IMPACT OF DEMONETIZATION ON FINANCIAL TRANSACTION OF AAMADMI. Ms. Komal Ramavat & Ms. Riddhi Thummar & Prof. Riddhi Sanghvi

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1 ISSN No X An Indexed Refereed Journal of Higher Education Towards Excellence UGC-ACADEMIC STAFF COLLEGE, GUJARAT UNIVERSITY, AHMEDABAD, INDIA IMPACT OF DEMONETIZATION ON FINANCIAL TRANSACTION OF AAMADMI Ms. Komal Ramavat & Ms. Riddhi Thummar & Prof. Riddhi Sanghvi Abstract In recent time Demonetization has announced by the PM on the night of 8 th Nov, Demonetization means withdrawal of particular currency from circulation. Reserve bank of India has withdrawal the old Rs. 500 and Rs 1000 notes as they are official mode of payments. Due to this aam aadmi suffers a lot but it is required to revive the economy from fake note and black currency. Demonization affects the economy through the liquidity side. Demonetization in India is a clear indication of that where nation wants to move. Demonetization is progressive shift to a cashless economy with a greater focus on electronic transaction. In India more than 90% transactions are done in cash so, it is a big step to for Indian economy to go cashless transaction. In this paper at the end we find that how demonization impact if aam aadmi and their day to day life, how this change their payment mode, how change this step their online transaction (increases or decreases) and according to them demonization is good or bad to change the economy from cash dominant to cashless. Demonetization raises the uses of cards, mobile wallets, net banking and other online payments mechanisms as well. Keywords: Demonetization, impact on Economy, digital payments, cashless Introduction of Topic Demonetization is the act of stripping a currency unit of its status as a legal tender. In other words, it is a withdrawal of particular form of currency circulation. This move is usually undertaken when the old currency is replaced by new one. This paper is focusing on the issue of making the Indian society a cashless society. This is correct that 100% cashless society is never possible in a country like India but people can make the start with less-cash society, after this start, the dream of a cashless society will not be a far-off destination. Many youths are indulging in the process of teaching people and families how to conduct cashless transactions through mobile apps, mobile banking and debit/credit cards. But with this, there are many problems which are to be tackled and it would take time to get emerge out of its impact. This great move has been taken for many important purposes such as to reduce untaxed black money, ICGS Page 243

2 to reduce the wild corruption, to encourage cashless transactions etc. This move will definitely bring about a whole amount of transition to no cash or low cash kind of transactions. India is one of the key growth countries for the companies, with a huge potential for growth in e- commerce. The cash crunch may bring the cash on delivery sales down significantly of e- commerce and increase the online payments. For e-commerce companies such as Amazon, Flipkart, Jabong.com, Snapdeal etc. already have a digital payment system, pointers to higher online payment which ultimately eliminates the troublesome cash on delivery options as well as there are e-wallets like paytm, oxizen, freecharge and mobikwik etc., plastic money (debit cards and credit cards) etc. for the digital transaction system. But with these positive things, there are many problems that the people are facing during this cash crunch move. There are many mishandling on the part of the Banks and third party who manage the ATMs. There is a shortage of liquidity whether it be a bank, people or anything else. This paper deals with the objective mentioned below and its effects on online transactions during this transformation period. Demonetization Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency. In India demonetization has happened thrice. The first was on the 12th of January 1946 (Saturday), second on 16th of January 1978 (Monday) and the third was on 8 th of November 2016 (Tuesday). The demonetization of denominations Rs. 500 and Rs. 1,000 banknotes was a policy decision carried out by the Government of India on 8th of November In the declaration, the use of denominations of all Rs. 500 and Rs. 1,000 banknotes of the Mahatma Gandhi Series would be invalid after the midnight of the same day, and was also announced that the new Rs. 500 and Rs. 2,000 banknotes of the Mahatma Gandhi New Series will be issued in exchange for the above mentioned old currency notes. The move by the government is defended as an attempt to eliminate a reasonable volume of currency notes which is in the circulation because of inflation. Objective of the Study The main objective of this paper is to study the impact of demonetization on 8th Nov.2016 by the present government on Indian economy and system. To highlight the positive and negative impacts of demonetization on the life if a common man in 2016 To see the effect of demonetization on various sectors of the economy. Literature Review ICGS Page 244

