INTRODUCTION :-

The move by the government to demonetize Rs.500 and

Rs.1000 notes by replacing them with new Rs.500 and
Rs.2000 notes has taken the country with surprise. The
move by the government is to tackle the menace of black
money, corruption, terror funding and fake currency. From
a market perspective, we think that this is a very
welcome move by the government and which has taken
the black money hoarders with surprise. The total value
of old Rs.500 and Rs.1000 notes in the circulation is to
the tune of Rs.14.2 trillion, which is about 85% of the
total value of currency in circulation. This means that the
total cash has to now pass though the formal banking
channels to get legitimacy. The World Bank in July, 2010
estimated the size of the shadow economy for India at
20.7% of the Gross Domestic Product (GDP) in 1999 and
rising to 23.2% in 2007. Assuming that this figure has not
risen since then (quite unlikely though) and that the cash
component of the shadow economy is also proportional (it
could be higher), the estimated unaccounted value of the
currency could be to the tune of Rs.3.3 trillion. Now, post
the announcement of demonetization by the government
this money would have to either accounted for by paying
the relevant tax and penalties or would get extinguished.
There are higher chances of larger proportion of this
unaccounted currency getting extinguished as the tax
rate and subsequent legal issues could be prohibitively
high for such money.
 Impact of Demonetization on Indian Economy

Effects on Parallel Economy:-

The removal of these 500 and 1000 notes and replacement of the
same with new 500 and 2000 Rupee Notes is expected to remove
black money from the economy as they will be blocked since the
owners will not be in a position to deposit the same in the banks

Temporarily stall the circulation of large volume of counterfeit

currency

It would curb the funding for anti-social elements like smuggling,

terrorism, espionage, etc.
Effects on Money Supply:-

With the older 500 and 1000 Rupees notes being scrapped, until
the new 500 and 2000 Rupees notes get widely circulated in the
market, money supply is expected to reduce in the short run.

To the extent that black money (which is not counterfeit) does

not re-enter the system, reserve money and hence money
supply will decrease permanently.

However gradually as the new notes get circulated in the market

and the mismatch gets corrected, money supply will pick up.
Effects On Demand:-
The overall demand is expected to be affected to an extent. The demand in following areas is to be
impacted particularly:
 Consumer goods

Real Estate and Property

Gold and luxury goods

Automobiles (only to a certain limit)

All these mentioned sectors are expected to face certain moderation in demand from the consumer
side, owing to the significant amount of cash transactions involved in these sectors.

Effects On Prices:-

Effects on various Economic Entities:-

With cash transaction lowering in the short run, until the new notes are spread widely into
circulation, certain sections of the society could face short term disruptions in facilitation of their
transactions. These sections are:

Agriculture and related sector

Small traders

SME

Services Sector

Households

Political Parties

Professionals like doctor, carpenter, utility service providers, etc.

Retail outlets

The nature, frequency and amounts of the commercial transactions involved with these
sections of the economy necessitate cash transactions on more frequent basis.

Thus, these segments are expected to have the most significant impact post this
demonetization process and the introduction of new notes in circulation.

Effects On GDP:-
 The GDP formation could be impacted by this measure, with reduction in the consumption
demand.

The impact on GDP growth is clearly going to be negative in the short run and depends to
a large extent on how long the cash crunch is going to take, Thomas Rookmaaker,
Director, Fitch Asia Pacific Sovereigns Group,

Most of International Credit rating Agencies Cut India Growth rate .

GDP growth rate is likely to slow down anywhere by 0.5 percent to 2 percent from the last
year GDP growth of 7.6 percent for atleast for next 6 months.

After a slowdown of 6-8 months the GDP is expected to grow rapidly.

Effects On Banking Sector:-

 As directed by the Government, the 500 and 1000 Rupee notes which now
cease to be legal tender are to be deposited or exchanged in banks (subject
to certain limits).

This will automatically lead to more amounts being deposited in Savings and
Current Account of commercial banks.

This in turn will enhance the liquidity position of the banks, which can be
utilized further for lending purposes.

However, to the extent that households have held on to these funds for
emergency purposes, there would be withdrawals at the second stage.

Effects On Online Transactions And Alternate Payment Methods:-

With cash transactions facing a reduction, alternative forms of payment will

see a surge in demand.

Digital transaction systems, E wallets and apps, online transactions using E

banking, usage of Plastic money (Debit and Credit Cards), etc. will definitely
see substantial increase in demand.

This should eventually lead to strengthening of such systems and the

infrastructure required.

In spite of the initial hiccups and disruptions in the system, eventually this
change will be well assimilated and will prove positive for the economy in the
long run.

Black money hoarders will definitely lose out, eventually boosting the formal
economy in the long run.

Short term fall in real estate prices might benefit middle class citizens.

This move by the Government along with the implementation of the GST will
eventually make the system more accountable and efficient.
II. REVIEW OF THE LITERATURE

A.

Macroeconomic Factors Affecting Monetization In the literature, monetization

and financial deepening are often used to capture the same phenomenon: an
increase in the ratio of broad money to GDP. Using this ratio as an indicator of
financial deepening, a study shows that real deposit rates, income level and
the real exchange rate are positively and significantly correlated with the
ratio in a selection of Asian countries (Agrawal, 2001). There is also an earlier
study that shows that positive real deposit and lending rates appear to
constitute a fundamental precondition for substantial financial development
(Lynch, 1996). This can be explained by a number of possible mechanisms:
negative real deposit rates tend to deter households from making new bank
deposits (Townsend and Ueda, 2010); and higher real deposit rates induce a
substitution effect away from other financial asset holdings, such as informal
credit markets (Taylor,1983, Edwards, 1988, van Wijnbergen,1982). Taken
together, real interest rates would emerge as one of the key macroeconomic
factors affecting monetization. Demographic factors are also highlighted in
the literature. An earlier paper found that the degree of financial deepening
was affected by the propensity to invest in financial assets, and the urban
population had higher propensity than the rural population (Patrick, 1966).
More

recently, a paper found that rural population density affects financial

deepening, showing that geographical barriers to banking services affect the
ease of access to finance (Detragiache et. al., 2005). A large body of
literature concerning the analysis of the demand for money also provides
guidance as to the potential macroeconomic factors affecting monetization
(Bordo and Jonung, 1989; Arize, 1994; Henstridge, 1999; Sriram, 2001). In a
portfolio investment framework, higher returns on real assets would
negatively affect the demand for money (Sriram, 1999). In developing
countries where financial assets are mostly limited to money, the expected
rate of inflation is shown to be a good proxy for the rate of return on real
assets (Arestis and Demetriades, 1991). Another factor analyzed in this
literature is central bank financing of fiscal deficits which is significant in a
number of developing countries where the government financing through
capital markets are limited (Fry et. al., 1996). A study shows that central bank
financing of the fiscal deficit tends to depress the demand for money because
of higher expected inflation in the absence of credible constraints on
monetary financing by the government (Ritter, 1995).

B.

