DEFINITION of 'Demonetisation'

Demonetization is the act of stripping a currency unit of its status as legal

tender. Demonetization is necessary whenever there is a change of national
currency. The old unit of currency must be retired and replaced with a new
currency unit.
The opposite of demonetization is remonetization where a form of payment
is restored as legal tender.

BREAKING DOWN 'Demonetisation'

There are multiple reasons why nations demonetize their local units of
currency. Some reasons include to combat inflation, to combat corruption,
and to discourage a cash system. The process of demonetization involves
either introducing new notes or coins of the same currency or completely
replacing the old currency with new currency.
In 2016, the Indian government decided to demonetize the 500- and 1000rupee notes, the two biggest denomination notes. These notes accounted for
86% of the countrys cash supply. The governments goal was to eradicate
counterfeit currency, fight tax evasion, eliminate black money gotten from
money laundering and terrorist financing activities, and promote a cashless
economy. By making the larger denomination notes worthless, individuals
and entities with huge sums of black money gotten from parallel cash
systems were forced to convert the money at a bank which is by law required
to acquire tax information from the entity. If the entity could not provide
proof of making any tax payments on the cash, a tax penalty of 200% of the
tax owed was imposed.
In 2015, the Zimbabwean government demonetized the Zimbabwean dollar
as a way to combat the countrys hyperinflation that was recorded at
231,000,000%. The 3-month process involved expunging the Zimbabwean
dollar from the countrys financial system and solidifying the US dollar,
Botswana pula, and South African rand as the countrys legal tender in a bid
to stabilize the economy.

Another example of demonetization occurred when the nations of the

European Monetary Union adopted the euro in 2002. In order to switch to the
euro, authorities first fixed exchange rates for the varied national currencies
into euros. When the euro was introduced, the old national currencies were
demonetized. However, the old currencies remained convertible into euros
for a while so that a smooth transition through demonetization would be
assured.
The Coinage Act of 1873 demonetized silver in favor of adopting the gold
standard as the legal tender of the United States. The withdrawal of silver
from the economy resulted in a contraction of the money supply, which
subsequently led to a 5-year economic depression in the country. In response
to the dire situation and pressure from silver miners and farmers, the BlandAllison Act remonetized silver as legal tender in 1878.

HISTORY OF DEMONETISATION IN THE

WORLD
The night of November 8, Prime Minister Narendra Modi announced the
demonetisation of Rs 500 and Rs 1,000 notes in order to weed out black
money from the country, sending the common man into a tizzy. Immediately,
queues at banks and ATMs swelled up, even as demonetisation became the
major topic of concern as well as discussion.
Facing support and condemnation in equal amounts, the measure of
demonetisation is not a new concept for the world. There were other nations
too that have tried changing their currency in the past. Let us take a look on
some of these countries:

1. Ghana

In 1982, Ghana rolled out the decision to demonetise their 50 cedi

currency notes in order to monitor money laundering and corruption. The
change was not welcomed warmly, creating chaos across the country and
finally resulted in a move back to physical assets and foreign currency.

2.

Nigeria

Nigerias economy collapsed after the 1984 demonetisation move that

did not go as planned. The military government of then President
Muhammadu Buhari introduced different coloured notes to invalidate
their old currency in order to fight black money.
3. Myanmar

Around 80% of Myanmars currency was demonetised in 1987 by the military to curb black
money, but the move resulted in a lot of protests and the country witnessed several killings.

4.

Soviet Union

Under the governance of Mikhail Gorbachev in 1991, the then Soviet

Union demonetised the higher denominations of ruble bills, the 50s
and 100s. The move did not go well and resulted in takeover of
Mikhails leadership within eight months of the plan.
5.

North Korea

North Korea faced demonetisation of their currency in 2010, which led

to major economy breakdown with people left to starve for basics.

6.

Zimbabwe

Zimbabwe once had hundred trillion dollar note, which was demonetised and
was exchanged in a mocking way dropping trillion dollars to $0.5 dollar.

DEMONETISATION A NON ECONOMIC

PRISM
India, one of the largest democracies of the world, is undergoing a major
reform drive called demonetisation. Quite clearly, the society to a large
extent is divided over the implementation as well as impact of this reform.
Everyone has an opinion about the move which is quite different from others.
Although the diversity in opinion is a fundamental right to have in any
democracy, but it is quite interesting to note down the category wise
concerns of society.

