INTRODUCTION:

Before starting let’s get familiar with the two words “Demonetization” and “Remontization”. Demonetization is the act of the government of stripping a currency unit of its status as legal tender .In other words demonetization is a act of government in which current currency unit is declared as illegal and cannot be used for transaction purposes and these currency units are replaced with new notes and coins. Remonetization on the other hand is the opposite to demonetization, in which a form a payment is recognized as legal tender.

On November 8,2016 night 8 pm Prime Minister Narendra Modi announced that Rs 500 and Rs 1000 currency notes will invalid and citizen where given time to exchange these denomination in banks. All the notes in lower denomination of Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2, Rs 1 and all coins will continue to be legal tender.

He also said that new notes of Rs 2000 and Rs 500 will be introduced. Other modes of currency exchange like cheque, demand draft, payments made through credit and debit cards will remain unaffected by demonetization.

India’s demonetization which took place on 8 November 2018 was unprecedented in International Economic history because it was highly secretive and sudden and it was carried out in normal economic and political condition elucidated by macroeconomic stability and fastest GDP growth rate.

Demonetization was intacted with multitude of motives like

· Stripping the Indian Economy of its black money.

· Forcing people to pay taxes for the unaccounted pile of cash.

· Promote the Digital India Movement.

· Make India a cashless economy.

· To eliminate the fake currency and dodgy funds.

· To stop the funding of criminal activities like terrorism and drug trafficking.

Demonetization is not the only effort taken by the government restricting the illicit activities. Some of the other steps taken by the government other than demonetization are as follow,

· Creation of the Special Investigative Team (SIT) in 2014.

· Black Money and Imposition of Tax Act 2015.

· Benami Transaction Act 2016.

· The Information Exchange Agreement with Switzerland.

· Change in the tax treaties with Mauritius, Cyprus and Singapore.

· Income Disclosure Scheme.

Reason behind banning high denominations currency:

1. In India 68 % of all transactions are cash based and the RBI has estimated that banned currency formed approximately 86% of all currency in circulation.

2. Main idea behind banning the Rs 500 and Rs 1000 notes is that unaccounted money used in corruption or funding terrorism and drug trafficking take place in the form of high value notes of Rs 500 and Rs 1000.

3. As per the data provided by the Reserve Bank of India, there were 16.5 billion Rs 500 notes which are 45 % of currency stock in 2014-2015 and 6.7 million Rs 1000 notes which was 39 % of the currency stock in 2014-15 was in circulation that time.

4. The Financial Action Task Force (FATF) has observed that high currency values are used in money laundering schemes, drug and people trafficking. FATF is a global body that monitors the criminal use of International Financial Service.

5. Lastly these notes constitute a huge percentage of money spent during general election by the political parties candidates in India.

LITERATURE REVIEW:

P.Kumar vijay (2016), Demonetisation is not new to the Indian Economy. Highest denomination note printed by Reserve Bank of India was Rs 10000 in year 1938 and again in 1954, but these notes were banned in January 1948 and January 1978 respectively according to RBI data statement.RBI issues new currency in India and derives its function from the Reserve Bank of India Act, 1934.RBI is to issue new redesign Rs 500 notes and Rs 2000 bank notes in the circulation since November 10, 2016. The decision was taken to curb the corruption in India.

Varshith J.R (2016) The Move to demonetize Rs 500 and Rs 1000 currency by the Union Government of India during the year 2016 was a historic effort to clean up decades long corruption and black money. Black Money had inflated the prices in real estate, gold and few other sectors of the economy. This inflated price was creating challenge for a common Indian citizen to Invest.

P. Patnaik (2016), Black money is created through tax evasion on income from lawful activities and money created through illegal activities. Demonetization is a step to curb black money in India. Black Money to be controlled only through honest tax administration.

Sukanta Sarkar (2010) Main reason behind the generation of black money is political system. They have formed many laws, committees, policies, schemes to control black money in the economy, but these laws, polices and schemes were not implemented properly.

Tax Research Team (2016) stated in favour of demonetization. The paper objective was to analyze the impact of demonetization on Indian economy. This paper show the impact of demonetization on availability of credit, spending and level of government activity anf finance

Arpit Guru and Shruti Kahanijow (2010) analyzed that black money is spread everywhere in India which are smartly concealed and stashed away abroad in a very large amount.

