retail outlets
ADVANTAGES OF DEMONETIZATION :
1. The demonetization decision taken by the government will help
to eliminate black money and corruption to large extent
2. Due to lack of funding there will be no arms smuggling and all
the terrorist activities will also be reduced
3. Withdrawal limits set by the RBI has reduced currency
circulation. Therefore card transactions will slowly replace the
cash transactions in daily activities
4. The regulations for exchange of money in banks on producing
a valid identity card like PAN, Aadhar card will facilitate the
government to track the money which is being exchanged. Now
we can track all details of the transactions from the banks. It is
difficult hide the black money
5. Real estate industry will have more transparency and
credibility, making it more attractive to the foreign investors as
well as domestic investors
Disadvantages of Demonetization:
1. It has caused great inconvenience to common man who
struggled to exchange old high denomination notes.
2. The general business activity has tremendously effected
resulting thousands of crores of loss to the national income
after demonetization announcement
3. It has taken a toll on half of the population who are not well
versed with the card transactions
4. The major problem is that big fishes will be left out whose
black money is in the form of foreign currency, gold and
property and stashed in tax havens
5. The ATM recalibration will take time
 Demonetization as a tool of Financial Inclusion
Demonetization has become blessing in disguise to the
cause of financial inclusion. It is resulted in rapid banking
education to the vast multitude of unbanked and semi
Banked population otherwise impossible. Though
demonetization has halted all regular banking business
operations and loss of revenues temporarily, it has not gone
waste and served the purpose of financial inclusion.

The cashless and transparent mechanism has led to

increased financial inclusion and this momentum should be
continued till India achieves complete financial inclusion.
Problems of Demonetisation:
1. Small farmers, sellers, merchants, daily wage labourers and
traders are suffering because of lack of proper planning, and
foresight such as recalibration of ATM machines.
2. People are facing problems because the limit of withdrawal
has not been kept at a higher level . The Reserve Bank of India
(RBI) failed to pump in equal exchange in smaller
denominations the 86% of cash which was withdrawn.
3. There was need to pile up enough 100 Rupee notes and other
smaller denomination notes in the market before taking this
step.
4. The RBI knows for sure that rural areas lack basic
infrastructure to handle the demonetization and commercial
banks are operating with as minimum number of staff and it is
difficult to handle customers and non-customers – living in
their areas of operation.
5. Only 18% of all ATMs are deployed in rural India. There are
not so many ATMs either to cater to the need of demanding
population.
6. India is also largely a cash economy. The cash transactions in
this economy are far more than the total number of electronic
transactions done on a daily basis
7. Prime Minister has asked all citizens to take a pledge to be part of a
cashless society. But do the preconditions for a successful transition
to digital banking exist?
8. The idea of demonetization is good but it has to be taken into
consideration that most of the black money is kept In the form
of land, buildings or gold or kept abroad. What is in cash
constitutes only 4% of the total amount of black money on
which taxes are not being paid.
9. It will be very difficult for half of the population
who are not well versed with the card transactions.
An estimated 600 million Indians—nearly half
the country’s population—are without a bank
account.
Three hundred million have no government
identification, necessary to open an account.

10. The major problem is that big fishes will be left

out whose black money is in the form of foreign
currency, gold and property and stashed in tax
havens.
ATM statistics in Urban India:
India has 61.88 ATMs per 1000 sq km which is higher
than developing countries like Brazil which has 21.82
Russia 12.61, China has 92.32 ATMs.

For every 1,00,000 adult population no. of ATMs in

India are 18.07

Bank Branches:
The number of commercial bank branches per 1,00,000
adults, India (13.55) is behind Russia (32.88) and Brazil
(20.67)
Ice Breaker 3:

Write the word “XEROX” in the blanks

------
?
-X-E-R-O-X-
Sinha's Presentation
Various
modes of
E-Payment: Cash
Mode of
E-Payment
E-payments

Barter System
Sinha's Presentation
1. Bank Card – Debit Card or Credit Card by Banks
.
2. Pos – Point of Sale - swipe machines using cards
3. Data USSD based Mobile Banking
4. AEPS – Aadhar Enabled Payment System – Bank to Bank
Payment system
5. UPI - Unified Payments Interface (UPI) is a payment system
launched by National Payments Corporation of India and
regulated by Reserve Bank of India to facilitates the fund
transfer between two bank accounts on the mobile platform
instantly.
6. E-wallets - A digital wallet refers to an electronic device that
allows an individual to make electronic transactions
purchasing items on-line with a smart phone. An individual's
bank account can also be linked to the digital wallet.
Conclusion :
In the Short-Run:
Demonetisation will cause “short term pain” but “growth
gains” in the long term. In the short-run, consumption
spending is particularly likely to be hit as also vast tracts of
the cash based productive segments.
Since most of the Rural Economy is based on cash, it's
going to impact the Rural Economy.
Sectors with a sizeable magnitude of cash transactions such
as Real Estate, construction, Jewellery, High-End Retail,
White Goods and Travel & Tourism are expected to
adversely affect.
Money supply will be adversely affected and leads to
deflationary economy of the country.
In the Long- Run:
In the long run, the economy will benefit from the reduction of the
black money, which will lead to higher tax collection, better business
environment, less corruption & transparency.
It will improve the situation of Fiscal Deficit of the country. This
move along with the implementation of the GST will eventually
make the system more accountable and efficient.
As the dust settles, and agents realign to higher levels of formal or
recorded transactions, growth benefits will follow through a wider
tax-base, better tax compliance, reduced transaction costs and
enhanced efficiencies in various supply-chains; macroeconomic
indicators are likely to improve too as inflation slows, fiscal
balances improve and interest rates soften further on the ground.
It will push the economy because of flow of more money into the
banking system