Category 1: The Elite

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The elite class in our country comprises of Politicians, bureaucrats, Corporate

and the various mafias/brokers of land, education, liquor etc.
A recent survey has revealed that the richest 1% Indians owned 53% of the
countrys wealth, while the share of the top 10% was 76.30%. The data is
self explanatory of the condition of financial inequality in the country. A
major credit for such inequality goes to this Elite class as most of them have
huge piles/wells of unaccounted wealth, and they hardly care about the
interest of country above themselves.

Impact: This class is significantly affected as they hold the maximum

unaccounted wealth in the country, however they are still hopeful that all is
not lost, and they can still manage things for themselves as they are doing
from ages.

Views: Most common concern of such class is about the implementation of

demonetisation, and not the drive itself. They talk about the ill-impacts on
deprived classes and inconvenience to the common man standing in long
queues. However, the irony is that their concern about the common man or
the deprived classes of the country is nothing more than opportunism to
achieve their own petty interests.

Category 2: The Enriched

This class is the majority of our society and has a huge divide in their
opinion. Reason for it being, while some people of this category are the
biggest victims of social inequality, some of them are the root cause for it.
This category consists of the honest individuals as well as the corrupt
officials and businessmen who consider earning black money and evading
taxation their birth right.
According to a report, out of 1.23 billion population of India in the year 2013
only about 1 percent of the population paid tax. Therefore, the negative
reaction of such people towards the drive is to an extent self explainable and
a spitting image of their continuous fear and frustration about their currently
accumulated unaccounted wealth and future existence without it.

Views: Though being subjected to some inconvenience, a majority of

honest people are supporting the drive. Now the question is why is an honest
common man supporting the move? The reason is very simple, an honest
man who has been paying his hard earned money to the government as
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taxes over the years has always been looked down upon and deprived of the
benefits he/she is entitled in lieu of their paid tax. Therefore, a hope of a
better future is what motivating a common man to support the move.
One the other hand is a group of people who are on a mission to label the
entire decision as a scam, mismanagement, miscalculation, non-futuristic
and draconian. All such people need to have our deepest sympathy and
condolences to their bankruptcy.

Impact: Major impact of the decision is not on the ones standing in the
queues, but on those who are unable to stand in those queues with their
wealth.

Category 3: The Deprived

Unfortunately this class represents one-fourth of our total population. It
comprises of people who remain below the poverty line and struggle for their
day to day existence.
Despite significant economic progress, one quarter of the nation's population
earns less than the government-specified poverty threshold of Rs 32 per day.
Therefore, it would be nothing less than criminal to comment on morality of
this class whose biggest achievement is their existence.

Views: Who cares for demonetisation? And the so called people leading the
protest by using their name should be ashamed of themselves as they have
never contributed for upliftment of this class.

Impact: Definitely there is an indirect impact, but not to an extent where

they have lost something as significant as others. They have been in lines
from the day they are boned, so they are rather supporting the move in the
hope of a better future.

BACKGROUND
Historically, previous Indian governments had demonetised bank notes.In
January 1946, banknotes of 1,000 and 10,000 rupees were withdrawn and
new notes of 1,000, 5,000 and 10,000 rupees were introduced in 1954. The
Janata Party coalition government had again demonetised banknotes of
1,000, 5,000 and 10,000 rupees on 16 January 1978 as a means of curbing
counterfeit money and black money.
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In 2012, the Central Board of Direct Taxes had recommended against

demonetisation, saying in a report that "demonetisation may not be a
solution for tackling black money or economy, which is largely held in the
form of benami properties, bullion and jewellery". According to data from
income tax probes, black money holders keep only 6% or less of their illgotten wealth as cash, hence targeting this cash may not be a successful
strategy.

On 28 October 2016 the total banknotes in circulation in India was 17.77

trillion (US$260 billion). In terms of value, the annual report of Reserve Bank
of India (RBI) of 31 March 2016 stated that total bank notes in circulation
valued to Rs 16.42 trillion (US$240 billion) of which nearly 86% (around Rs
14.18 trillion (US$210 billion)) were 500 and 1,000 banknotes. In terms of
volume, the report stated that 24% (around 22.03 billion) of the total 90266
million banknotes were in circulation.