3 Vedashree Mali, (December 2016), According to this research paper, The paper discusses about the move of demonetization taken by Central Government of India on 8th November, 2016 with respect to its reasons and effects on different sectors in India. The sectors cover Micro Businesses, E-Wallet businesses, online retail stores and so on. The paper is based on secondary data collected from different newspapers and online sources, mentioned in references. Prabhakar Joshi (August 2017), According to this research paper, In spite of the fact that Demonetization has Bring into existence so many constrains must negotiate with series of hurdles for the citizens of India, and they had confronted so many state of difficulty that needs to be resolved; they faced wait in line problems in the banks and ATMs for depositing and withdrawing money. Citizens of India faced problem of less expenditure of goods due to the lack of cash liquidity. Various businesses broke up due the lack of liquidity; business proprietors as well as person who uses goods or services faced so many question raised for consideration or solution. Government has given so many legal means to recover a right or obtain redress for a wrong to the citizens for time to time. Some economics connoisseur said that positive and forceful consequence of demonetization will showed in future. Government has also increased the withdrawal limits so that the queues in front of banks and ATMs have brought down. In some manner black money also seems to be comes out to many cooperators. Now we should wait and watch the on the whole impact of demonetization constrain. Research Methodology Period of Research : 1 month Type of analysis : Secondary Data Collection Method : Internet, Newspapers, Magazines and Videos Type of Research : Descriptive Research Effect of 2016 Demonetisation Soon after the announcement of demonetization, all banks and ATMs across the country were paralyzed because of cash shortages. The cash shortages had many disadvantageous effects on every small business, agriculture, and also on transportation, with people wanting to exchange their old banned notes having lengthy waits in long queues, and several deaths were reported to be linked to the difficulty in exchanging cash. Deaths were also accounted for the lack of medical facilities or preparations due to denial of old currency notes by the hospitals. In turn as a collective effect because of the demonetization and US presidential election, the Indian stock exchange indices fell to a six-month low in the week which followed the pronouncement. On the very next day after the demonetization announcement, BSE SENSEX lost nearly 1,689 points and NIFTY by over 541 points. At the close of the intraday trading as on 15 November 2016, the BSE SENSEX index was low by over 565 points and the NIFTY 50 index was below 8100 on intraday. ICGS Page 245

4 The first four days after the demonetization witnessed about Rs. 3 trillion (US$45 billion) in the form of old currency notes of Rs. 500 and Rs. 1,000 being deposited in the banking system and an amount of Rs. 500 billion (US$7.4 billion) had been distributed through withdrawals from the deposited bank accounts, ATMs and exchanges over the bank counters. In just four days, the Indian banking system handled almost 180 million transactions. The State Bank of India reported to have received about Rs. 300 billion (US$4.5 billion) as deposits after just two days of demonetization. A sudden hike in the online transactions with the usage of debit and credit cards was also reported. Evading techniques like Gold purchases, Donations, Multiple bank transactions, depositing in the Jan Dhan Scheme bank Accounts, Railway bookings, Municipal and local tax payments, Backdated accounting were also reported to have happened. According to an information by the Union Minister of State for Finance Arjun Ram Meghwal, as stated in Rajya Sabha 1,716.5 crore pieces of Rs 500 denomination notes and crore pieces of Rs 1,000 notes were in circulation as on the November 8th 2016, the date on which demonetization was pronounced. It actually sums up in a value which comes close to Rs lakh crore Demonetization Affects the Cashless Transaction The government wants India to go cashless, but doing so is not easy. Embracing cashless options and being an informed consumer who is aware of the available systems and their designs increases the chances of a convenient and consumer-friendly experience. Traditionally, online transactions were done either by providing debit and credit card details or through net banking interfaces. While there were issues of security, which kept improving, the payment experience was not very user-friendly. Options were also largely restricted to computers with access to internet. But after the smart phone revolution, things have changed entirely. India has seen an explosion in digital payment options, from e-wallets to the Unified Payment Interface to a combination of the two. There are many cashless payment options available in India. Impact of demonetization on various fields Demonetization impacted to every area in Indian economy. Daily routine of people changed a lot due to note exchange. Many people were facing difficulties due to the move of government. Even this decision lowered the GDP of the country, downfall in stock market as well. Major changes in the day-to-day activity and bank exchange as follows: Effect on parallel economy: Cash economy to witness contraction The currency of the aforementioned denominations constitutes around 86% of the total value of the currency in circulation. It was expected to remove black money from the economy as they ICGS Page 246