The Impact of Financial Sector Reforms on Financial Deepening

An earlier literature put a strong emphasis on financial liberalization as the

key condition for financial deepening. It is argued that a move from a regime
of financial repression (characterized by negative real returns on financial
assets) to one of liberalization would be the necessary condition to mobilize
savings (McKinnon, 1973, Shaw, 1973). More recently, the emphasis has
shifted to institutional and legal aspects as fundamental factors for financial
sector development (Tressel and Detragiache, 2008). According to the study,
the relationship between the degree of financial sector reform and financial
depth has been found to be significant, with the impact of banking sector
reforms particularly important. This factor is strongly and positively
associated with increases in financial depth (although their marginal effect
becomes insignificant after five years), and the magnitude of the impact is
almost twice as large in developing countries as in advanced countries.
Additionally, it is found that reforms in developing countries tend to succeed
when political institutions and property rights are better developed. Another
related factor analyzed in the literature is capital account openness. On one
hand, capital account controls are a typical aspect of financial repression
policies pursued by the authorities of developing countries (Kletzer and Kohli,
2001). On the other hand, capital inflows tend to weaken the relationship
between monetization and the level of real economic activity and may lessen
the usefulness of monetization as an indicator of financial development (Pill
and Pradhan, 1995).

C.

Economic Growth Effects of Financial Sector Development

Although this paper concerns factors influencing monetization, not the

consequence of monetization, the growth impact of financial sector
development is relevant for the study of monetization. This is because
monetization can be a key contributor to financial sector development, and
given the emerging consensus that financial sector development is an
important driver of economic growth (Demirguc-Kunt and Levine, 2008), one
could argue that monetization is the backbone of sustained economic
development. 5 From a theoretical point of view, a well functioning financial
system influences resource allocation and economic growth in several
respects by: producing information and allocating capital; monitoring firms
and exerting corporate governance; helping to ameliorate and diversify risks;
pooling and mobilizing savings; and facilitating exchange and lowering
transaction costs (Levine, 2005). Numerous empirical studies have examined
 each of these specific aspects (Levine, 2005, for an overview). A wide range
of empirical techniques and indicators of financial development have been
used to examine the role of financial sector development in economic growth.
The early literature found potentially large long term growth effects of
changes in financial development (e.g., the cross country study of King and
Levine, 1993). The introduction of more robust econometric techniques such
as dynamic panel methodology strengthened this evidence, finding a robust
link between financial development indicators and both economic and
productivity growth (Beck, Levine and Loazya, 2000). In the specific context
of poorer countries, it has been found that finance tends to support growth
mainly through the speeding up of capital accumulation. However, this effect
appears to be nonlinear as countries with very low levels of financial
development experience very little growth acceleration from a marginal
increase in financial development (Rioja and Valev, 2004a, 2004b). Specific
aspects of financial sector development are also found to be associated with
economic growth. Stock market development facilitates long run growth
(Levine and Zervos, 1998, Rousseau and Wachtel, 2000), while higher
degrees of public ownership of banks are associated with lower levels of bank
development and slower economic growth (La Porta, Lopez-de-Silanes and
Shleifer, 2002). Additionally, a study finds that there is little evidence that
foreign banks contribute much to the growth process of developing countries
(Zhuang et. al., 2009).

Monetization is the process of converting or establishing something into legal tender. While it
usually refers to the coining of currency or the printing of banknotes by central banks, it may also
take the form of a promissory currency (see text).
The term "monetization" may also be used informally to refer to exchanging possessions for cash or
cash equivalents, including selling a security interest, charging fees for something that used to be
free, or attempting to make money on goods or services that were previously unprofitable or had
been considered to have the potential to earn profits. And data monetization refers to a spectrum of
ways information assets can be converted into economic value.
Still another meaning of "monetization" denotes the process by which the U.S. Treasury accounts for
the face value of outstanding coinage. This procedure can extend even to one-of-a-kind situations
such as when the Treasury Department sold an extremely rare 1933 Double Eagle, the amount of
$20 was added to the final sale price, reflecting the fact that the coin was considered to be issued
into circulation as a result of the transaction.
What does 'Monetize' mean To monetize is to convert an asset or any object into money or legal
tender. The term "monetize" has different meanings depending on the context. Governments
monetize debt to keep interest rates on borrowed money low and to avoid financial crisis, while
businesses monetize products and services to generate profit.

Promissory currency[edit]

Such commodities as gold, diamonds and emeralds have generally been regarded by human
populations as having intrinsic value within that population based on their rarity or quality and thus
provide a premium not associated with fiat currency unless that currency is "promissory". That is, the
currency promises to deliver a given amount of a recognized commodity of a universally (globally)
agreed-to rarity and value, providing the currency with the foundation of legitimacy or value. Though
rarely the case with paper currency, even intrinsically relatively worthless items or commodities can
be made into money, so long as they are difficult to make or acquire.

Debt monetization[edit]

Debt monetization is a term widely and confusingly used to describe the financing of government
operations by the central bank.[1] The use of the term derives from the view that if a nation's
expenditure exceeds its revenues, it incurs a government debt which can be repaid by the
government treasury by

1. money it already holds (e.g. income or liquidations from a sovereign wealth fund)

2. taxes collected from the public

3. issuing new bonds

4. money it creates de novo

In most countries the government assigns exclusive power to issue its national currency to a central
bank[citation needed], but central banks may be forbidden by law from purchasing debt directly from the
government. For example, the Treaty on the Functioning of the European Union (article 123) forbids
EU central banks' direct purchase of debt of EU public bodies such as national governments. Their
debt purchases have to be from the secondary markets. Monetizing debt is thus a two-step process
where the government issues debt (Government bonds) to cover its spending and the central bank
purchases the debt, holding it until it comes due, and leaving the system with an increased supply of
money.

Government bonds may be sold to the public directly or to the central bank when government needs
money to repay bonds that have come due.

The central bank may purchase government bonds by conducting an open market purchase, i.e. by
increasing the monetary base through the money creation process. If government bonds that have
come due are held by the central bank, the central bank will return any funds paid to it back to the
treasury. Thus, the treasury may "borrow" money without needing to repay it. This process of
financing government spending is called "monetizing the debt".[1]

Debt monetization and inflation[edit]

The sections below apply when the inflation rate is steady or rising. If the inflation rate is falling or is
negative, the sections below need to be re-interpreted in the light of that context. References for
using monetization for policy reasons in these circumstances are replete in the publications of the
Bank or England and the Federal Reserve relating to monetary policy in years such as 2012 and
2013 ; when this action was taken to prevent potentially dangerous disinflation or even negative
inflation. Reference to one source may be potentially mis-leading. In future years comprehensive,
definitive fully retrospective reports on this period will have been written, but none exist now.

