Page 1 of 10
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 468
Demonetization in India
DEEPALI , Faculty of commerce
P.I.G gcw jind
ABSTRACT
India has a thriving cash economy. A majority of businesses in India run on cash with no
transparency or accountability. This money never enters the tax system of the country. It is a
‘leakage’ from the economic cycle adversely impacting the working of the Indian economy.
According to reports, two thirds of India’s GDP is cash economy—around Rs 90 lakh crores. It is
the honest tax-paying citizen of the country who suffers. Ever since demonetization initiative was
announced by Prime Minister Narendra Modi on November 8, several developments have taken
place related to the move. While some have been encouraging, others highlight the flip side of the
historic step taken by the Centre. The demonetization programme has been evaluated in the context
of its short-term costs and long term gains. Short term losses include loss of welfare for the low- income people and decline in GDP growth. On the long-term gain side, a large number of benefits
are identified which will appear with time. This paper bring to you the good and bad developments
related to demonetization that have taken place in the last couple of days and also its impact on
Indian economy.
Page 2 of 10
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 469
INTRODUCTION
Demonetization is a generations’ memorable experience and is going to be one of the economic
events of our time. Its impact is felt by every Indian citizen. Demonetization affects the economy
through the liquidity side. Its effect will be a telling one because nearly 86% of currency value in
circulation was withdrawn without replacing bulk of it. As a result of the withdrawal of Rs 500
and Rs 1000 notes, there occurred huge gap in the currency composition as after Rs 100; Rs 2000
was the only denomination. Absence of intermediate denominations like Rs 500 and Rs 1000 have
reduced the utility of Rs 2000. Effectively from introduction of Rs 500 denomination, the problem
has been overcomed.
Prime Minister of India, Mr Narendra Modi, took the entire country by surprise when he declared
demonetization of INR 500/- and INR 1,000/- currency on 8th November, 2016. As per Modi
Government, the agenda of this move was 3 fold:
● To eliminate counterfeit currency;
● To shrink the size of the parallel economy and black money in India; and
● To reduce corruption.
It is not the first time in the history of India or globally that demonetization has happened. In India,
it occurred one-and-a-half years before Independence in 1946, and again in 1978. The drive could
not be successful earlier as people anticipated the move. Thus, they had ample time to park their
black money in safe zones. Also, the circulation of higher denomination notes was not as high then
as the current 86 per cent.
While this is the third time in the Indian history that Indian high value currency has been stripped
of its status as a legal tender, the first two instances of demonetization did not have an impact like
Page 3 of 10
European Journal of Business &
Social Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 01
January 2019
Available online: https://ejbss.org/ P a g e | 470
the recent one. This is primarily because, this time, the demonetized currency represents 86% of
the total currency in circulation.
In a country where 68% of the transaction are cash based (as per CLSA data), a move like this is
definitely going to have several long- as well as short-term impacts.
IMPACTS OF DEMONETISATION ON INDIAN ECONOMY
Demonetization technically is a liquidity shock; a sudden stop in terms of currency availability. It
creates a situation where lack of currencies jams consumption, investment, production,
employment etc. In this context, the exercise may produce following short term/long term/,
consumption/investment, welfare/growth impacts on Indian economy. The intensity of
demonetization effects clearly depends upon the duration of the liquidity shocks. Following are
the main impacts.
1. Demonetization is not a big disaster like global banking sector crisis of 2007; but at the
same time, it will act as a liquidity shock that disturbs economic activities.
2. Liquidity crunch (short term effect): liquidity shock means people are not able to get
sufficient volume of popular denomination especially Rs 500. This currency unit is the
favourable denomination in daily life. It constituted to nearly 49% of the previous
currency supply in terms of value. Higher the time required to resupply Rs 500 notes,
higher will be the duration of the liquidity crunch. Current reports indicate that all
security printing press can print only 2000 million units of RS 500 notes by the end of
this year. Nearly 16000 mn Rs 500 notes were in circulation as on end March 2016.
Some portion of this were filled by the new Rs 2000 notes. Towards end of March
approximately 10000 mn units will be printed and replaced. All these indicate that
currency crunch will be in our economy for the next four months.
