India's Demonetization: A Short-Term Loss or a Long-Term Gain?
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Case Code: ECON061 Case Length: 20 Pages Period: - Pub Date: 2017 Teaching Note: Available |
Price: Rs.500 Organization : OnePlus Industry : Smartphone Countries : India Themes: Demonetization, Counterfeit Currency,Cashless Society |
Abstract Case Intro 1 Excerpts
Excerpts
Background
The history of demonetization in India could be traced to the year 1946 when an ordinance was promulgated to phase out higher denomination notes. This was the first incident of demonetization that happened before India gained independence. On January 12, 1946, the government came out with two ordinances. In the first ordinance, it asked banks to furnish information about currency holdings of various denominations like Rs.100, Rs. 500, Rs. 1,000, and Rs.10,000 while the second announced to the public that denominations of Rs. 500 and above would no longer be in use. The then governor of the apex bank of India, the Reserve Bank of India (RBI), Chintaman Dwarakanath Deshmukh, (Chintaman), was highly skeptical about the government’s move to demonetize certain denominations at short notice. People were given 10 days to exchange their old notes and this deadline ended on January 23 but was later extended to February 09 with people being required to explain why they could not exchange their notes in the first ten days....
Demonetization 2016 - The announcement
In a bid to protect the country from corruption and black money, the Indian Government implemented a sudden ban on Rs. 500 and Rs. 1,000 currency notes by making them invalid from the midnight of November 08, 2016. Prime Minister Modi made a public announcement of demonetizing the Rs. 500 and Rs. 1,000 notes only a few hours before the midnight ban became effective as he said, "For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development. To break the grip of corruption and black money, we have decided that the currency notes presently in use will no longer be legal tender from midnight tonight."...
The Chaos, Confusion, and Fear
The announcement of abruptly withdrawing Rs. 500 and Rs. 1,000 notes from public use created chaos, confusion, and fear among all Indian citizens as billions of currency notes suddenly became unusable. The RBI posted 25-point detailed frequently asked questions (FAQs) explaining the rationale behind the move while assuring the public that higher value cash was exactly equal to the amount in lower denominations for exchange at banks and post offices....
The Bright Side
On the one hand, Modi government and opposition parties were fighting in Parliament over the merits and demerits of the note ban; on the other, a suffering public was standing in long queues at banks, post offices, and ATMs for withdrawals and to get their notes exchanged. Economists from across the globe expressed their views on the short-term and long-term impact of this demonetization move...
The Flip Side of Demonetization
The success or failure of demonetization depended on its impact on black money and corruption, and the amount which came back to the banks. While the Modi-led government and the opposition parties were debating the merits and demerits of the note ban, some economists believed that the process initiated by the government to eliminate a parallel economy was not exactly demonetization but just a replacement of currency....
Wave of Demonetization Across the Globe
Though demonetization had a number of side effects, India was not the only country which had taken this initiative to curb the spread of illegal activities in its economy. There were many other countries which had embraced this program in the past. Some of these countries achieved the desired results while others failed miserably....
Result of India's Demonetization
Assuring the public that the cash crisis would be resolved, Modi said, “If you find anything wrong with my intentions or actions, hang me in public. I promise you I will give you the India which you desired. If someone faces problem, I also feel the pain. I understand their problem but this is only for 50 days.” On December 30, 2016, the deadline set by the PM expired and the result of demonetization was still vague, with mixed reactions coming in from across India....
Shifting to a Cashless Society
Furthermore, as the campaign for demonetization progressed, the Government of India gradually transitioned its objective from being a measure to fight corruption to one to modernize India’s economy and stated that an important objective of the demonetization program was promoting cashless transactions. The government took initiatives to encourage people to go in for cashless transactions and introduced several schemes. For example, a 0.75% discount was offered on digital payments made for buying petrol and diesel while a price cut of 0.5% was offered on railway season tickets bought through the digital payment system. Similarly, 10% and 8% discounts were given on online purchase or payment of premium of new general and life insurance policies. Post-demonetization, many traders experienced increased digital payments as one of the garment shop owners in India’s capital, New Delhi, shared his experience,...
Loose Ends of Demonetization 2016
Almost everybody agreed that the decision to demonetize was bold and visionary with the intentions of the government being fair and straightforward; however, the imperfect implementation ruined its major objectives. Experts were of view that the problems caused by the demonetization policy were because of its flawed design and inept implementation. There was lack of a cost-benefit analysis and no alternate options had been considered before the program was rolled out....
Upcoming Challenges Facing India
While the Government of India believed that the junked currency notes could be replaced in just 50 days – by the end of December 2016 – analysts believed that it could take until May 2017 to replace all the bills rendered worthless. In the coming months, the government had to convince the citizens of India to have patience and wait till the economy stabilized...
Way Forward
While the country was facing challenges on all fronts, those with the bulk of unaccounted cash found ways to escape demonetization. One of the ways was purchasing gold in cash. It was found that gold sales increased in India soon after the demonetization announcement. Experts speculated that in order to block such channels, the government might restrict gold ownership in the coming years...
Exhibits
Exhibit I:Percentage Share of Denominations in Circulation by Value in FY 2015-16 Exhibit II: Sensex Values before and after Demonetization Exhibit III: Share of cash in volume of consumer transactions
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