When government deficits are financed through debt monetization the outcome is an increase in
the monetary base, shifting the aggregate-demand curve to the right leading to a rise in the price
level (unless the money supply is infinitely elastic).[2][3] When governments intentionally do this, they
devalue existing stockpiles of fixed income cash flows of anyone who is holding assets based in that
currency. This does not reduce the value of floating or hard assets, and has an uncertain (and
potentially beneficial) impact on some equities. It benefits debtors at the expense of creditors and
will result in an increase in the nominal price of real estate. This wealth transfer is clearly not
a Pareto improvement but can act as a stimulus to economic growth and employment in an economy
overburdened by private debt.[citation needed] It is in essence a "tax" and a simultaneous redistribution to
debtors as the overall value of creditors' fixed income assets drop (and as the debt burden to
debtors correspondingly decreases). If the beneficiaries of this transfer are more likely to spend their
gains (due to lower income and asset levels) this can stimulate demand and increase liquidity. It also
decreases the value of the currency - potentially stimulating exports and decreasing imports -
improving the balance of trade. Foreign owners of local currency and debt also lose money. Fixed
income creditors experience decreased wealth due to a loss in spending power. This is known as
"inflation tax" (or "inflationary debt relief"). Conversely, tight monetary policy which favors creditors
over debtors even at the expense of reduced economic growth can also be considered a wealth
transfer to holders of fixed assets from people with debt or with mostly human capital to trade (a
"deflation tax").

A deficit can be the source of sustained inflation only if it is persistent rather than temporary, and if
the government finances it by creating money (through monetizing the debt), rather than leaving
bonds in the hands of the public.[4]
Revenue from business operations[edit]

In some industry sectors such as high technology and marketing, monetization is a buzzword for
adapting non-revenue-generating assets to generate revenue. Web sites and mobile apps that do
generate revenue are often monetized via advertisements, subscription fees or (in the case of
mobile) in-app purchases. In the music industry, monetization happens when a recording artist puts
a video on the Internet and the platform where it appears shows advertisements before, during, or
after the video. For each public viewing, the advertising revenue is shared with the artist or others
who hold rights to the video content.[5] A previously free product may have premium options added
thus becoming freemium.

Failure to monetize web sites due to an inadequate revenue model was a problem that caused many
businesses to fold during the dot-com bust. David Sands, CTO for Citibank Equity Research,
affirmed that failure to achieve monetization of the Research Analysts' models as the reason the de-
bundling of Equity Research has never taken hold.

Monetization of non-monetary benefits[edit]

Monetization is also used to refer to the process of converting some benefit received in non-
monetary form (such as milk) into a monetary payment. The term is used in social welfare reform
when converting in-kind payments (such as food stamps or other free benefits) into some
"equivalent" cash payment. From the point of view of economics and efficiency, it is usually
considered better to give someone a monetary equivalent of some benefit than the benefit (say, a
liter of milk) in kind.

Inefficiency: in the latter situation people who may not need milk cannot get something of
equivalent value (without subsequently trading or selling the milk).

Black market growth: people who need something other than milk may sell it. In many
circumstances, this action may be illegal and considered fraudulent. For example, Moscow
pensioners (see below for details) often give their personal cards that allow free usage of local
transport to relatives who use public transport more frequently.

Changes on the market: supply of milk to the market is reduced by the amount distributed
to the privileged group, so the price and availability of milk may change.

Corruption: firms that should give this benefit have an advantage as they have guaranteed
consumers and the quality of the goods supplied is controlled only administratively, not by
market competition. So, bribes to the body that choose such firms and/or maintain control can
take place.
Russian social welfare monetization of 2005[edit]

In 2005, Russia transformed most of its in-kind benefits into monetary compensation.

Before this reform there were a large system of preferences: free/reduced price of travels on local
transport, free supply of drugs, free health resort treatment, etc. for diverse categories of society:
military personnel, the disabled, and separately, persons disabled due to WWII, Chernobyl disaster
"liquidators," inhabitants of Leningrad during the siege, former political prisoners, and for
all pensioners (that is, women 55+, men 60+). This system was a legacy of the Soviet Union, but it
was heavily extended by populist laws passed by central and regional authorities during the 1990s.

By the law 122- of 22 August 2004, this system was converted into cash payments by various
means:

abolition of preference, compensated by raising of wage (e.g. free use of local transport for
military personnel) or pension (e.g. different preferences for Chernobyl liquidators)

for the three most important preferences (free local transport, 50%-price suburban rail
transport, free supply of drugs): a choice between the preference and some extra money.

The main causes of friction in the reform were the following:

technical and bureaucratic problems (e.g. for usage of the 50% discount for suburban rail
transport, a person would need to present a paper from the local State Pension Fund office
stating that he/she doesn't choose monetary compensation);

separation of all preference-recipients into federal and regional according to the body
authorizing the preference. The largest group pensioners was regional, and this caused
most of the problems:

In poor regions, financial pressure caused the local government to abolish these
preferences with little or no compensation to the former recipients.

Even if the preferences were retained, they would apply only to pensioners of the
region in question. Thus, pensioners from the Moscow Oblast (administrative region), for
example, could not freely use the metro and buses in Moscow proper, because these are
two different local governments. Later, most of these problems would be solved by a series
of bi-lateral agreements between neighboring regions.

A wave of protests emerged in various parts of Russia in the beginning of 2005 as this law started to
take effect. The government responded with measures that eventually addressed the most pressing
of the protesters' concerns (raising of compensations, normalization of bureaucratic mechanisms,
etc.).

The long-term effects of the monetization reform varied for different groups. Some people received
compensation in excess of the services they had previously received (e.g. in rural areas without any
local transport, the free transport benefit was of little value), while others found the compensation to
be insufficient to cover the cost of the benefits they had previously depended on. Transport
companies and railroads have benefitted from monetization as they now collect higher revenue from
the use their services by pensioners who had previously ridden at the government's expense. (In
some regions, more than half of the passengers formerly did not pay for municipal transport, but the
government did not compensate the transport companies for the full fare of these passengers.)
Effects on the medical system are controversial. Doctors and nurses have to fill out many forms in
order to receive compensation from the government for services provided to pensioners, thus
reducing the time that they have to provide medical services.

United States agricultural policy[edit]

In United States agricultural policy, "monetization" is a P.L. 480 provision (section 203) first included
in the Food Security Act of 1985 (P.L. 99-198) that allows private voluntary organizations and
cooperatives to sell a percentage of donated P.L. 480 commodities in the recipient country or in
countries in the same region. Under section 203, private voluntary organizations or cooperatives are
permitted to sell (i.e., monetize) for local currencies or dollars an amount of commodities equal to not
less than 15% of the total amount of commodities distributed in any fiscal year in a country. The
currency generated by these sales can then be used: to finance internal transportation, storage, or
distribution of commodities; to implement development projects; or to invest and with the interest
earned used to finance distribution costs or projects.[

Demonetisation[edit]
See also: Monetisation, Remonetisation, and Withdrawal of low-denomination coins

Coins and banknotes may cease to be legal tender if new notes of the same currency replace them
or if a new currency is introduced replacing the former one.[5] Examples of this are:

The United Kingdom, adopting decimal currency in place of pounds, shillings, and pence in
1971. Banknotes remained unchanged (except for the replacement of the 10 shilling note by the
50 pence coin). In 1968 and 1969 decimal coins which had precise equivalent values in the old
currency (5p, 10p, 50p - 1, 2, and 10 shillings respectively) were introduced, while decimal coins
with no precise equivalent (p, 1p, 2p equal to 1.2d (old pence), 2.4d, 4.8d respectively) were
introduced on 15 February 1971. The smallest and largest non-decimal circulating coins, the half
penny and half crown, were withdrawn in 1969, and the other non-decimal coins with no precise
equivalent in the new currency (1d, 3d) were withdrawn later in 1971. Non-decimal coins with
precise decimal equivalents (6d ( = 2p), 1 and 2 shillings) remained legal tender either until the
coins no longer circulated (1980 in the case of the 6d), or the equivalent decimal coins were
reduced in size in the early 1990s. The 6d coin was permitted to remain in large circulation
throughout the United Kingdom due to the London Underground committee's large investment in
coin-operated ticketing machines that used it.[citation needed] Old coins returned to the Royal Mint
through the UK banking system will be redeemed by exchanging them for legal tender currency
with no time limits; but coins issued before 1947 have a higher value for their silver content than
for their monetary value.[citation needed]

The successor states of the Soviet Union replacing the Soviet ruble in the 1990s.[citation needed]
 Currencies used in the Eurozone before being replaced by the euro are not legal tender, but
all banknotes are redeemable for euros for a minimum of 10 years (for certain notes, there is no
time limit).[citation needed]

India demonetised its 500 and 1000 rupee notes on November 8, 2016. This action affected
86 percent of all cash in circulation. The demonetisation action was intended to curb black
money, the hoarding of unaccounted cash, and sponsorship of terrorism. The old notes are now
being replaced by Rs.2000 and new Rs.500 notes.

Individual coins or banknotes can be demonetised and cease to be legal tender (for example, the
pre-decimal United Kingdom farthing or the Bank of England 1 pound note), but the Bank of
England does redeem all Bank of England banknotes by exchanging them for legal tender currency
at its counters in London (or by post) regardless of how old they are. Banknotes issued by retail
banks in the UK (Scotland and Northern Ireland) are not legal tender, but one of the criteria for legal
protection under the Forgery and Counterfeiting Act is that banknotes must be payable on demand,
therefore withdrawn notes remain a liability of the issuing bank without any time limits. [citation needed]

In the case of the euro, coins and banknotes of former national currencies were considered legal
tender from 1 January 1999 until 28 February 2002 (in some cases). Legally, those coins and
banknotes were considered non-decimal sub-divisions of the euro.[citation needed]

When the Iraqi Swiss dinar ceased to be legal tender in Iraq, it still circulated in the northern Kurdish
regions, and despite lacking government backing, it had a stable market value for more than a
decade. This example is often cited to demonstrate that the value of a currency is not derived purely
from its legal status[citation needed] (but this currency would not be legal tender).

This is also true of the paper money issued by the Confederate States of America during
the American Civil War. The Confederate currency became worthless by its own terms after the war,
since it could only be redeemed a stated number of years after a peace treaty was signed between
the Confederacy and the United States (which never happened, as the Confederacy was defeated
and dissolved).

Demonetisation is currently prohibited in the United States and the Coinage Act of 1965 applies to all
US coins and currency regardless of age. The closest historical equivalent in the US, other than
Confederate money, was from 1933 to 1974, when the government banned most private ownership
of gold bullion, including gold coins held for non-numismatic purposes. Now, however, even surviving
pre-1933 gold coins are legal tender under the 1964 act.[citation needed]

Withdrawal from circulation[edit]

Banknotes and coins may be withdrawn from circulation, but remain legal tender. United States
banknotes issued at any date remain legal tender even after they are withdrawn from circulation.
Canadian 1- and 2-dollar bills remain legal tender even if they have been withdrawn and replaced by
coins, but Canadian $1,000 bills remain legal tender even if they are removed from circulation as
they arrive at a bank. However, Bank of England notes that are withdrawn from circulation generally
cease to be legal tender but remain redeemable for current currency at the Bank of England itself or
by post. All paper and polymer issues of New Zealand banknotes issued from 1967 onwards (and 1-
and 2-dollar notes until 1993) are still legal tender; however, 1- and 2-cent coins are no longer used
in Australia and New Zealand.

Data monetization
From Wikipedia, the free encyclopedia

Data monetization, a form of monetization, is generating revenue from available data sources or
real time streamed data by instituting the discovery, capture, storage, analysis, dissemination, and
use of that data. Said differently, it is the process by which data producers, data aggregators and
data consumers, large and small, exchange sell or trade data. Data monetization leverages data
generated through business operations as well as data associated with individual actors and with
electronic devices and sensors participating in the internet of things. The ubiquity of the internet of
things is generating location data and other data from sensors and mobile devices at an ever
increasing rate. When this data is collated against traditional databases, the value and utility of both
sources of data increases, leading to tremendous potential to mine data for social good, research
and discovery, and achievement of business objectives. Closely associated with data monetization
are the emerging data as a service models for transactions involving data by the data item.

There are three ethical and regulatory vectors involved in data monetization due to the sometimes
conflicting interests of actors involved in the data supply chain. The individual data creator who
generates files and records through his own efforts or owns a device such as a sensor or a mobile
phone that generates data has a claim to ownership of data. The business entity that generates data
in the course of its operations, such as its transactions with financial institutions or risk
factors discovered through feedback from customers also has a claim on data captured through their
systems and platforms. However, the person that contributed the data may also have a legitimate
claim on the data. Internet platforms and service providers, such as Google or Facebook that require
a user to forgo some ownership interest in their data in exchange for use of the platform also have a
legitimate claim on the data. Thus the practice of data monetization, although common since 2000,
is now getting increasing attention from regulators. The European Union and the United States
Congress have begun to address these issues. For instance, in the financial services industry,
regulations involving data are included in the GrammLeachBliley Act and Dodd-Frank. Some
individual creators of data are shifting to using personal data vaults[1] and implementing vendor
relationship management[2] concepts as a reflection of an increasing resistance to their data being
federated or aggregated and resold without compensation. Groups such as the Personal Data
Ecosystem Consortium,[3] Patient Privacy Rights,[4] and others are also challenging corporate
cooptation of data without compensation.

Financial services companies are a relatively good example of an industry focused on generating
revenue by leveraging data. Credit card issuers and retail banks use customer transaction data to
improve targeting of cross-sell offers. Partners are increasingly promoting merchant based reward
programs which leverage a banks data and provide discounts to customers at the same time.

Contents
 [hide]

1Steps

2Pricing Variables and Factors

3Benefits

4Frameworks

5Examples

6Intellectual property landscape

7Presentations and Publications

8See also

9References

Steps[edit]
1. Identification of available data sources this includes data currently available for
monetization as well as other external data sources that may enhance the value of whats
currently available.

2. Connect, aggregate, attribute, validate, authenticate, and exchange data - this allows data to
be converted directly into actionable or revenue generating insight or services.

3. Set terms and prices and facilitate data trading - methods for data vetting, storage, and
access. For example, many global corporations have locked and siloed data storage
infrastructures, which stymies efficient access to data and cooperative and real time
exchange.