OBJECTIVES:

The following are the objectives of the study:-

· To examine the effect of demonetization in India.

· To know how far it is beneficial to public.

RESEARCH METHODOLOGY:

This Paper is based on secondary data. Data’s information is collected from various published sources like newspaper, records, reports, magazine, journal and the like.

DEMONITIZATION AND BLACK MONEY:

The idea that pushed people to support demonetization was its association with bringing an end to the black money problem in India.

Impact of demonetization on Black Money:

1. Better Tax Compliance:

Demonetization is likely to lead better tax compliance, raise the Tax to GDP ratio and improved tax collection. It would lead to lower borrowing, the better fiscal management. Inflation may see downward trend in nearby term due to lower cash transaction. With high Tax to GDP ratio, the government will be able to reduce income tax rates which resulted to higher disposable income with people and on the other hand improve the consumption in the medium to long term.

2. Real Estate check:

Demonetization is seen as a check on the real estate sector where prices are artificially raised by property owners, reducing the accessibility of affordable housing for the poor and the middle class. Demonetization of Rs 500 and Rs 1000 notes will lead to decline in the real estate prices making it affordable to all lower and middle class.

3. Parallel Economy burst:

When economic activities go unreported or not measured by society’s current technique to monitor economic activity, it falls under parallel economy. Money that has neither been reported to public authorities at the time of their generation or at any time of possession nor taxes has been paid on it. It is also known as phantom trader or shadow economy. Demonitzation is expected to curb the parallel economy as the owner of black money will deposit all its black money in bank and will pay taxes along with penalty on it. It will largely benefit Income Tax department and with specific data gathered catching of defaulters will become easy. It will temporarily stop the circulation of large volume counterfeit currency and prevent funding for anti social activities like smuggling, terrorism, espionage etc

4. Check Terror funding:

Demonetization will put a stop to neighboring countries, drug cartels and terrorist of supplying high value currency into India.

5. Check Fake Notes:

Demonetization will reduce the flow of fake currencies in Indian Market as the data shows that most of the currency in circulation exists in high denomination notes Rs 500 and Rs 1000. According to the Reserve Bank of India annual report more than 2.61 lakh conterfiet notes of denomination Rs 500 were detected by banks in the year 2015-16 and 1.43 lakh fake notes of Rs 1000 were detected. Counterfiet notes of Rs 500 and Rs 1000 accounted for more than 92 % of all the fake currency by banks across the country.

Some important data:

· According to Bank report, number of suspicious transaction report filed by bank during 2016-17 has gone up from 61361 in 2015-16 to 361214, for financial institution number of suspicious transaction increased from 40333 (2015-16) to 94836 (2016-17),for intermediaries registered with Stock Exchange Board of India the number of suspicious transaction increased from 4579 (2015-16) to 16953 (2016-17).

· Based on Big data analytics, in year 2016-17 cash seizure by Income Tax Department has been doubled when compared to year 2015-16; during search and seizure undisclosed income Rs 15497 crore has been admitted by Income Tax Department which is 38 % higher than the undisclosed amount admitted during 2015-16; and undisclosed income detected during surveys in 2016-17 is Rs 31716 crore which is 41% higher than the detection made in 2015-16.

· Undisclosed income admitted and undisclosed income detected taken together amount to Rs 29213 crore which is close to 18 % of the amount involved in suspicious transaction. This process will gain momentum under “Operation Clean Money” launched on January 31, 2017.

· The exercise to remove unknown source with currency has further yielded results in the form of 56 lakh new individual tax payer filing their return till august 5,2017 which was the last date for filing return for this category; last year this number was about 22 lakh. Self assessment tax paid by non-corporate tax payers increased by 34.25 % during April 1 to April 5 in 2017 when compared to the same period in 2016

DEMONITIZATION AND BANKING:

The biggest beneficiary from this demonetization is banking sector. This is mainly because people rush to deposit there cash into banks, which resulted increase in substantial liquidity with the banks. As the deposits with bank increases, so will increase the number of CASA which will increase the Net Interest Income and the Ney Earning of the Banks.

