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Demonetization in Emerging Markets : Boon or Bane

Article · December 2016

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 Demonetization in Emerging Markets :
Boon or Bane
Surajit Malakar* and Dr Ravi Chatterjee**

INTRODUCTION
The Indian economy is one of the world‘s fastest growing economies which is
consistently maintaining a growth rate of around 7%. However the shadow economy
i.e. the black money economy is also growing at an alarming pace. Indian economy
is having this tall shadow economy for decades now. This has led to enormous
concentration of unaccounted money in hands of few which is leading to economic
disparity. The Government of India (GOI) is trying to increase penalties for tax evaders
and incentivize honest tax payers. The Government of India therefore introduced an
income declaration scheme whereby it gave tax evaders an opportunity to pay tax on
their unaccounted wealth and fall in line with the honest tax payers. Simultaneously
the Indian government under the leadership of Prime Minister Shri Narendra Modi
took a bold step of demonetizing currency notes of Rs. 500 and Rs. 1000 so as to
pull the noose around the neck of tax evaders. “Demonetization is the act of stripping
a currency unit of its status as legal tender” (Kumar Prakash, 2016). When any
Government withdraws the legal tender rights of any denomination of currency, it is
known as demonetization. Same was followed when the European Monetary Union
nations decided to adopt Euro as their currency. However, the old currencies were
allowed to convert into Euros for a period of time in order to ensure a smooth transition
through demonetization. Zimbabwe, Fiji, Singapore and Philippines were other countries
to have opted for currency demonetization.
The main intention of demonetization was to curb black money, crack the terror funding
and sever the supply of counterfeit currency notes. The declaration was made by the
Prime Minister himself and the nation immediately welcomed the move. The Prime
Minister asked for 50 days to set things right and the nation was more than willing to
give him that. But then every single person was asking only one question “Will it be
good for the nation?” It’s a simple question with a complex answer. GOI firmly took a
step of demonetization to cut the supply of counterfeit currency notes. There ongoing
debate that terrorist mainly support the infrastructure that pumped fake currency notes
into the country in order to destabilize the Indian economy. Demonetization can render
the entire counterfeit money infrastructure useless in minutes. The question arises
that whether it is right time to force such cash less transaction when a country like
India is struggling to fight against cyber crime.

* Assistant Professor, Army Institute of Management, Kolkata; Email: msurajit@rediffmail.com; Ph:

9433056409
** Assistant Professor, Army Institute of Management, Kolkata; Email: ravic.aimk@gmail.com; Ph:
7044106607

Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016 117
Present report argues that demonetization is an initiative to fight against corruption.
This report tries to build upon the fundamentals that emerging country like India
should work upon technology front first and then should implement demonetization in
practice. Demonetization is seen as a long-term gain than short term pain. It has
been very clear that short term outcome of demonetization is shortage of cash for
purchasing necessitates but in long term it can lead to boosting the economy.

BACKGROUND OF THE STUDY

On 8th Nov 2016, the Indian Prime Minister Shri Narendra Modi scrapped Rs 500
and Rs 1000 notes and paved the way for stopping corruption, black money and
terrorism. These currency notes can be redeemed before the yearend or else it would
hold no value. 86 % of the total notes in circulation consist of these two high-value
notes. The whole drive is for a valid cause and the most important reason is to
eliminate black money that has been mostly used for illegal activities. It would also
greatly support in eradication poverty from the country (Times-News-Network, 2016).
It is very well known that black money give rise to tax evasion and also notoriously
funds political campaigns. People will now account for their cash if they want to
convert or deposit it. The second target is Pakistan’s terror networks are lubricated
by fake currency. It was estimated by the Reserve Bank of India (RBI) in the annual
report of 31 March 2016 stated that in terms of value total bank notes there is Rs.
16.42 lakh crore of Rs. 500 and Rs. 1000 banknotes in circulation. Greater financial
inclusion as banking will get a push e.g. 25.45 crore Jan Dhan Yojana accounts were
opened in which Rs. 45,637 crore was deposited by 09 Nov and has reached to Rs.
74,322 crore by 30 Nov 2016 (Times-News-Network, 2016).
The demonetization process is an effective way to make this country cashless. It
does not nudge the economy but push the economy in that direction. The
demonetization of currency is like to be disruptive in the short run but in the medium
to long run it will make economy more formal with significant gains in terms of demand
boost and investment activity. Increased Tax compliance will mean Tax to GDP ratio
will go up as higher public spending on infrastructure, better fiscal position will lead
to further lower interest rate. Very few people in India pay income tax e.g. Number of
tax returns in 2012-13 was 3.13 crore, 2013-14 was 3.61 crore and 2014-15 was
3.91 crore. The biggest benefit that will come from this will be that the black money
will return to banks and become part of formal economy. Money will go to poor as
they will have bank accounts and as people use proxies to launder black money, that
won’t happen (Economic Times, 2016). Even though, the crisis of cash presents a
big opportunity for the country to adopt cashless transactions, but the question is that
is the country ready for this changeover? The slow and unstable internet, lack of
infrastructure to accept cards especially in rural areas and the mindset of the people
need to be rebooted. Number of ATMs and POS terminals is 2.2 lakh and 15 lakh
respectively. Debit Card usage at POS is 5.2% and ATMs is 94.8%. Growth between
2013 and 2015 for Debit Cards 64%, ATM 43% & POS Machine 28% (Economic
Times, 2016). All said and done, this highly ambitious plan has put people on lurch
as the ATMs are running dry and replacing cash has actually became logistical
nightmare. In the initial few days it was declared that at the Petrol pumps, medical
shops, hospitals the Rs 500 and Rs 1000 notes will be accepted. Many petrol pumps