4. Perform Research and analytics draw predictive insights from existing data as a basis for
using data for to reduce risk, enhance product development or performance, or
improve customer experience or business outcomes.

5. Action and leveraging the last phase of monetizing data includes determining alternative or
improved datacentric products, ideas, or services. Examples may include real time
actionable triggered notifications or enhanced channels such as web or mobile response
mechanisms.

Pricing Variables and Factors[edit]

A fee for use of a platform to connect buyers and sellers
 A fee for use of a platform to configure, organize, and otherwise process data included in a
data trade

A fee for connecting or including a device or sensor into a data supply chain

A fee for connecting and credentialing a creator of a data source and a data buyer - often
through a federated identity

A fee for connecting a data source to other data sources to be included into a data supply
chain

A fee for use of an internet service or other transmission service for uploading and
downloading data - sometimes, for an individual, through a personal cloud

A price or exchange or other trade value assigned by a data creator or generator to a data
item or a data source

A price or exchange or other trade value offered by a data buyer to a data creator

A price or exchange or other trade value assigned by a data buyer for a data item or a data
source formatted according to criteria set by a data buyer

An incremental fee assigned by a data buyer for a data item or a data set scaled to the
reputation of the data creator

A fee for use of encrypted keys to achieve secure data transfer

A fee for use of a search algorithm specifically designed to tag data sources that contain
data points of value to the data buyer

A fee for linking a data creator or generator to a data collection protocol or form

A fee for server actions - such as a notification - triggered by an update to a data item or data
source included into a data supply chain

IT Research firm Gartner has developed and published proprietary models for quantifying the value
of data (Why and How to Measure the Value of Your Information Assets) for quantifying information's
value that can be useful in pricing data or determining its overall economic value. This is part of
Gartner's infonomics research led by Doug Laney.

Benefits[edit]
Improved decision-making that leads to real time crowd sourced research, improved profits,
decreased costs, reduced risk and improved compliance

More impactful decisions (e.g., make real time decisions)

 More timely (lower latency) decisions (e.g., a vendor making purchase recommendations
while the customer is still on the phone or in the store, a customer connecting with multiple
vendors to discover a best price, triggered notifications when thresholds are reached for data
values )

More granular decisions (e.g., localized pricing decisions at an individual or device or sensor
level versus larger aggregates).

Frameworks[edit]
There are a wide variety of industries, firms and business models related to data monetization. The
following frameworks have been offered to help understand the types of business models that are
used:

Doug Laney of Gartner, a leading IT research and advisory firm, has posited a model for a range of
data monetization methods:

Indirect Data Monetization

Using data to improve efficiencies

Using data to measurably reduce risks

Using data to develop new products, markets

Using data to build and solidify partner relationships

Publishing Branded indices

Direct Data Monetization

Bartering or trading with information

Information-enhanced products or services

Selling raw data through brokers

Offering data/report subscriptions

He also suggests a set of feasibility tests and questions for any data monetization ideas being
considered:

Type of
Feasibility Question
Feasibility
Practical Is the idea utilitarian, or merely interesting/cool? Is it usable?

Would the idea have sufficiently broad appeal, internally or

Marketable
externally?

Can the idea be developed and implemented to the extent required

Scalable
or intended?

Do you have the skills to oversee the development & implementation

Manageable
of the idea?

Do you have the tools, information and skills to develop and rollout
Technological
the idea?

Will the idea require too much investment or generate sufficient

Economical
return on investment?

Does the idea conform to local laws where it will be used or

Legal
implemented?

Will the idea be something that has the potential for

Ethical
customer/user/public backlash?

Will the idea cause significant positive vs. negative impact on the
Example
environment?

Roger Ehrenberg of IA Ventures, a VC firm that invests in this space has defined three basic types of
data product firms:

"Contributory databases. The magic of these businesses is that a customer provides their
own data in exchange for receiving a more robust set of aggregated data back that provides
insight into the broader marketplace, or provides a vehicle for expressing a view. Give a little,
get a lot back in return a pretty compelling value proposition, and one that frequently
results in a payment from the data contributor in exchange for receiving enriched,
aggregated data. Once these contributory databases are developed and customers become
reliant on their insights, they become extremely valuable and persistent data assets.
Data processing platforms. These businesses create barriers through a combination of
complex data architectures, proprietary algorithms and rich analytics to help customers
consume data in whatever form they please. Often these businesses have special
relationships with key data providers, that when combined with other data and processed as
a whole create valuable differentiation and competitive barriers. Bloomberg is an example of
a powerful data processing platform. They pull in data from a wide array of sources
(including their own home grown data), integrate it into a unified stream, make it consumable
via a dashboard or through an API, and offer a robust analytics suite for a staggering number
of use cases. Needless to say, their scale and profitability is the envy of the industry.
Data creation platforms. These businesses solve vexing problems for large numbers of
users, and by their nature capture a broad swath of data from their customers. As these data
sets grow, they become increasingly valuable in enabling companies to better tailor their
products and features, and to target customers with highly contextual and relevant offers.
Customers dont sign up to directly benefit from the data asset; the product is so valuable
that they simply want the features offered out-of-the-box. As the product gets better over
time, it just cements the lock-in of what is already a successful platform. Mint was an
example of this kind of business. People saw value in the core product. But the product
continued to get better as more customer data was collected and analyzed. There werent
network effects, per se, but the sheer scale of the data asset that was created was an
essential element of improving the product over time."[5]

Selvanathan and Zuk [6] offer a framework that includes "monetization methods that are
outside the bounds of the traditional value capture systems employed by an enterprise...
tuned to match the context and consumption models for the target customer." They offer
examples of "four distinct approaches: platforms, applications, data-as-a-service, and
professional services."

Ethan McCallum and Ken Gleason published an O'Rielly eBook titled Business Models
for the Data Economy

Collect/Supply
Store/Host
Filter/Refine
Enhance/Enrich
Simplify Access
Analyze
Obscure
Consult/Advise[7]

Examples[edit]
Packaging of data (with analytics) to be resold to
customers for things such as wallet share, market
share and benchmarking
 Integration of data (with analytics) into new
products as a value-added differentiator such
as On-Star for General Motors cars

GPS enabled smartphones

Geolocation-based offers and location discounts,

such as those offered
by Facebook[8] and Groupon[9] are other prime
examples of data monetization leveraging new
emerging channels

CRM based ad targeting and media attribution,

such as those offered by Circulate

Intellectual property landscape[edit]

Some of the patents issued since 2010 by
the USPTO for monetizing data generated by
individuals include; 8,271,346, 8,612,307, 8,560,464,
8,510,176, and 7,860,760. These are usually in the
class 705 related to electronic commerce, data
processing, and cost and price determination. Some of
these patents use the term, the data supply chain to
reflect emerging technology to federate and aggregate
data in real time from many individuals and devices
linked together through the internet of things. Another
emerging term is information banking.