5 would be blocked considering the holders would not be in a position to deposit the same in the banks, temporarily halt the circulation of large volumes of counterfeit currency and curb the funding for anti-social elements like smuggling, terrorism, espionage, etc. (factly, 2016). Effect on GDP: downward bias to GDP growth The sudden decline in money supply and simultaneous increase in bank deposits was adversely impacted consumption demand in the economy in the short term. This, coupled with the adverse impact on real estate and informal sectors may lead to lowering of GDP growth (factly, 2016). Effect on banks As directed by the Government, the 500 and 1000 Rupee notes, which at that time cease to be legal tender were to be deposited or exchanged in banks (subject to certain limits). This would automatically lead to more amounts being deposited in Savings and Current Accounts of commercial banks. This, in turn, would enhance the liquidity position of the banks, which would be later utilized further for lending purposes. (factly, 2016). ATM withdrawals In initial days, ATM which were not recalibrated had limit of withdrawal up to Rs 2000/- per day, whereas which were recalibrated had limit of withdrawal up to Rs 2500/- per day. (factly, 2016). Impact Positive Impact Foreign Trust: Transparency is always welcomed, especially in business. It is the most important gradient for foreign investors. Everyone likes to have their money in safe hands. Black money is a major factor in India which inhibits the rapid growth in private sector. When a company decides to invest in a product they can calculate almost every kind of expenditure they will have to face except bribe. Ratan Tata has shown his irritation about corruption and bribe many times. So decreased black money will surely help Indian government to gain trust from foreign investors. Lubrication in Circulation: Money is the lubrication that makes the market economy possible. A large portion of this lubricant was immobilized in the form of black money. Rs 500 and Rs 1000 share a major part. Due to this immobilization government is bound to circulate more currency notes in the market to keep it running. Hard Money to Digital Money: Though, it is the first of its kind, but we may have to face these surgical strikes on black money in the future too. This will give some time to people to understand the need of digital money in the current era. We have seen some inspiring pictures where vegetable seller is accepting money via PayTm. India is changing. New Hope: Black money was a key agenda for BJP during election campaigns. But people were disappointed when there was no major step taken by the current government. Now when PM Modi has declared the demonetization of Rs 500 and Rs 1000 notes, a positive vibe has been spread throughout the country. Zero Counterfeit Notes: In India, the circulation of fake Indian currency notes (FICN) has been on the rise, according to the Reserve Bank of India s (RBI) annual reports. The ICGS Page 247

6 year saw a steep rise, with 594,446 FICN detected, up from 488,273 in the year When it comes to the type of notes counterfeited in , RBI data showed that counterfeited Rs 500 notes were most common, with 273,923 recorded. Rs 100 and Rs 1000 notes were the second and third most counterfeited bills, respectively. Most of the FICN are printed in Pakistan. Major transit points include India s neighboring countries Nepal and Bangladesh. Other transit routes includes Dubai, Thailand, Malaysia, Sri Lanka and China. Now all this FICN is equal to ZERO. Rein on Terrorism: The ISI has been making a profit of 30-40% on the face value of each counterfeit Indian note produced in Pakistan, according to the report. The cost of printing a Rs 1,000 counterfeit note, for instance, is Rs 39 (the RBI spends Rs 29 to print a Rs 1,000 note), but it is sold at Rs , according to the report. It is a measure source of funding for these terrorist groups. Now all these funding will be equal to ZERO. Increased Income Tax Revenue: It would be an exaggeration to say that all black money holders will deposit all of their stored cash into bank accounts. But they will also not let their hard-earned cash to become worthless paper. And whatever they will do it will convert their black money into white, at least for once. Someone is surely going to pay income tax on that amount. It will drastically increase the revenue generated from tax. Deflation: Deflation refers to situation, where there is decline in general price levels. It increases the real value of money and allows one to buy more goods with the same amount of money over time. All of the above mentioned points will lead to the decrease in inflation which will automatically increase deflation rate. Goods will be cheaper and facilities will be in the range of poor people. Negative Impact As government has announced it in hastiness, it may affect its execution. Allow withdrawal from ATM is upto Rs and from bank its Rs only. Long queues will not allow a person to get money on time. It will be a little difficult for a family person to survive with this amount. The Average Population per Bank Branch (APBB) as on stands at 12,100. Government has given us 50 days to deposit all our cash money into our bank accounts. Let s say 40 days are working out of 50. It means, on banks have to deal with average of 300 people daily. Yes, I agree that this number includes every living human being (children, senior citizens, women), so you can say that this number will reduce on practical scale. But wait, what about people who will come along? What about people who will come repeatedly, or I can say, daily? What about people who have to come again due to closing time or any other reason? This number will surely exceed. Believe me, public dealing is a very tough job and when you have 300 hassled brains in front of you, it becomes horrible. Running out of Money: Though, everyone needs new currency notes, it is very hard to provide cash on time, even by RBI. Because, there is a limit on printing currency notes. Government just can t order RBI to print new notes as per requirement. There is a regulatory system which guides RBI and Indian government how much new currency ICGS Page 248