118 Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016
stopped receiving Rs 500 notes for fuel below Rs 300 as they were unable to find
change (Times-City, 2016). There have been instances where parents were left with
dead infant as they could not pay medical bills, father of prospective bride died of a
heart attack brought on by a desperate lack of cash and senior citizens have died
standing in line of ATMs. When politicians fail the people become the opposition and
can cause worry for the government (Ghose, 2016).
Students studying outside their hometowns feel the cash heat as they receive pocket
money from their parents for their daily expenses, which has been disrupted due to
the cash crunch (Times-News-Network, 2016). November month end became Mayday
for many banks in the metro cities of India as anxious customers waited outside the
banks as the salaries got credited (Times-News-Network, 2016). The pensioners were
also in dire state as they were unable to withdraw money from the banks, ATMs and
post office has disrupted their daily lives (Chakroborty & Konar, 2016). On the other
hand E-wallets gain from shift to cashless economy, the digital payments industry
rejoiced but banks are staring at the nightmare of handling the currency system
reshuffle (Economic Times, 2016). Housing prices in 42 major cities across India
could drop by up to 30% over 6-12 months after the demonetisation of high-value
notes, wiping out over Rs 8 lakh crore worth market value of residential properties
sold and unsold by developers since 2008. Housing prices in 42 major cities across
India could drop by up to 30% over 6-12 months after the demonetisation of high-
value notes, wiping out over Rs 8 lakh crore worth market value of residential
properties sold and unsold by developers since 2008.

EFFECTS OF DEMONETISATION
Demonetization has made people insane as Rs 2k notes were being sold over eBay
for 1.5 lakh it was having religious number ‘786’ and the smaller denomination notes
like Rs 20 and Rs 50 were being sold for Rs 900 and Rs 5000 respectively (Sarkar,
2016). The currency crunch has disrupted the entire supply chain. More than 45 lakh
trucks got stranded on highways from Nagaland to Maharashtra, Punjab to UP.
Transportation association from across the country reported that the business has
gone down by 40-50% across all regions which have adversely affected the supply
chain (Rai, 2016). In the state of Kolkata where fish is being eaten almost every day
and in almost all the households, vanished from the market due to the confusion
caused by demonetization. As money started trickling in, the prices for the perishable
products dipped drastically overnight. Overall the retailers and the shoppers both got
distressed in the process. This has specifically affected the wholesale market as the
daily transaction happens in cash and reaches in lakh. The wholesales rates have
come down but at the retailers level the rates are high and is really not helping the
end customers (Times-News-Network, 2016). The newspaper vendors need to by
newspapers from the supplier daily in cash on the other hand 60% of the customers
pay in cash on monthly basis. Due to cash crunch and shortage of lower denomination
notes, it is not only bringing difficulty making payments but also the daily purchase
from the newspapers vendors have come down by more than 50% (Sen, 2016).
The month of November has been the worst ever for the automobile industry, the
sale for the luxury cars has dipped drastically (Times-News-Network, 2016). The used

Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016 119
car market also sees a drop of 40% as stated by auto financers and organized used
car sellers as more than 70% of used vehicles sell on cash. The used car business
is largely unorganized and only 15-20% vehicles are financed. As a result, the currency
crunch has impacted it more than the new car market (Sengupta, 2016). At the time
of peak seasons the airfares goes up but due to demonetization the airlines are
forced to offer special discounts to fill up planes. In general the airlines are facing a
10% fall in the bookings but are very hopeful that the bookings for holidays in winters
will spike up (Sinha S. , 2016). The real estate sector will be severely hit by the
demonetization decision as the secondary market transactions where 60:40 ratio of
black money had become common (Sinha P. , 2016). The cash squeeze will wipe out
over Rs 8 lakh crore worth market value of residential properties sold and unsold by
developers since 2008 across 42 Indian cities (Times-News-Network, 2016).
Deaths have been reported across the country, after the process of Demonetization
many have lost their balance of mind as they are not able to withdraw cash from
ATMs and are not able to pay for the basic necessities (Times-News-Network, 2016).
Several clinical establishments in Kolkata, India have hiked various charges and
doctors fees after demonetization hit the country. Some of the clinics also plan to
discontinue taking fees in cash and would share their account details in which the
consultation charges can be paid at the end of the month. As this amount gets
accountable the income tax amount will have to be borne by the patients. In all this
new system will bring a hike of 15% in the existing rates (Mitra, 2016). The drug
stockiest see sales drop by 20% in the month of November and consumption at the
retail level was affected by 10%. Diagnostic and health care services experienced a
drop of 15 to 20% as many patients have deferred health checkups and wellness
test due to cash crunch (Mukherjee, 2016).

METHODS
To get view on adverse effect of demonetization and merits of demonetization, several
interviews were conducted. Interview method is particularly useful for drawing out the
outcome based on participants’ personal experience from some reference phenomena.
Open ended interview was conducted with 13 people. Out of 13 samples, 8 were
working professionals and the rest of the participants were students doing their post
graduation. Each interview was based on the central theme of merits and demerits of
demonetization. The interviews lasted for 50 minutes.

RESULTS FROM INTERVIEW

Majority of the respondents felt that demonetization has positive and negative effects
as it has short term pain and long term gain. The gain can be stoppage of the terrorist
activities and black money in this process. People will involve in e-payment modes
that will benefit them as it is easy and safe. It will be beneficial as the people who were
not paying taxes will start paying it. It will also help FDIs to come to our country.
The negative side to this would be that India being 60% village, and is not ready for
online payment systems. Black money is in the form of land and building and black
money is very limited in cash form, so this process has not been in a position to
eradicate black money to that extent. If the cash problem elongates there will be

120 Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016
huge problem in India, many people have lost their jobs and few of them have also
lost their lives.
Additionally a practicing chartered accountant shared his opinion on merits of
demonetization as under:
“Demonetization coupled with implementation of GST and simultaneous reduction in
Income-tax rates can have a terrific impact on Indian economy. It would not only curb
the shadow economy but also prevent it from growing back. As there would not be
cascading effect of indirect taxes and income tax rates would be lower, businessmen
will lose incentive to do black marketing. However it should be backed by simple tax
processes and strict laws for tax evasion. Demonetization will cause a great surge in
deposits with banks. This will create a lending pressure on banks thereby reducing
lending rates. Lower lending rates will provide impetus to manufacturing sector and
thereby providing better employment opportunities to the youths of the nation. This
will improve purchasing power and in-turn fuel demand for goods and services. The
Government should however be cautious so that imported goods do not replace local
products thereby increase trade deficits”.
“Demonetization if implemented in the right spirit will result in higher tax collections
with lower rates of taxes. Higher tax collections will provide the financial might to the
Government to pursue its investment goals in basic infrastructure. With improved
infrastructure the people of the nation will get better public facilities, education and
medical facilities. This will improve the standard of living of the people and prosperity
of the nation”.