An unexplored but potentially disruptive arena for data

monetization is the use of Bitcoin micropayments for
data transactions. Because Bitcoins are emerging as
competitors with payment services like Visa or PayPal
that can readily enable and reduce or eliminate
transaction costs, transactions for as little as a single
data item can be facilitated. Consumers as well as
enterprises who desire to monetize their participation
in a data supply chain may soon be able to access
social network enabled Bitcoin exchanges and
platforms.[10] Clickbait and data hijacking may wither as
micropayments for data are ubiquitous and enabled.
Potentially, even the current need to build out data
broker managed data trading exchanges may be
bypassed. Stanley Smith,[11] who introduced the notion
of the data supply chain, has said that simple
micropayments for data monetization are the key to
evolution of ubiquitous implementation of user
 configurable data supply schemata, enabling data
monetization on a universal scale for all data creators,
including the burgeoning internet of things.

Patent monetization
From Wikipedia, the free encyclopedia

Licensing of patents

Overviews

Licensing
Royalties

Types

Compulsory licensing
Cross-licensing
Defensive Patent License
Defensive termination
Fair, reasonable, and non-discriminatory(FRAND,
RAND)
Shop right

Strategies

Catch and release

Defensive patent aggregation
Patentleft
Patent monetization
Patent pool
Stick licensing

Clauses in patent licenses

Field-of-use limitation

v
t
e
Patent monetization refers to the generation of revenue or the attempt to generate revenue by a
person or company by selling or licensing the patents it owns. According to a 2006 survey of patent
owners at the European Patent Office, about half of small and medium-sized enterprises (SMEs)
take patents for monetary reasons.[1]

Some of these owners try to make money from patents on inventions they develop, manufacture or
market. Others attempt to generate revenue by buying and enforcing patents against one or more
alleged infringers in a manner considered by the target or observers as unduly aggressive or
opportunistic, often with no intention to further develop, manufacture or market the patented
invention. The latter group is pejoratively called patent trolls by their critics.

History[edit]
Texas Instruments is believed to be the first company to monetize in the 1990s its portfolio of
patents[2] (more than 38,000 in total[3]) when the company was losing market share to competitors.[4]

After the Texas Instruments example, IBM was another company who used the same technique in
the 1990s to monetize its own patents to make more than $1 billion annually in revenue. [2]

Microsoft use its patents to make deals with the major Android vendors, which amount to more than
70% of Android's market share.[5]

Eastman Kodak is an example of a struggling company which use its patents portfolio to make
additional revenue. For example, it is said that Kodaks' licensing programs have generated more
than $3 billion in revenue since 2004.[2]

Nokia generated 500 million from patents in 2013.[6][7]

References[edit]
1. ^ Jump up to:a b The Economics of Money, Banking, and the Financial Markets 7ed, Frederic
S. Mishkin

2. Jump up^ The Economics of Money, Banking, and the Financial Markets 7ed, Mishkin

3. Jump up^ The economics of the platinum coin option The Economist January 9, 2013

4. Jump up^ The Economics of Money, Banking, and the Financial Markets 7ed, Mishkin

5. Jump up^ Wixen, Randall W. (2005). The Plain & Simple Guide to Music Publishing. home:
Hal Leonard Corporation. p. 180. ISBN 978-1-4803-5462-3.

6. Jump up^ CRS Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws,
2005 Edition - Order Code 97-905 Archived 10 August 2011 at the Wayback Machine.
Indian 500 and 1000 rupee note demonetisation
From Wikipedia, the free encyclopedia

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specific problem is: The article title and content of article need to correlated
and focussed Please help improve this article if you can. (December
2016) (Learn how and when to remove this template message)

This article may lack focus or may be about more than one
topic. Please help improve this article, possibly by splitting the article and/or
by introducing a disambiguation page, or discuss this issue on the talk
page. (December 2016)

It has been suggested that Aakrosh Diwas be merged into this article.
(Discuss) Proposed since December 2016.

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reached on the talk page of this article.
 A store displaying the demonetisation message: "Withdrawal of legal tender status for 500 and 1000 notes",
at the cash counter

The demonetisation of 500 and 1,000 banknotes was a policy enacted by the Government of
India on 8 November 2016. All 500(US$7.40) and 1,000 (US$15) banknotes of the Mahatma
Gandhi Series ceased to be legal tender in India from 9 November 2016.[1]

The announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live
televised address at 20:15 Indian Standard Time (IST) on 8 November.[2][3] In the announcement,
Modi declared that use of all 500 and 1,000 banknotes of the Mahatma Gandhi Series would be
invalid from midnight of the same day and announced the issuance of new 500
and 2,000banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.
However, the banknote denominations of 100, 50, 20, 10 and 5 of the Mahatma Gandhi
Series remained legal tender and were unaffected by the policy.

The government claimed that the demonetisation was an effort to stop counterfeiting of the current
banknotes allegedly used for funding terrorism, as well as a crack down on black money in the
country.[4][5] The move was described as an effort to reduce corruption, the use of drugs,
and smuggling.[6][7] However, in the days following the demonetisation, banks and ATMs across the
country faced severe cash shortages.[8][9] The cash shortages had detrimental effects on a number of
small businesses, agriculture, and transportation, while people seeking to exchange their notes had
lengthy waits, and several deaths were linked to the rush to exchange cash. [10][11] Also, following
Modi's announcement, the BSE SENSEX and NIFTY 50 stock indices crashed for the next two days.
[12]

The demonetisation received support from several bankers as well as from some international
commentators, although it was criticised by members of the opposition parties, which led to debates
in both houses of parliament and triggered organised protests against the current government in
front of the parliament and elsewhere across India. [13][14][15]

Contents

[hide]

1Background

2Televised address

3Exchanging old notes

4Alleged prior leakage of information

o 4.1Allegations and claims

5Reactions
 o 5.1Support

o 5.2Criticism

o 5.3Opposition

o 5.4Strikes

6Effects and aftermath

o 6.1Cash rush

o 6.2Stock market crash

o 6.3Transportation halts

o 6.4Agriculture

o 6.5Banking

o 6.6Business

o 6.7Municipal and local tax payments

o 6.8Income tax raids and cash seizures

o 6.9Insurgent groups

o 6.10Railways

7Evasion attempts

o 7.1Gold purchases

o 7.2Donations

o 7.3Multiple bank transactions

o 7.4Railway bookings

8See also

9References

10External links

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 to curb counterfeit money and
black money.[16]

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".[17][18] According to data from
income tax probes, black money holders keep only 6% or less of their ill-gotten wealth as cash,
hence targeting this cash may not be a successful strategy.[19]

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 16.42 trillion (US$240 billion) of which nearly 86%
(around 14.18 trillion (US$210 billion)) was 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.
[20]

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."[21][22][23][24] On 8 May 2014, RuPay, domestic card system, was
launched.[25] The Government of India had launched Jan Dhan Yojana for financial inclusion of people
having no banking system in August 2014. 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. The scheme yielded 65,250 crore (US$9.7 billion) from 64,275 declarations with
45% of it as the revenue to the government.[26] The Unified Payments Interface was launched
by National Payments Corporation of India in April 2016 to encourage cashless payments.[27]

Televised address
On 8 November 2016, an announcement was made by the Prime Minister of India Narendra Modi in
an unscheduled live televised address to the nation at 20:15 IST.[2][3] In the announcement, Modi
declared circulation of all 500 and 1,000 banknotes of the Mahatma Gandhi Series as invalid
effective from the midnight of the same day, and announced the issuance of new 500
and 2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.

