What is Demonetization?

One of the biggest reforms in the history of India was announced by honorable Prime Minister Shri. Narendra Modi on 08th Nov, 2016. Demonetization of Rs 500 and 1000 currency notes initiated by Prime Minister Modi is said to be a surgical act of eradicating corruption from the country. This has given rise to the ban on Rs 500 and Rs 1000 notes. This is considered as a major step to check black money, corruption and fake currency notes. People holding currency notes of Rs. 500 and 1000 had to deposit the notes to their bank account or can exchange it with new notes from banks and post-offices from before December 30, 2016. This initiative from Prime Minister Modi has affected all sectors including medical tourists.

Indian Govt. banned INR 500 and INR 1000 notes from 8th Nov, 2016.

Indian Govt. banned INR 500 and INR 1000 notes from 8th Nov, 2016.

Brief Timeline of India’s Demonetization

Date What happened in 2016
8-Nov Modi declares the Rs. 500 and Rs. 1,000 notes invalid. Exchange of currency up to Rs. 4,000 allowed at banks, ATM withdrawal limited to Rs. 2,000.
10-Nov Banks reopen after a day. Massive queues ensue as millions line up to deposit or exchange old currency.
12-Nov Deaths attributed to waiting in the queues begin to be reported. The Sensex registers the biggest single-day fall in nine months.
13-Nov Currency exchange limit raised to Rs. 4,500 and ATM withdrawal to Rs. 2,500.
15-Nov Banks asked to use indelible ink marks on those exchanging money; the election commission raises concerns.
16-Nov Parliament session begins; opposition parties raises against the government over the suffering of the poor.
17-Nov Currency exchange limit lowered to Rs. 2,000.
18-Nov India’s Supreme Court says many are “frantic” over demonetization.
22-Nov RBI says banks have received Rs. 5.3 lakh crore in deposits since Nov.08.
24-Nov Old notes can now only be deposited at banks and not exchanged.
27-Nov RBI governor Urjit Patel justifies demonetization, says the new notes are difficult to counterfeit.


RBI’s Take on Demonetization:
As of December 30th, 2016, The Reserve Bank of India received about 15 lakh crores worth of junked or old Rs. 1000 and Rs. 500 notes as part of demonetization. The expected amount by RBI was about 15.4 lakhs crores. Though the bulk amount is shared with the media and public, the Government and RBI is yet to clarify how much deposited by each bank across the country. Though the numbers are announced, there is lot of ambiguity around double counting. RBI had requested all banks to share the final deposited numbers by end of 30th December. But old notes from other non-banking sources are yet to be rechecked to confirm numbers.

Apart from these Indian’s who were in abroad during November 9 to December 30, 2016 are given another 3 months grace period to deposit old notes at the banks. Thus the final due date for them would be March 31st, 2017. And NRIs have the exemption to deposit notes up to 6 months i.e. till 30th June, 2017. Indians have no restriction to deposit old notes in the next 50- days window but NRIs can deposit Rs. 25,000 only as per law restrictions laid by FEMA.

The whole motive of this move by PM Narendra Modi was to eradicate high denomination fake currency notes from the country. Though there is no security features copied, layman used to find the fake notes similar to original notes. This created easy flow of fake notes in the Indian economy. It was also being misused by terrorists and for black money transactions. As India is cash based economy, transacting fake notes was easier and the chance of getting it into the light of Government was very low. With the introduction of demonetization there have been lots of transactions through secure payment modes such as Internet banking, IMPS, mobile wallets, credit or debit cards and wallet payments.

Reception of Demonetization by Indian Democracy:
While some consider demonetization as a sudden measure to remove huge value of paper money from the financial sources causing to a lot of political instability and threat to economic growth. Others consider this as a part and parcel of Indian democracy. Citizen finds these new changes in the economy as a pain and is creating a lot of difficult in their livelihood. Over 85% of the country’s liquidity is affected by eradicating Rs. 500 and Rs. 1000 notes. This demonetization has affected every individual in the country.

Irrespective of what the holistic effect of demonetization on the economy is, all the citizens feel this as a nightmare. There also has been an economy sink as sufficient notes are not being circulated. Having said all these, people are feeling insecure due unstable statements from the Prime Minister. The rules keep changing and its affecting lot of common man. People have even lost lives by standing in queues to withdraw money from banks and ATM machines, all these have negatively affected the economy and on the Prime Minister. By close observation, it is clearly understood that the poor and middle- income earning group has been majorly hit by this demonetization. Those who live on the basis of daily wages find it very hard to get daily income into hands as there is limit to withdraw money from banks.