Impact of Demonetization on Banking Sector:

1. Increase in deposits:

Demonitization has increased the deposits with banks. Unidentified money by public authorities in the form of Rs 500 and Rs 1000 was flowing to banks and with those sizes of CASA has been increased. Increased deposits so mobilized by SCB’s have been used in i) reverse repo’s of various tenors with the RBI and ii) Cash Management Bills (CMB’s) issued under Market Stabilization Scheme. Loans and advances extended by banks increased by Rs 1008 billion.

2. Fall in cost of funds:

After demonetization increase in deposits leads to fall in cost of funds. This help the banks to keep a major part of deposits in the form of cash deposits. Major portion of cash deposits is held by PSU banks (70% of cash deposits). Post demonetization several banks lowered their domestic term deposit rates and lending rates. During November 2016 – February 2017 medium term deposits rates of SCB’s declined by 38 bps while up to January 2017 weighted average term deposits rate of banks declined by 24 bps. Banks also reduce their lending rates.

3. Demand for Government Bonds:

Bank started lending surplus deposits to RBI under reverse repo rate option.Surplus with banks was due to demonetization.PSU banks deployes their excess funds in government bonds. Banks returns increased by 15% to 20% by investing in bonds

4. Opening of Jan Dhan Account:

22.3 million new accounts were opened with public sector banks under Pradhan Mantri Jan Dhan Yojana (PMJDY) after demonetization. Of the New Jan Dhan accounts opened 53.6 % were in urban area and 46.4 % in rural areas. 63.6 % increase in total balance in PMJDY is notice. The total deposit in PMJDYwas Rs 456 billion on November 9, 2016 which increase to Rs 746 billion as on December 7,2016.

Demonitisation and cashless economy:

Demonitisation had forced the people for digital banking. People used their credit cards, debit cards, mobile wallets etc to make payment for their daily need things. A cashless economy is one in which flow of cash within an economy is non-existent and all the transaction have to be carried out through electronic channels.

Digital Transaction Platform:

1. Unified payment Interface (UPI):

UPI is developed by National Payment Corporation of India. It is an instant real time payment system which facilitate inter-bank transaction. This interface is regulated by Reserve Bank of India. UPI works by instantly transferring funds between two bank accounts on a mobile plateform. Fund transfer limit is Rs 1 lakh per transactions. Currently 30 banks are providing UPI services

2. Bharat Interface for Money (BHIM):

BHIM is a mobile application developed by National Payment Corporation of India. BHIM is a mobile application based on UPI. It was named after B.R. Ambedkar and is intended to provide facility to customer by providing them making payment through banks and drive them toward cashless transaction. Mobile wallet like Pay TM, Mobiwiki, Airtel Money etc hold money while BHIM app is only mechanism which transfers money between different bank accounts.

3. Adhar Pay:

Special feature which make Adhar Pay different from UPI apps like SBI pay, Phone pe, Free charge, Pay TM, etc is that, customer can pay to merchant using finger print. Adhar pay application is made mainly for the merchants. Customers are not required to carry any card, smart phone or the like. Adhar pay application use finger print for the authentication and on the basis of authentication the money is debited from adhar linked bank account.

4. Mobile Wallet:

Mobile wallet is a way to carry cash in digital format. Customer need to add his credit or debit card details to mobile wallet application or customer can transfer money through net banking to mobile wallet. Customer can make purchase using smartphones tablets, smart watches etc instead of carrying cards. Example Vodaphone M-Pesa, Citrus Pay, Oxigen, Airtel money, Jio money etc

5. Micro ATM’s:

Micro ATM is a device used by large number of business correspondent to deliver basic banking services.

6. Internet Banking:

Internet banking also known as online banking, e banking, and virtual banking is a way of using banking services through their official websites. This electronic platform enables the customer to conduct wide range of financial transaction. Some of the services are as follows sending money through NEFT,IMPS,RTGS, Utility bill payment, balance enquiry, e-Term deposits etc.

7. Mobile Banking:

Mobile banking also known as M-banking is a service provided by a bank or other financial institutions that allow the customer to conduct different type of financial transaction using mobile phone and tablets.