After the official announcement by Prime Minister Modi, the Governor of the Reserve Bank of
India, Urjit Patel, and Economic Affairs secretary, Shaktikanta Das explained in a press conference
that while the supply of notes of all denominations had increased by 40% between 2011 and 2016,
the 500 and 1,000 banknotes increased by 76% and 109% respectively in this period owing to
forgery. This forged cash was then used to fund terrorist activities against India. As a result the
decision to eliminate the notes had been taken.[28]
Patel also informed that the decision had been made about six months ago, and the printing of new
banknotes of denomination 500 and 2,000 had already started. However, only the top members of
the government, security agencies and the central bank were aware of the move. But media had
reported in October 2016 about the introduction of 2,000 denomination well before the official
announcement by RBI. This statement has led to much debate, because the Reserve Bank governor
six months before the announcement was Raghuram Rajan, while the new banknotes have the
signature of the newly appointed governor, Urjit Patel.[29][30]

Exchanging old notes

This section needs to be updated. Please update this article to reflect recent
events or newly available information. (November 2016)

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following deposit of demonetised
currency notes in bank on 15 November 2016.

The Reserve Bank of India laid down a detailed procedure for the exchange of the demonetised
banknotes with new 500 and 2,000banknotes of the Mahatma Gandhi New
Series and 100 banknotes of the preceding Mahatma Gandhi Series.[1] Following are the key points:

Long queue in front of SBI ATM at Paravur near the city of Kollam in Kerala, 19th November 2016.

Citizens will have until 30 December 2016 to tender their old banknotes at any office of the
RBI or any bank branch and credit the value into their respective bank accounts. [1]

Cash withdrawals from bank accounts were restricted to 10,000 per day and 20,000 per
week per account from 10 to 13 November 2016.[1] This limit was increased to 24,000 per week
from 14 November.[31][32]

For immediate cash needs, the old banknotes can be exchanged for the new 500 and
2,000 banknotes as well as 100 banknotes over the counter of bank branches by filling up a
requisition form along with a valid ID proof.[1] This exchange is restricted to once per person.

Initially, the limit was fixed at 4,000 per person from 8 to 13 November 2016.

This limit was increased to 4,500 per person from 14 to 17 November 2016. [31][32]

The limit was reduced to 2,000 per person from 18 November 2016. [33]
 Initially, all ATMs were dispensing banknotes of only 50 and 100 denominations and cash
withdrawals from ATMs were restricted to 2000 per day.[34] From 14 November onwards, ATMs
recalibrated to dispense new 500 and 2000 notes will allow a maximum withdrawal of 2,500
per day, while other ATMs dispensing banknotes of only 50 and 100 denominations will allow
a maximum withdrawal of 2000 per day.[31][32]

However, exceptions were given to petrol, CNG and gas stations, government hospitals, railway and
airline booking counters, state-government recognised dairies and ration stores, and crematoriums
to accept the old 500 and 1,000 banknotes until 11 November 2016, which was later extended to
14 November 2016 and once again to 24 November 2016. [35][36] International airports were also
instructed to facilitate an exchange of notes amounting to a total value of 5,000 for foreign tourists
and out-bound passengers.[37]

Under the revised guidelines issued on 17 November 2016, families were allowed to withdraw
250,000 for wedding expenses from one account provided it was KYC compliant. The rules were
also been changed for farmers who are permitted to withdraw 25,000 per week from their accounts
against crop loan.[33][38]

Alleged prior leakage of information

Several exact details pertaining to the decision to demonetise the notes had been published on 1
April 2016 in a Gujarati newspaper called Akila, including for instance, that there would be around 2
months' time to exchange banned notes, and that new notes in the 2,000 denomination would be
issued.[39][40] The editor of the newspaper claimed that it was only an April fools day prank.[41]

A fortnight before the official announcement, a news report in Hindi daily Dainik Jagran quoting RBI
sources mentioned about the coming release of new 2000 rupee note and alongside withdrawal of
prevailing 500 and 1000 rupee notes when it is released. [42][43]

A businessman reportedly admitted in an interview, that he had received prior warning of the
impending demonetisation from a source in the government, and that he had sufficient time to
convert most of his money into smaller denominations.[44]

The chairman of the State Bank of India had also openly spoken in April 2016 about the possibility of
demonetisation of 500 and 1000 notes.[45]

A BJP MLA from Rajasthan, Bhawani Singh Rajawat, claimed in a video that 'Ambani and Adani'
were informed about the demonetisation, and made arrangements. However, he later said that it was
an off-the-record conversation, and officially denied the comments.[46][47]

Allegations and claims

The Communist Party of India (Marxist) (CPI ( M)) alleged that the BJP unit in West Bengal had
advance knowledge about the impending announcement, and deposited money just before the
announcement.[48][49] Aam Aadmi Party leader Arvind Kejriwal also claimed that there had been some
leakage regarding the move.[50][51] Kejriwal questioned how Sanjeev Kamboj, a BJP leader in Punjab,
posted about the 2000 notes days before the official announcement, and alleged that a sudden
spike in bank deposits between July and September 2016 was also due to information leakage. [52]

Reactions

Support

The decision met with mixed reactions Several bankers like Arundhati Bhattacharya (Chairperson
of State Bank of India), Chanda Kochhar (MD & CEO of ICICI Bank) and Deepak Parekh (Chairman
of HDFC) appreciated the move in the sense that it would help curb black money.
[53]
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.[53] Infosys founder N. R. Narayana Murthypraised the move.[54][55]

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."[56]

The Indian National Congress spokesperson Randeep Surjewala welcomed the move but remained
sceptical on the consequences that would follow.[57] Chief Minister of Bihar Nitish Kumar supported
the move.[58][59][60] The demonetisation also got support from Chief Minister of Andhra Pradesh Nara
Chandrababu Naidu.[61][62][63] Former Chief Election Commissioner of India S. Y. Quraishi said
demonetisation could lead to long term electoral reforms.[64] Indian social activist Anna Hazare hailed
demonetisation as a revolutionary step.[65][66][67] The President of India Pranab Mukherjee welcomed
the demonetisation move by calling it bold step.[68][69][70][71] The opinion of the masses varied both ways
on micro-blogs and social media sites like Twitter.[72] In general, the move to demonetise and try to
hinder black money was appreciated, but the manner in which it was carried out by causing
hardships to common people was criticised.[73]

By and large, international response was positive which saw the move as a bold crackdown on
corruption.[74][75][76] International Monetary Fund (IMF) issued a statement supporting Modi's efforts to
fight corruption by the demonetisation policy.[74]

Chinese state media Global Times praised the move and termed it as "fierce fight against black
money and corruption."[75] 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.[77][78] BBC's South Asia Correspondent Justin Rowlatt in his article
praised the move for its secrecy and success and elaborated on reason behind demonetisation.
[79]
Tim Worstall termed the demonetisation as welcome macroeconomic effect in his article in Forbes
magazine.[80] Swedish Minister of Enterprise Mikael Damberg supported the move by calling it bold
decision.[76]