It is bureaucratic process to convert old money to new money but at the light of this many farmers and laborers are losing option of earning daily wages. This is directly affecting their family from having food and clothing. These same laborers and farmers are not asked to spend hours and days in banks to open a bank account and also to withdraw their hard earned money. In most of the rural areas, banks are at very far distance, travelling to take money from bank will in itself lead them to lose couple of days work.

Demonetization could be for good or bad but the way it was targeted to the citizens was not planned and organized and this is causing a lot of chaos and death in the country.

Impact of Demonetization on:

a. India’s Economy & GDP:
The aim of demonetization was to wash away ‘black money’ from the country and ensure India is banked, licit and tax paying country. The micro economic benefit of this is it helps in eradicating or controlling terrorists activities with fake money but at the macroeconomic view- layman is being most affected as compared to actual gamblers and scammers.

While some ministers feel demonetization will be a long term benefit as it is will help in having a spurt in the Indian economy, not everyone believes in this theory. For the next two quarters most of the economists and analysts feel there will a dip in the country’s economy and GDP. This is mainly due to the instability of the rules on the basis if demonetization and lack of confidence by public on the Government.

Finance Minister believes the GDP of the country is expected to grow as there are many financial transactions which do not fall into the category of economic activities. The positivity around the demonetization is, there is hope that on the long term there is a lot of benefit from this move. Though at this point are suffering due to sudden changes in the economy.

b. Banking Sector:
Banking sector find demonetization as a great move. There will a boost in the financial assets savings as India is moving towards being a cashless economy. Margins are being impacted as there are lot of deposits and limited access to lend. The credit deposit ratio is seen to be in unfavorable state. There is expected to be positive margins only if capital adequacy spikes up. The best and available source to deploy huge flow of deposits is by G-Secs. However, this will create a temporary dip on the bond values.

Demonetization led to introduction of a new INR 2000 note and a new design on INR 500 note.

Demonetization led to introduction of a new INR 2000 note and a new design on INR 500 note.

Banks have to be ready to compromise on the lending rates to attract customers for credit purposes and as part of these banks such as SBI, PNB and other banks have slashed their lending rates on housing loans. In the near future, a dip in lending rates is expected to be seen on all types of loans. This will make easier for individuals get loans at affordable rates. Banks are said to be making profits with the help of demonetization. Irrespective of the different available sources of e-wallets, the banking sector is still being involved into many online transactions. This helps in making the financial transaction controlled and thus the retail payment system is a great way of adding additional source to the banks.

As part of demonetization, many have turn to be ‘first time users of banks’. Once the first time user cleared, people are continuing to use banks for future transactions. This has helped the banks to have increased deposits of up to 1-2%. As RBI has stabilized and controlled outflow of money from banks, the inflow is helping in having a formal economy as compared to having an informal economy.

NBFC-MFIs have started to go through the face of loan defaults due to demonetization. This has led to temporary increase to the non-performing assets of the institutions. It’s not just the asset quality that is being impacted with this chain reaction but also earning capacity of these institutions is at great threat. Daily wagers and low income earning people are not able to pay the dues on time due to lack of availability of money in hand. Mobilizing collections is the greatest challenges from retail customers after the withdrawal of Rs. 500 and Rs. 1000 notes from the Indian economy. NBFC and Micro-Finance institutions are turning hesitant to lend to those who do not have bank accounts. This measure is taken by them to ensure timely collection of payments, but lack of alternatives is turning its retails customers away.

Though on the long term there will not be much impact on the NBFC and MFIs, the current shake in the economy is affecting the NBFC service providers and their customers. The main disruption seen in this sector is during the collection cycles. This has led to spike in over dues and defaults. Liquid cash transactions are highly difficult but laborers and farmers do not have much option rather than defaulting payments at such scenarios. It is said that the liquidity crunch seen in these NBFCs and MFI are not structural but are cyclic.

The main customers of most of the NBFCs and MFI are small customers like farmers and laborers. Thus there is argument to allow NBFCs and MFI to exchange Specific Bank Notes (SBN) to its rural customers. This will help in having liquidity and defaults and late payments can be brought into control. Unintentional defaults will no more be a reason why there is less liquidity or down fall in the NBFCs and MFI. Apart from these, there should also be some relaxations on the withdrawal limits for these institutions to promote its growth and stability in the current market.

d. Residential Real Estate:
Owning a home was a dream for many in India, but with the help of demonetization there is fall in the real estate value. High EMIs are no more a reason or not having a house of your own. Banks have started to slash lending rates for home loans. This means you will now have to pay lesser to own a house. There are been lot of transparency in the Real Estate Regulatory Act and this will help in protecting investors from delayed constructions and actual delivery of the property.