In the past, the Bharatiya Janata Party (BJP) had opposed demonetisation. BJP
spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and
the aadmis (general population), those who are illiterate and have no access
to banking facilities, will be the ones to be hit by such diversionary
measures."
The Government of India devised an Income Declaration Scheme (IDS),
which opened on 1 June and ended on 30 September 2016. Under the
scheme, the black money holders could come clean by declaring the assets,
paying the tax and penalty of 45% thereafter.
Modi said that the queues due to demonetisation were the last queues that
would end all other queues.

REACTIONS
Support

T he decision met with mixed initial reactions Several bankers like

Arundhati Bhattacharya (Chairperson of State Bank of India) and
Chanda Kochhar (MD & CEO of ICICI Bank) appreciated the move in the
9

sense that it would help curb black money.Businessmen Anand

Mahindra (Mahindra Group), Sajjan Jindal (JSW Group), Kunal Bahl
(Snapdeal and FreeCharge) also supported the move adding that it
would also accelerate e-commerce.Infosys founder N. R. Narayana
Murthy praised the move.
Finance Minister Arun Jaitley said that demonetisation would clean the
complete economic system, increase the size of economy and revenue
base. He mentioned the demonetisation along with the upcoming
Goods and Services Tax (GST) as "an attempt to change the spending
habit and lifestyle."
The Indian National Congress spokesperson Randeep Surjewala
welcomed the move but remained sceptical on the consequences that
would follow.Chief Minister of Bihar Nitish Kumar supported the
move.The demonetisation also got support from Chief Minister of
Andhra Pradesh Nara Chandrababu Naidu.Former Chief Election
Commissioner of India S. Y. Quraishi said demonetisation could lead to
long term electoral reforms.Indian social activist Anna Hazare hailed
demonetisation as a revolutionary step.The President of India Pranab
Mukherjee welcomed the demonetisation move by calling it bold
step.The opinion of the masses varied both ways on micro-blogs and
social media sites like Twitter.
By and large, international response was positive which saw the move
as a bold crackdown on corruption.International Monetary Fund (IMF)
issued a statement supporting Modi's efforts to fight corruption by the
demonetisation policy.
Chinese state media Global Times praised the move and termed it as
"fierce fight against black money and corruption."Former Prime
Minister of Finland and Vice-President of European Commission Jyrki
Katainen welcomed the demonetisation move stressing that bringing
transparency will strengthen Indian economy.BC's South Asia
Correspondent Justin Rowlatt in his article praised the move for its
secrecy and success and elaborated on reason behind
demonetisation.Tim Worstall termed the demonetisation as welcome
macroeconomic effect in his article in Forbes magazine.Swedish
Minister of Enterprise Mikael Damberg supported the move by calling it
bold decision.

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Singapore-based paper The Independent published a laudatory article

on the move titled "Modi does a Lee Kuan Yew to stamp out corruption
in India." Lee Kuan Yew was the Singaporean Prime Minister and is
considered the architect of modern Singapore. "From making up his
mind to rolling it out, a new Lee Kuan Yew is born in India. It will be
reflected in the legacy of this Prime Minister," the article said.

Criticism

The Indian Supreme Court while hearing one among a slew of cases
filed against the sudden demonetisation decision in various
courts,observed that it "appears to be carpet bombing and not surgical
strike" which government repeatedly claims it to be.
Nobel laureate Indian economist Amartya Sen, severely critcized the
demonetisation move calling it a "despotic action" among other things.
Former Senior Vice-President and Chief Economist of the World Bank,
Kaushik Basu, called it a 'major mistake' and said that the 'damage' is
likely to be much greater than any possible benefits.
Pronab Sen, former Chief Statistician and Planning Commision of India
member, called it a "hollow move" since it did not really address any of
the purported goals of tackling black money or fake currency.
Prabhat Patnaik, a former professor of economics at the Jawaharlal
Nehru University, Delhi called the move 'witless' and 'anti-people'. He
criticised the simple way in which black money was assumed as "a
hoard of cash", saying that it would have little effect in eliminating
"black activities" while "causing much hardship to common people."
Noted economist and journalist, T. N. Ninan wrote in the Business
Standard that demonetisation 'looks like a bad idea, badly executed on
the basis of some half-baked notions'.Deepak Parekh (Chairman of
HDFC) had initially appreciated the decision to ban the Rs. 500 and Rs.
1000 notes, but later said that the move had derailed the economy,
and expressed skepticism about its outcome.
Chief Ministers of several Indian states like Mamata Banerjee,Arvind
Kejriwal and Pinarayi Vijayan have criticized and led major protests
against the decision in their states and in parliament. Initially, the
move to demonetise and try to hinder black money was appreciated,
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but the manner in which it was carried out by causing hardships to