RESPONSE ON DIFFICULTIES AND DEMERITS OF DEMONETISATION

The cash was not available in Rs 100 denominations in the ATMs and high
denomination notes became very difficult to be used for daily expenses. As people
could withdraw Rs 2000 notes only and the shopkeepers were not ready to take it,
so people had to overspend in-order to get changes. There was Cash flow shortage
due to which the promised amount of 24 k could not be received by the people.
Small denomination notes were not available, lot of time was wasted standing in the
ATM queue, and also the senior citizens were harassed in the process. Many people
had to face problem taking out money due to bank closers. People had to wait for
long time in queues for taking out money and wasted productive time. Rural people
have been affected as there are less ATM and do not have access to banks.
The preparation was not adequate as there was less circulation of notes. Cash could
have been made available in small denominations in large amount as it would have
helped the people in finding ease in spending it. The masses have not been educated
on how to identify the original notes. Small shops could have been given POS
machines so that they could facilitate the customers in paying through card. The
people who have been taking bribes will still take it and recirculation will be big
problem. It is also feared that Rs 2000 note being a very high denomination note it
will lead to black money again.

DISCUSSION
The effect of demonetization on economy depends greatly on the manner in which it

Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016 121
is implemented and on related rules and policies issued by the Government. Keeping
in view the demonetization policy of Indian Government, the probable adverse effects
are discussed below:
Because of restrictions on withdrawals from banks and limited supply of new currency
notes across the country, there would be liquidity crises. This would induce people to
spend only for the necessities and that also in small quantities. This would lead to
immediate fall in demand of food items and large scale wastage of perishable items
like vegetables. Reduced prices of food items would reduce the rates of commodities
thereby reducing the incomes of farmers. This will adversely affect the purchasing
power of farming community which still forms a major part of Indian economy. This
would result in overall fall in demand of goods across all sectors pushing the economy
towards depression. However the Government can avert this by quickly pumping in
new cash and removing the withdrawal limits along with promoting the use of plastic
money.
The cost of demonetization is unascertainable. Cost of demonetization does not mean
only cost of printing new notes and supplying it into the economy. It also takes in to
consideration the millions of productive man hours wasted in the process of
demonetization. This cost can be controlled only by finishing the demonetization
process in the shortest possible time span. Demonetization will cause a great surge
in deposits with banks. This will cause the banks to lower the deposit rates. Low
deposit rates mean lower interest income for pensioners and retired peoples thereby
forcing them to take jobs even after retirement. The Government should come out
with some kind of pension scheme for retired peoples to support them. Apart from
above it is resulting into inconvenience to general public till the process of
demonetization is completed.

REFERENCES
Chakroborty, A., & Konar, D. (2016, December 02). Long wait no money pensioner hit worst.
Times of India , p. 02.
Economic Times. (2016, November 09). Black to the Future by ET Bureau. Economic Times .
Economic Times. (2016, November 23). The Digital Switch by Pratik Bhakta and Saloni Shukla.
Economic Times .
Economic Times. (2016, November 10). Trumped. But will Make India White by ET Bureau.
Economic Times .
Ghose, S. (2016, November 20). Oppn may be pushover; but Modi souldn’t take the people for
granted. Times of India , p. 16.
Kumar Prakash, R. (2016, November 09). What is demonetisation and why was it done. Economic
Times .
Mitra, P. (2016, November 27). As black goes out, docs’ fees and clinic charges shoot up.
Times of India , p. 01.
Mukherjee, R. (2016, December 02). Drug stokiests sees sales drop by 20% in November.
Times of India , p. 20.
Rai, P. (2016, November 20). 45 lakh trucks stranded oh highways. Times of India , p. 09.
Sarkar, J. (2016, November 17). Numbers game: Rs 2k notes sold for Rs 1.5 L on e-Bay. Ties
of India , p. 01.

122 Kindler Vol. XVI z No. 1&2 z Jan-Jun 2016, Jul-Dec 2016
 Sen, S. (2016, December 05). Pay day blues for newspaper vendors. Times of India , p. 04.
Sengupta, N. (2016, November 30). Used car market sees 40% drop in demand. Times of India
, p. 19.
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p. 07.
Sinha, S. (2016, November 17). In peak season, airlines in flyer hunt. Times of India , p. 02.
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of India , p. 1.
Times-News-Network. (2016, November 24). Demonetisation: Housing prices to drop up to 30%,
wiping Rs 8 lakh crore in value. Times of India .
Times-News-Network. (2016, November 17). It’s ‘economic anarchy’, claims oppn; ‘bold mpve’,
insists govt. Times of India , p. 01.
Times-News-Network. (2016, November 17). Not a penny to spare, student faces cash heat.
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of cash. Times of India , p. 01.
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