New properties will not have much of negative impact due to demonetization, the actual issue lies in resale and land property markets. For the next three to six months this market is expected to be down due to negative market sentiments. Cash components play a vital role in resale and land property transactions, thus a direct impact of demonetization lies here. Unaccounted cash has been sucked by the banks as part of demonetization, thus transacting through cash for these purposes is relatively impossible. Those buyers who were ready to pay cash to purchase a property completely are now out of this market. Thus there will be lower demand for the real estate properties in the market. This will create pressure on the property sellers to bring down the value. There are chances of distressed sale by those sellers who are in need of immediate money.

There has been revision in the MCLR rates by banks and some of the banks on which it is already effective are:

Banks Current MCLR Rate – 02nd Jan 2017 Base Rate
SBI MCLR Base Rate 7.75% – 8.15% 9.30%
IDBI Bank MCLR Base Rate 8.50% – 9.30% 9.65%
PNB MCLR Base Rate 8.20% – 8.75% 9.60%
Kotak Bank MCLR Base Rate 8.20% – 9.00% 9.40%
Dena Bank MCLR Base Rate 8.40% – 8.55% 9.70%
State Bank of Hyderabad MCLR Base Rate 8.80% – 9.25% 9.75%
Union Bank of India MCLR Base Rate 8.15% – 8.75% 9.55%


e. Automobile Sector:
By November there has been a steep dip of 30% in the automobile industry’s retail sales. This hit is worse in Gujarat, Punjab and other northern regions as compared to other areas of India. Due to cash crunch the dealers of automobiles are seeing a dip in the business and are worried if it will affect their future. Also automobile companies in a dilemma of manufacturing ordered vehicles. There has been lot of order cancellations off-late by potential purchasers.

In the second hand market, the situation is even worse. People do not have cash for transacting and thus are not finding easy to handle such deals. Apart from this, the impact is also seen at service stations. While people with bank and accounts and money in it have way to paying the service charges on their automobiles, lot of laborers and poor community are not able to transact using cards and net banking.

Being practical, the automobile industry has had worse impact due to demonetization and can even be said, all aspect of this industry in floating towards negativity. However, they have hope that in some way things will change for the better. The second-hand market has had over 50% dip in the transactions and this is also majorly hit in the northern regions of the country. Many manufacturers are hesitant to reveal their sales estimate loss. The predictions and estimates on automobile industry have gone to a toss. This toss has had its share of impact in the trading and stock market world as well.

f. Oil & Gas Sector:
Luckily this industry does not see much of an impact. The demand has of course lowered which is marginal however; there are no adverse effects on the oil and gas sector. It is neither a positive situation nor negative. Things are in neutral state except for the minor shake due to the initial period of demonetization. Everything is expected to get to normal within couple of months in this sector.

Haven said that, Government took some measures to ensure people are not struggling during demonetization period. Petrol pumps and gas refill stations were accepting old notes of Rs. 500 and Rs. 1000 up until 24th November. This helped the public to not worry about travelling in own vehicles around the city. But at the same time, people travelling through public transport were severely affected on 09th November, the day when financial sector was at a freeze. People travelling out-of-state or within state faced difficulty in transacting their high demonetization currencies for basic needs.

Even for the next 2-3 quarter, there is no adverse effect expected on the oil and gas industry. In fact, everything is expected to get back to normal within this period of time. Though the industry is still in a stable state, there was lots of chaos among people to understand the stand point of petroleum, oil and gas lenders.

g. Metal & Mining Sector:
High value cash transaction on metal is quite common is India; those who are involved in such activities have been highly impacted. High denomination currencies being banned over-night left these business transactions to come to a still. This was also a safe haven so far for converting black money into white money. All this has now come to a halt and there is very less space for breathing. Irrespective of how small or big the transactions are all has to happen through secured banking system. People are also blocked with currency withdrawal limit, thus there are limited or almost no alternatives available.

Converting investment or money into the form of gold and other precious metals is no more an easy task. There is no hard cut on these transactions. People who wish to save some gold and precious metals can still do so, however, at the cost of accounting it in the eyes of law. Having said that, people are losing trust on paper money, thus they would find chances to save it in form of gold and other metals. Close vigilance is on all gold transactions in the country to ensure it is not used as a medium for black money.

There has been increase in the import and exports of gold and precious metals however; all transactions are strictly passing through legal checks. Indian government is very particular to not re-create the scenario in form of gold and metals.

h. Pharmaceuticals Sector:
Cash strength of big and small pharma companies has been equalized. Big pharma companies that were willing to bribe to grab the market have lost their cash strength. By this, small and big pharmaceutical companies are able to play in the markets with competitive spirits. With legal money, pharma companies will find business easier. Due to cash flow impact, all transaction is strictly through online and banks. This will help in earning accurate profits and the same will be taxable. This will help in stabilizing the rates of medicines.