common people was criticised.A Public Interest Litigation (PIL) was filed
in Madras High Court by M Seeni Ahamed, General Secretary of the
Indian National League, to scrap the decision. The High Court
dismissed the PIL stating that it could not interfere in monetary policies
of the government.Similar PILs were also filed in the Supreme Court of
India.Supreme Court of India is yet to decide on the matter. It is listed
for hearing on 2 December 2016.
Several government ministers had declared before the demonetisation
that they were holding large amounts of cash, including Arun Jaitley,
who had more than 65 lakh rupees in cash. This led to speculation
about whether and when the ministers had deposited the cash they
held.

Opposition

A Congress-led opposition, which includes 13 political parties, opposed

the current government on the demonetisation issue in the Winter
Session of the Indian Parliament on 16 November 2016. The Chief
Minister of West Bengal Mamata Banerjee also met the President
Pranab Mukherjee to oppose the demonetisation.The debate on
demonetisation is known to be initiated by Indian National Congress
and Anand Sharma in the Rajya Sabha on 16 November 2016,while
Banerjee is known to be the first to oppose the current government on
the demonetisation.
On 16 November 2016, Banerjee led a rainbow delegation comprising
political parties of Trinamool Congress, Aam Aadmi Party, BJP ally Shiv
Sena, Patidar Anamat Andolan Samiti (of Hardik Patel) and National
Conference to Rashtrapati Bhawan to protest against the decision to
withdraw the Rs 500 and Rs 1000 banknotes. A memorandum was
submitted to the President of India Pranab Mukherjee demanding
rollback of the decision.Outside the Parliament in a rally the same day,
Saugata Roy, a member of parliament from the opposition Trinamool
Congress Party, commented, "People are in utter distress, especially
the informal sector is totally disrupted. Poor people, daily wage
earners, they're all facing difficulty"
In the demonetisation debate on the first day of the Winter Session of
Parliament at the Rajya Sabha, on 16 November 2016, Pramod Tiwari
12

from the Indian National Congress, accused Narendra Modi for the
demonetisation[clarification needed] and compared him to Mussolini,
Hitler and Qadhafi, while Prem Chand Gupta questioned a statement of
Modi from the unscheduled TV broadcast on 8 November, "If it was
planned 10 months ago, how did RBI Governor Urjit Patel sign on new
note?". While on the other side, Praful Patel criticised the
demonetisation by stating "the government was not even prepared to
recalibrate the ATMs while announcing the move. People's suffering
unimaginable. Nobody is questioning the government's intention, but
you are unprepared to execute the move". Later, the former Chief
Minister of Uttar Pradesh Mayawati Prabhu Das stated the situiation to
"a financial emergency", by saying "It looks as if Bharat has shut
down." Also, Sitaram Yechury from Communist Party of India,
questioned the government on the demonetisation move by stating
"only 6% of black money in India is in cash to drive his point that
demonetisation won't curb illicit wealth."
On 17 November 2016, in a rally against demonetisation of Rs 500 and
Rs1000 notes, led by the Chief Minister of Delhi Arvind Kejriwal and his
West Bengal counterpart Mamata Banerjee at Azadpur Mandi, the
biggest vegetable and fruits wholesale hub in the national capital,
Arvind Kejriwal demanded the withdraw of demonetisation in 3 days, or
else there would be a rebellion, he said. Banerjee also stated "I give
the government 3 day ultimatum, fix things or withdraw the
demonetisation scheme".
In the demonetisation debate on the second and third day of the
Winter Session of Parliament, on 17 and 18 November 2016, the
opposition and the government clashed over the demonetisation issue,
bringing the house to continuous halts.
On 24 November 2016, in the demonetisation debate, the former
prime minister of India Manmohan Singh said "this scheme will hurt
small industries, the farming sector. The GDP can decline by about 3
per cent due to this move", while he also questioned "I would like to
ask the Prime Minister examples of countries where people have
deposited their money in the banks and not allowed to withdraw their
own money." and later also said "It is no good that on each day banks
bring out new notifications. It doesn't reflect properly on Prime
Minister's Office, Finance Minister and the Reserve Bank of India.
Cooperative banking system has been prevented from handling
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cash".Singh at last termed the demonetisation move as an "organized