7 notes should be printed other country has to face some serious issues like, inflation. So, government will not be able to provide enough money to banks to pass on to consumers. It will create uncertainty. Empty ATM s: Same as bank branches, queues on ATM s will also have to face same fate. Standing in long queues and returning with nothing will not please anyone. Patients: Government hospitals have been allowed to accept old Rs 500 and Rs 1000 notes. According to National Family Health Survey-3, the private medical sector remains the primary source of health care for 70% of households in urban areas and 63% of households in rural areas. So its easy to understand that what will be the effects on these 63% and 70% patients. White into Black: As Indian, we do believe in cash. Even if our money is purely white, we go to bank, withdraw some money and go for shopping. Cheques and ATM swipes are not available everywhere. Like, if someone in family is hospitalized or, have marriage in house, we do withdraw our cash and feel comfortable. So, whatever the reason is, if someone has withdrawn a decent amount from his account then it will create a huge problem for him to prove himself innocent. So, in this case, instead of converting black money into white, a person has accidentally converted his white money into black. Patience of People: Considering all of the above points (and many more in the line), it will need a superman effort from a common man to keep his patience in balance. Any outburst in the tolerance of people will make the situation more terrible. Though, for now, people are more in favor of respected PM because right now they are not suffers. But when they will face hurdles in their routine jobs due to shortage of money then it will be their patience which will make this historic move a success story. Downfall in Economy: Though, it will be a very temporary effect, but for the next few months, there will be a visible effect on economy due to the decreased purchased capacity of consumers. Worst effects will be on startups and medium sized companies and firms. Recent update of demonetization Latest RBI data on reserve money shows that as on June 16, 2017, currency in circulation (CIC) reached a figure of Rs lakh crores. But this is still short (by 15%) of the CIC of Rs lakh crores available on circulation as on November 4, 2016, the week prior to the announcement of demonetization. Although Prime Minister Narendra Modi asked for 50 days to restore the normalcy, even after seven months of demonetization, currency shortage still remains unresolved. On social media, people still complain about empty ATMs and cash crunch in several parts of the country, though most mainstream media publications are not paying any attention to this. Within a couple of weeks after the demonetization, the narrative of the goals of the demonetization dramatically shifted from the black money and fake currency to the virtues of digital economy. Consequent to this, India witnessed a publicity blitzkrieg that promoted digital transactions. Digi dhan melas and lucky dips were organized to encourage people to embrace the ICGS Page 249