Pharma companies can pay as cash invoice only Rs. 20,000. Through this it means, if no cash, no transaction. The drug department will be more regulated and each medicine that is brought and sold will be reflecting in the book of accounts of the pharma company and in banks. In case if the government wants to implement new rules and regulations on the pharmaceutical sector, it will be easier and quickly effective. Pharma companies will come with innovative ideas to offer better medication to public in order to attract the market. Innovation and knowledge will be given more important than cash and bribe.

Pharma sector are now making use of the below chain of distributors to operate easily:
• Distributors
• Pharma companies
• Stockiest
• Doctors
• Consumer
• Retailers
• Pharmacies
• Chemist
• Carrying and forwarding agent

i. Utilities & Industrial Sector:
The impact of demonetization is greatly seen on small traders and retailers. The unorganized retailers are adversely affected than organized retailers. Segments such as jewelry as well luxury goods have more impact than those who handle basic and essential goods. However, retail; markets are still able to earn profits through plastic money and online transactions. Public cannot stop shopping for their basic necessities, thus credit and debit cards are being used for this type of transactions and money flow to and from bank is not at still.

Domestic consumption will be at stable state however; those retailers who are involved in handling luxury goods will face difficulty. As the impact of demonetization is not just on one sector but on the industry on the whole, there is definitely an impact on all sectors either with short term effect or adverse/ long term effect.

In order to bring transparency and structured effect on the retail sector, demonetization has become a great factor. It can be said that, this Utilities & Industrial Sector is in a stable state as compared to other sectors.

j. Debtors:
Debtors and borrowers who are involved in legal transactions need not worry about demonetization. For this category, there will be no impact through withdrawal of high demonetization currencies. Only difference would be repayment of debt will be through online transfers or cheques to bank accounts instead of cash payment. Those debts and transactions that were given outside the eyes of law will come into the light when these are being cleared. As it is difficult to transact through cash, individuals will have to repay the debts through banks accounts. Any transaction that is suspect-able or not accounted legally will have to be explained by the individual.

Which sectors have remained mostly unaffected?
Demonetization of high denomination of currency note Rs. 500 and Rs. 1000 has affected the whole Indian economy. The sector that does not have much impact due to this is just job market. It still cannot be said that there is no impact on this sector. But the impact is very minimal and negligible. All other industries such as consumer goods, real estate, e-commerce, tourism, Automobile, Utilities, Pharmaceuticals, Aviation, Debtors and creditors, Telecom, Oil, Gas and commodities, precious metals, gold and agriculture has had severe effect.

The Overall Impact & Outcome So Far!
Prime Minister Narendra Modi’s demonetization initiative created a sudden interruption in India’s commercial eco-system. Trade across all aspects of the economy was disturbed and cash-centric segments like fishing, agriculture, and voluminous informal markets were virtually shut down. Many livelihoods and businesses went down completely -economic, physical and emotional impact of millions of people standing in queue for hours to deposit or exchange old banknotes are better not to describe.

It is true that to bring come changes in the country such immediate overnight actions are required. However, in this case proper planning and forecasting was not involved, this lead to lot of chaos and negative impact on the move. The government, RBI and PM. Modi tried to be reactive the approach instead of being proactive. This difference has shaken up the trust of Indian citizens on the government. The cash transaction system is good for a country like India, but the question is ”Is the right time and is this the right way”?

Many businessmen across all sectors have seen a dip in the profits. Foreign companies are in a dilemma to invest in India due to lack of information on sudden changes. Rural areas and farmers are adversely affected and are in a state of being forced to bring all their petty savings to banks. The security features of new Rs. 500 notes and Rs. 2000 notes are impressive. However, tendering changes for these notes is a pain. People are expecting a great fall in the real estate market with the removing of black money. Fall in housing price, in other words mean high chance of housing being affordable for low and middle class population in the country.

Through this system, India is moving towards being a cashless country with more honest individuals paying taxes for everything that is essential. About 250 of every million Indian notes were fake and was a reason for black money transaction. This is no more the case in India and transactions are cleaner, safe and legitimate. It’s true that common man has suffered and is still suffering due to demonetization due to unplanned and unprepared initiative by the government. Banks not having sufficient cash for people to withdraw after announcement of new currencies notes lead to ambiguity and people started to lose trust on the Government. This helped citizens to get a glimpse of how prepared the government was.

Currency demonetization is of course a historic move by Prime Minister Narendra Modi. But to gain public support the next moves by the government should planned, prepared and well organized. Government should be ready to act proactively instead of being reactive. This will help in communicating the big picture to the citizens, thus clearing all the misconceptions and current issues in the Indian economy.