loot, legalized plunder of the common people".

Strikes

As the demonetisation was opposed in both houses of the parliament,

it triggered organised nationwide strikes across India.The Opposition
involving parties like Indian National Congress, Bahujan Samaj Party,
Trinamool Congress,DMK, JD(U), AIADMK, Nationalist Congress Party,
Left, Rashtriya Janata Dal and the Samajwadi Party decided to observe
Aakrosh Diwas as, a protest campaign day on November 28 and
launch protests in front of banks, demanding that money be returned
to people.In the state of Bihar, 15 trains were blocked and stranded,
while the states of West Bengal, Maharashtra and Uttar Pradesh saw
protest marches and rallies led by opposition parties.In the state of
Kerala, shops and business establishments were shut, with school and
colleges closed throughout the state, while movements of private
vehicles were also disrupted in Northern Kerala.

EFFECTS AND AFTERMATH

Cash rush
The scarcity of cash due to demonetisation led to chaos, and most
people holding old banknotes faced difficulties exchanging them due to
endless lines outside banks and ATMs across India, which became a
daily routine for millions of people waiting to deposit or exchange the
Rs 500 and Rs 1000 banknotes since 9 November.ATMs were running
out of cash after a few hours of being functional, and around half the
ATMs in the country were non-functional.Sporadic violence was
reported in New Delhi, but there were no reports of any grievous
injury,people attacked bank premises and ATMs,and a ration shop was
looted in Madhya Pradesh after the shop owner refused to accept 500
banknotes.
Several people were reported to have died from standing in queues for
hours to exchange their old banknotes.Deaths were also attributed to
lack of medical help due to refusal of old banknotes by hospitals.As of
15 November 2016, the attributed death toll was 25.In an interview,
14

Chief Minister of Delhi Arvind Kejriwal lashed out at a BBC reporter who
asked him to justify his 19 November claim that 55 deaths were linked
to demonetisation.While, the CMD of Punjab National Bank said that
panic after demonetisation started fading on 19 November 2016.As of
8 December 2016, there were still long queues at banks and ATMs.

Stock market crash

As a combined effect of demonetisation and US presidential election,
the stock market indices dropped to an around six-month low in the
week following the announcement. The day after the demonetisation
announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50
plunged by over 541 points.By the end of the intraday trading section
on 15 November 2016, the BSE SENSEX index was lower by 565 points
and the NIFTY 50 index was below 8100 intraday.

Transportation halts
After the demonetisation was announced, about 800,000 truck drivers
were affected with scarcity of cash, with around 400,000 trucks
stranded at major highways across India were reported. While major
highway toll junctions on the Gujarat and Delhi-Mumbai highways also
saw long queues as toll plaza operators refused the old banknotes.
Nitin Gadkari, the Minister of Transport, subsequently announced a
suspension of toll collections on all national highways across India until
midnight of 11 November, later extended until 14 November and again
until midnight of 18 November, and yet again till 2 December.

Agriculture
Transactions in the Indian agriculture sector are heavily dependent on
cash and were adversely affected by the demonetisation of Rs 500 and
Rs 1,000 banknotes.Due to scarcity of the new banknotes, many
farmers have unsufficient cash to purchase seeds, fertilisers and
pesticides needed for the plantation of rabi crops usually sown around
mid-November.Farmers and their unions conducted protest rallies in
Gujarat, Amritsar and Muzaffarnagar against the demonetisation as
well as against restrictions imposed by the Reserve Bank of India on
15

district cooperative central banks which were ordered not to accept or

exchange the demonetised banknotes.

