Indian Institute of Plantation Management

Presentation On

Demonetization & Human Development

Submitted by : Rishikesh MishraIIPM Bengaluru

Demonetization & Human Development

Why Need Case study ? Why Need Debate and Discussion in INDIA.Why did government appeal every Institute, college, media, NGO etc. for Discuss and Debate .

What is Demonetization?Demonetization is the act of stripping a currency unit of its status as legal tender.It is the process of ceasing to produce and circulate particular forms of currency.This is necessary whenever there is a change of national currency. The old unit of currency is retired and replaced with a new currency unit.Legal tender is a medium of payment recognized by a legal system to be valid for meeting a financial obligation.

January 1946- Rs.1,000 and Rs.10,000 banknotes, which were in circulation were demonetized primarily to curb unaccounted money.

1978- The higher denomination banknotes in Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in the year 1954 and these banknotes were again demonetized in January 1978.

Denominations of 1, 2, 3, 5, 10, 20 & 25 paise were in circulation till June 30, 2011 but were then withdrawn. While the 50 paise coins are still in circulation. They are called small coins while the other denominations are known as rupee coins.

History of demonetization in India

History of demonetization in India

Reasons for Demonetization

Governments across the world have decided to ban currency notes in circulation, rendering huge amounts of cash useless overnight, due to a plethora of reasons.

a)Fight against counterfeiting currenciesb)Stop funding for terror activitiesc)Battling black money

Why ban Rs 500 and Rs 1000 (large value) notes?

The Financial Action Task Force, a global body that looks at the criminal use of the international financial system notes that high-value bills are used in money laundering schemes, racketeering, and drug and people trafficking.A Centre for Media Studies report showed that nearly Rs 30,000 crore was spent during the 2014 general election, while official spending only accounted for Rs 7,000-Rs 8,000 crore.

Stages that led to demonetization

Challenges for RBIThe logjam may be particularly acute in rural areas where

both bank branches and ATMs are in short supply.While rural India reportedly has 6 lakh villages and had

44 crore savings account holders, they were home to just 48,000 bank branches.

The 12 lakh ATMs that are in operation across the country will also need to be reconfigured to dispense the new denominations.

Challenges for the GovernmentThere is no good estimate for how much of India’s black money is

in forms other than currency/physical notes such as gold, jewelry, land or any other form of wealth.

At a time when private investment has been hit and with factory output contracting, scrapping high-value notes may prolong the economic pain.

The challenge is not just in pulling out 85 per cent of the high-value currencies in circulation but also to ensure a culture of compliance.

Impact of DemonetizationThe effect of this policy is not going to be uniform across the economy. Sectors that have a larger cash component in their transactions will be hit harder, such as real estate, movie production, campaign finance, etc.This will then be followed by a correction in these markets. Whether these corrections are deflationary (reducing prices) or contractionary (reduce business) is something to watch closely.

Impact of Demonetization

Impact of Demonetization

Short-term ImpactNegative Effect:-

Low number of bank accounts in remote, small villages and supply-chain disruptions could affect demand for consumer staples for a brief while, believe analysts.

The demand impact of large-ticket consumer durables items such as apparels, white goods, apparel and the likes could also head south.

Positive EffectThis could also have the effect of bringing down deposit

and lending rates further without the RBI having to cut its repo rate. A rise in deposit base will allow banks to lower the blended cost of funds

Rising use of credit/debit cards, net banking and other online payment mechanisms will be another positive, as these would not only lower transaction costs but some of these could help earn some fee income as well.

Long Term ImpactIt also provides a boost to the government’s financial

inclusion drive, pushing more households towards efficient banking and payment infrastructure.

Tax revenues will increase.

Bank deposits will increase and they will have more capacity to support the economy. It will boost growth as it will expand and clean the formal gross domestic product.

Conclusion

ConclusionDespite having many positives such as rising tax to GDP,

higher GDP growth, lower inflation, higher financial savings, this demonetization move may not curb the root cause of black money.

“This initiative addresses the ‘stock’ of black money but not necessarily the flow/fresh creation of black money unless some mechanism is built to track the movement of the new high-value currency notes.