Demonitisation and employment:

· After demonetization loss of 1.5 million jobs had been estimated by the Center for Monitoring Indian Economy. Labor Participation Rate (LPR) had been decline.

· Decline in LPR is a sign of an economic slowdown for a developing country like India.

· Survey conducted by AIMO had found a drop in employment of 60 % and loss in revenue of 55%. AIMO is All India Manufacturing Organisation, which represent traders and small– medium and large scale industries.

· Infrastructure projects which falls under medium and large scale industries reported a 35 % cut in employment and 45 % revenue loss

· Foreign companies engaged in Export-oriented activities reported 30 % job losses and 40% revenue fall

· In manufacturing sector, job losses are 5% and revenue loss of 20%.

Demonitisation and GDP:

Demonetization was a key contributor in economic slowdown in India’s. GDP for April-June quarter slipped to 5.7 %.The World had reduced the India’s GDP growth forecast to 7% for 2017-18 due to banning of old notes and application of Goods and Service Tax(GST). According to an article published in Deccan Chronicle dated February 2, 2018 India regained its status of world’s fastest growing major economy in the October- December Quarter.

India is the Asia’s third largest economy. According to the government data it grew 7.2 % in October –December quarter, greater than last 5 quarters. Highest quarterly growth recorded since July-September quarter of 2016-17.

International Monetary Fund (IMF) projects India’s GDP to grow at 7.4 % in 2018 and 7.8% in 2019. Moody’s Investor service estimates India to grow at 7.6% in 2018 and 7.5% in 2019. It is a positive sign of economic recovery from impact of demonetization and GST.

Recent data:

GDP:

· According to the recent data published in trading economics.com, India GDP is growing.

· Fastest increase were seen in household spending 8.6% as compared to 6.7% in quarter one and Inventories from 7.8% to 8.6%.

· Exports increased to 12.7% which is much higher than 3.6% rise in the previous periods.

· Imports also increased at a faster rate of 12.5% as compared to 10.9% in Q1.

· Government consumption (7.6% compared to 16.8%) and Gross fixed Capital Formation (10% compared to 14.4 %) slowed down.

· Household spending accounted for 54.9% of GDP, Gross fixed capital formation accounted for 31.6% of GDP, Public Expenditure accounted for 11.8% of GDP, Changes in stocks accounted for 0.7% of GDP, Export accounted for 21.4% of GDP while import subtracted 24.7%.

Gross value added:

· Gross Value Added = GDP excluding taxes

· Gross Value added expanded 8% which is higher than 7.6% when compared to Q1

· Faster growth was recorded for financial, real estate and professional services i.e 6.5% growth rate when compared to 5% in Q1, manufacturing (13.5% compared to 9.1%), agriculture, forestry and fishing (5.3% compared to 4.5%).

· On the other hand, a slowdown was recorded for trade, hotels, transport, communication and services related to broadcasting(6.7% compared to 6.8%), Public administration and defense (9.9% compared to 13.3%), construction (8.7% compared to 11.5%),mining and quarrying (0.1% compared to 2.7%) and utilities (7.3% compared to 7.7%).

· Financial and real estate activities were the biggest sector of the economy bearing 24.1%, internal trade bearing 18.9%, manufacturing bearing 18% , agriculture 13.3%, public sector 12.4%, construction 7.9%, mining 3.2% and ultilites 2.3%.

CONCLUSION:

Demonetization is proved to be immunization to Indian economy in long run. As various vaccinations are given to small children’s to protect them from dangerous disease, diseases which can make permanent loss to them. In the same way demonetization worked as a vaccination which will protect the economy from deadly disease like corruption, black money, fraud money, terrorism funding, drug and human traffic in long run. Recent data placed above showed that biggest beneficiary of demonetization are banking sectors, Income tax department. Through demonization Income tax department is successful in recovery of unidentified money to large extent which reduces the black money to large extent. Indian economy in initial period of demonetization slow down for quarters but now again it has gain its pace of growth. For transparency in the economy steps have been taken to make India a cashless economy.

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Received on 07.09.2018 Modified on 20.09.2018

Int. J. Rev. and Res. Social Sci. 2018; 6(3): 279-283.

DOI: 10.5958/2454-2687.2018.00028.X