Banking
In the first four days after the announcement of the step, about Rs 3
trillion (US$45 billion) in the form of old Rs 500 and Rs 1,000
banknotes had been deposited in the banking system and about Rs
500 billion (US$7.4 billion) had been dispensed via withdrawals from
bank accounts, ATMs as well as exchanges over the bank counters.
Within these four days, the banking system has handled about 180
million transactions.The State Bank of India reported to have received
more than Rs 300 billion (US$4.5 billion) in bank deposit in first two
days after demonetisation.A spike in the usage of debit card and credit
card post demonetisation was also reported.
Between November 10 and November 27, banks reported exchange
and deposits of demonetised banknotes worth Rs 8.45 trillion (US$130
billion) (exchange of Rs 339.48 billion (US$5.0 billion) and deposits of
Rs 8.11 trillion (US$120 billion)). During this period, an amount of Rs
2.16 lakh crore (US$32 billion) had been withdrawn by people from
their accounts.
In Malda, a district believed to be a transit-point for fake Indian
currencies,a large sum of cash deposits in dormant accounts were also
reported. According to The Economic Times, more than 80 percent of
fake currency in India originates from Malda district in West Bengal.

Business
By the second week after demonetisation of Rs 500 and Rs 1,000
banknotes, cigarette sales across India witnessed a fall of 30
40%,while E-commerce companies saw up to a 30% decline in cash on
delivery (COD) orders.Several e-commerce companies hailed the
demonetisation decision as an impetus to an increase in digital
payments. They believe that it would lead to a decline in COD returns
which is expected to cut down their costs.
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The demand for point of sales (POS) or card swipe machines has
increased.E-payment options like PayTM and PayUMoney has also seen
a rise. According to data of Pine Labs, the demand for its POS machines
doubled after the decision. Further it states that the debit card
transactions rose by 108% and credit card transactions by 60% on 9
November 2016.

Income tax raids and cash seizures

The Finance Ministry instructed all revenue intelligence agencies to join
the crackdown on forex traders, hawala operators and jewellers
besides tracking movement of demonetised currency notes.
Income Tax departments raided various illegal tax-evasive businesses
in Delhi, Mumbai, Chandigarh, Ludhiana and other cities that traded
with demonetised currency.The Enforcement Directorate issued several
FEMA notices to forex and gold traders. Large sum of cash in defunct
notes were seized in different parts of the country.In Chhattisgarh
liquid cash worth of 4.4 million (US$65,000) was seized.

Seizures of new Rs. 2000 notes

Huge amounts of cash in the form of new notes were seized all over
the country after the demonetisation.
In December 2016, over 4 crore in new Rs. 2000 notes were seized
from four persons in Bangalore, Rs 33 lakh in Rs. 2000 notes were
recovered from Manish Sharma, an expelled BJP leader in West
Bengal,and Rs. 1.5 crore was seized in Goa. 900 notes of the new Rs.
2000 denomination were seized from a BJP leader in Tamil Nadu.
Around Rs. 10 crore in new notes were seized in Chennai.As of 10
December, Rs. 242 crore in new notes had been seized.
It was noted in the media that while people were dying in queues to
obtain a few thousand rupees in cash, persons with the right
connections were able to amass crores of rupees in new notes, thus
rendering the demonetisation exercise futile.
It was announced by the government that the seized notes will be
brought into the mainstream as soon as possible to ease out the cash
problem.
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 Insurgent groups
The move also reportedly crippled Communist guerrilla groups
(Naxalites) financing through money laundering.On 10 November the
police arrested a petrol pump owner at Ranchi when he reportedly tried
to deposit Rs 2.5 billion, belonging to a person affiliated with the
banned Communist Party of India (Maoist).According to Chhattisgarh
Police demonetisation has affected the Naxalite activities. It is reported
that insurgents have stashed more than 70 billion in the Bastar
region.Mumbai Police reported a setback to Hawala operations. Hawala
dealers in Kerala were also affected.The Jammu and Kashmir Police
reported the effect of demonetisation on hawala transactions of
separatists. While Manohar Parrikar claimed that the move has also
helped in reducing the incidents of stone-pelting in valley,his claim has
been disputed. More than 300 Naxals have surrendered to the police
voluntarily due to shortage of funds.