8 digital economy. We heard tall claims from the top ministers and bureaucrats that the digital transactions made a giant leap and that the present currency in circulation is more than enough to meet the demands of transactions needed by the nation. Niti Aayog CEO Amitabh Kant made a very ambitious announcement that ATMs, credit and debit cards and POS machines will be redundant by He claimed that they will all become redundant in India, and India will make this jump because every Indian will be doing his transaction just by using his thumb in thirty seconds. Prime Minister, in his mann ki baat address on March 26, 2017, exhorted people to embrace digital transactions so that target could be reached in half the time. In this context, a fact check is essential to ascertain the current status of digital transactions to understand how much our economy has shifted from cash transactions to digital transactions. RBI and NPCI data, all available in the public domain, are used here to separate wheat from the chaff Yardsticks used by RBI to analyze digital transactions Cashless transactions are given in the RBI Annual Report in Part II, under the chapter IX namely Payment and Settlement Systems and Information Technology. These transactions are divided into two major heads, namely Systemically Important Financial Market infrastructures (SIFMIs) and Retail Payments. SIFMIs consists of big token transactions viz. RTGS, CBLO, government securities clearing and forex clearing. SIFMI consists of almost 90% of the amount of cashless transactions while retail payments consist rest of the 10% of the cashless as per annual report of The numbers of transactions under SIFMIs are only million, which is just 1.5% of all cashless transactions volume of million. Table IX.1, Payment Systems Indicator Annual Turnover is reproduced from the RBI Annual Report for here. Based on the same yardsticks, which are being used by RBI, a detailed comparison of various components of the cashless transactions for last six years is done here. Our present area of interest is not the big ticket transactions (SIFMIs), but the big volume transactions fall under the retail payments, which is broadly divided into three major groups: Paper Clearing, Retail Electronic Clearing and Card Payments. Paper Clearing Paper clearing consists of the Cheaque transaction system, MICR clearing and non-micr clearing. These don t fall under digital transactions though they qualify to be cashless transactions. If we look at data from the last six years ( to ), we can see that slowly electronic (digital) transactions are replacing these paper clearing transactions. From the graph given below, it can be seen that paper clearing transactions, which consisted of 82% value of the total retail payments in , was reduced to 37% in ICGS Page 250

9 This phenomenal change is due to a steady shift in the consumer behavior as people adapt to digital transactions such as NEFT, IMPS, NACH. Chart 01: Paper Clearing Value as % of total Retail Cashless Payments (Source: RBI Website) Card Payments A card payment consists of credit cards, debit cards and PPIs. This is the one sector which seen a remarkable year-to-year growth of 65% during the last financial year. This growth is basically driven by a substantial jump in the debit card POS usage which shows a growth of 107%. Of course, demonetization forced people to use their debit cards extensively for personal consumption expenses. But, we should remember that the total amount of Rs 7421 billion under the card payments is just over 5% of total retail payments of Rs 1,39,611 billion. Chart 02: Card Payment Transactions for Last Six years ICGS Page 251

10 (Source: RBI Website) Chart 03: Transactions Volume of last 6 years (Source: RBI Website) Chart 04: Pre & Post Demonetization Trend for Digital Payments Conclusion (Source: RBI Website) ICGS Page 252

11 In 21 st century all the thing are going to digital. People have no time for going to manual work, shopping or any other things. The name itself suggests Digitalizing India i.e. a vision to transform India digitally by infusing technology in governance also known as E-Governance. This campaign was started by our PM in 2015 with a prior objective of connecting people digitally with the new transparent and responsive government like for example, railway computerization, land record computerization, providing digital literacy, availability of high speed internet, mobile phone and bank account enabling in digital space, providing services in online platform etc. There are lots of benefits with this innovative like Every service would be just a touch away (i.e. by increase in usage of smart phones) Banking facilities were made a lot easier, also available in remote areas of the country Information is made open to all, access to various government services through a single online platform, for e.g.: UMANG Corruption would be reduced by opting online mode for transactions Online market available i.e. GeM (government e-marketplace) IT Infrastructure is also developed and many employment opportunities will be increased Increase rate in ease of doing business. And a lot of more advantages, hence this can be considered as a good innovative program to transform India digitally Demonetization though it has created some positive and some negative impavts on different sectors but in long run it definitely will have positive impact in controlling black money and fake money. ICGS Page 253

12 References 1. Read more: /demonetization.html 2. Investopedia ation%20of%20500%20a Ms. Komal Ramavat Student, MBA 2 nd Year Noble Group of Institutions, Junagadh, Gujarat ramavatkomal95@gmail.com Ms. Riddhi Thummar Student, MBA 2 nd year Noble Group of Institutions, Junagadh, Gujarat riddhithummar203@gmail.com Prof. Riddhi Sanghvi Assistant Professor, Noble Group of Institutions, Junagadh riddhisanghvi83@gmail.com ICGS Page 254