Railways
As of November 2015, Indian Railways did not have the option to make
payment with cards at the counters. After the demonetisation move,
the government announced to make card payment options available at
railway counters in the country.

EVASION ATTEMPTS
Gold purchases
In Gujarat, Delhi and many other major cities, sales of gold increased
on 9 November, with an increased 20 to 30% premium surging the
price as much as Rs 45,000 (US$670) from the ruling price of Rs
31,900 (US$470) per 10 grams (0.35 oz).

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 Donations
Authorities of Sri Jalakanteswarar temple at Vellore discovered cash
worth Rs 4.4 million (US$65,000) from the temple Hundi.

Multiple Bank Transactions

There have also been reports of people circumventing the restrictions
imposed on exchange transactions and also attempting to convert
black money into white by making multiple transactions at different
bank branches.People were also getting rid of large amounts of banned
currency by sending people in groups to exchange their money at
banks.In response, the government announced that it would start
marking customers with indelible ink. This was in addition to other
measures proposed to ensure that the exchange transactions are
carried out only once by each person.On 17 November, the
government reduced the exchange amount to Rs 2,000 (US$30) to
discourage attempts to convert black money into legitimate money.

Railway bookings
As soon as the demonetisation was announced, it was observed by the
Indian Railways authorities that a large number of people started
booking tickets particularly in classes 1A and 2A for the longest
distance possible, to get rid of unaccounted cash. A senior official said,
"On November 13, 42.7 million passengers were nationally booked
across all classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is
a sharp dip from the number of passengers booked on November 9,
when 27,237 passengers had booked tickets in 1A and 69,950 in 2A."
The Railways Ministry and the Railway Board responded swiftly and
decided that cancellation and refund of tickets of value Rs 10,000 and
above will not be allowed by any means involving cash. The payment
can only be through cheque/electronic payment. Tickets above Rs
10,000 can be refunded by filing ticket deposit receipt only on
surrendering the original ticket. A copy of the PAN card must be
19

submitted for any cash transaction above Rs 50,000. The railway

claimed that since the Railway Board on 10 November imposed a
number of restrictions to book and cancel tickets, the number of
people booking 1A and 2A tickets came down.

Municipal and local tax payments

As the use of the demonetised notes had been allowed by the
government for the payment of municipal and local body taxes, it led
to people using the demonetised Rs 500 and Rs 1,000 notes to pay
large amounts of outstanding and advance taxes. As a result, revenue
collections of the local civic bodies jumped. The Greater Hyderabad
Municipal Corporation reported collecting about Rs 1.6 billion (US$24
million) in cash payments of outstanding and advance taxes, within 4
days.

Backdated accounting
The Enforcement Directorate raided several forex establishments
making back dated entries.Money laundering using backdated
accounting was carried out by co-operative banks,jewellers,sellers of
iPhones and several other businesses.

CONCLUSION
However clever the plan looked on paper, it is both extraordinarily
blunt and risky. Demonetisation will probably make only limited strides
in shrinking the black economy while affecting all of Indias 1.3bn
citizens, the poorest most of all.

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In much of the Indian economy, and especially outside big cities, where
cash transactions are most common and financial infrastructure least
developed, the sudden invalidation of a vast amount of outstanding
currency represents a significant monetary shock. Not all of Indias
shadow economywhich provides real employment and income, if not
real tax revenuescan migrate quickly and easily above board.
Whatever cannot easily be shifted represents a potential loss of
economic activity, and a drag on broader Indian economic growth.
Similarly, if a cash crunch forces small firms without access to credit to
shut down, the eventual alleviation of the cash shortage might not lead
to an immediate and complete revival of economic activity.
Managing an economys money is among the most important tasks of
the government. Clumsy use of monetary instruments comes with high
risk. John Maynard Keynes, an economist, was echoing Lenin when he
wrote in 1919: There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency. Trust is fragile,
and precious.

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