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.[81]

Criticism

On 8 November 2016, Chief Minister of West Bengal Mamata Banerjee called the new declaration
"drama".[82] 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. [83] Similar PILs were
also filed in the Supreme Court of India.[84] Supreme Court of India is yet to decide on the matter. It is
listed for hearing on 2nd December 2016. Former World Bank Chief Economist, Kaushik Basu, said
that the 'damage' is likely to be much greater than any possible benefits. [85][86]

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."[87]

Opposition

A Congress-led opposition, which includes 13 political parties, opposed the current government on
the demonetisation issue in the Winter Session of Parliament on 16 November 2016. The Chief
Minister of West Bengal Mamata Banerjee also met the President Pranab Mukherjee to oppose the
demonetisation.[88][89][90][91][92][93] The debate on demonetisation is known to be initiated by Indian National
Congress[94] and Anand Sharma in Rajya Sabha on 16 November 2016,[95][96] while Mamata
Banerjee is known to be the first to oppose the current government on the demonetisation. [97]

On 16 November 2016, Chief Minister of West Bengal Mamata 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 500 and 1000 banknotes. A memorandum was submitted to
the President of India Pranab Mukherjee demanding rollback of the decision.[98] 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" [10]

In the demonetisation debate on the first day of the Winter Session of Parliament at the Rajya
Sabha, on 16 November 2016, Pramod Tiwari from the Indian National Congress, accused Narendra
Modi for the demonetisation and compared Narendra Modi 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 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 current 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."[99]

On 17 November 2016, in a rally against demonetisation of 500 and 1000 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.
Mamata Banerjee also stated "I give the government 3 day ultimatum, fix things or withdraw the
demonetisation scheme".[100]

In the demonetisation debate on the second and third day of the Winter Session of Parliament at
the Rajya Sabha, on 17 and 18 November 2016, the opposition and the current government clashed
over the demonetisation issue, bringing the house to continuous halts.[101]

On 24 November 2016, in the demonetisation debate in Rajya Sabha, 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 cash".
[102]
Singh at last termed the demonetisation move as an "organized loot, legalized plunder of the
common people".[103]

Strikes
Main article: Aakrosh Diwas

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

organised nationwide strikes across India, noticeably starting 28 November 2016. [104] 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.
[104]
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.[104]

Effects and aftermath

This section reads like a press release, or is otherwise written in a

promotional tone. Please help by rewriting this article from a neutral point of
view. When appropriate, blatant advertising may be marked for speedy
deletion with {{db-spam}}. (December 2016)
Cash rush

Queue at an ATM for 100 banknotes in Howrah, on 8 November 2016, 22:23 (IST)

People queue outside a private bank to deposit and exchange old 500 and 1000 banknotes in Kolkata on 10
November 2016.

The scarcity of cash due to demonetisation led to chaos, and most people holding old banknotes,
faced difficulties to exchange them as endless lines outside banks and ATMs across India, became a
daily routine for millions of people waiting to deposit or exchange the 500 and 1000 banknotes
since 9 November.[10][9][8][105] ATMs were running out of cash after a few hours of being functional, and
around half the ATMs in the country were non-functional.[9] Sporadic violence was reported in New
Delhi, but there were no reports of any grievous injury,[106] people attacked bank premises and ATMs,
[107][108][109][110][111][112]
and a ration shop was looted in Madhya Pradesh after the shop owner refused to
accept 500 banknotes.[113][114][115][116]

Several people were reported to have died from standing in queues for hours to exchange their old
banknotes.[117][118][119][120][121][122]Deaths were also attributed to lack of medical help due to refusal of old
banknotes by hospitals.[123][124][125] As of 15 November 2016, the attributed death toll was 25. [126][127][11] In
an interview, 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. [128] While, the CMD
of Punjab National Bank said that panic after demonetisation started fading on 19 November 2016.
[129]

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.[12] 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.[130]

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. [131] 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.[132][133]

Agriculture
This section is missing information about effects of demonetisation
on agriculture and farmers. Please expand the section to include this
information. Further details may exist on the talk page. (November 2016)

Transactions in the Indian agriculture sector are heavily dependent on cash and were adversely
affected by the demonetisation of 500 and 1,000 banknotes.[134] 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.[135] 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 district cooperative central
banks which were ordered not to accept or exchange the demonetised banknotes. [136][137][138][139]

Banking

A State Bank of India branch remained open at night, and a long queue of people waited outside the ATM to
withdraw money

In the first four days after the announcement of the step, about 3 trillion (US$45 billion) in the form
of old 500 and 1,000 banknotes had been deposited in the banking system and about 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.[31]The State Bank of India reported to have received more than 300
billion (US$4.5 billion) in bank deposit in first two days after demonetisation. [140][141][142] A spike in the
usage of debit card and credit card post demonetisation was also reported. [143]

Between November 10 and November 27, banks reported exchange and deposits of demonetised
banknotes worth 8.45 trillion (US$130 billion) (exchange of 339.48 billion (US$5.0 billion) and
deposits of 8.11 trillion (US$120 billion)). During this period, an amount
of 2.16 lakh crore(US$32 billion) had been withdrawn by people from their accounts.[144]

In Malda, a district believed to be a transit-point for fake Indian currencies,[145] 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.[146]
Business

By the second week after demonetisation of 500 and 1,000 banknotes, cigarette sales across
India witnessed a fall of 3040%,[147] while E-commerce companies saw up to a 30% decline in cash
on delivery (COD) orders.[148][149] 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.[150]

The demand for point of sales (POS) or card swipe machines has increased. [151] E-payment options
like PayTM and PayUMoney has also seen a rise.[152] 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.[151]

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 500 and 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 1.6
billion (US$24 million) in cash payments of outstanding and advance taxes, within 4 days. [153]

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.
[154]

Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai,
Chandigarh, Ludhiana and other cities that traded with demonetised currency.[155] The Enforcement
Directorate issued several FEMA notices to forex and gold traders.[154] It also raided several forex
establishments making back dated entries.[156] Large sum of cash were seized in different parts of the
country.[157][158][159][160][161] In Chhattisgarh liquid cash worth of 4.4 million (US$65,000) was seized.[162]

Insurgent groups

The move also reportedly crippled Communist guerrilla groups (Naxalites) financing through money
laundering.[163][164] On 10 November the police arrested a petrol pump owner at Ranchi when he
reportedly tried to deposit 2.5 billion, belonging to a person affiliated with the banned Communist
Party of India.[165] According to Chhattisgarh Policedemonetisation has affected the Naxalite activities.
It is reported that insurgents have stashed more than 70 billion in the Bastar region.[164][166][167] Mumbai
Police reported a setback to Hawala operations.[168][169] Hawala dealers in Kerala were also affected.
[170]
The Jammu and Kashmir Police reported the effect of demonetisation on hawala transactions of
separatists.[171][172] The move has also helped in reducing the incidents of stone-pelting in valley.[173][174]
[175]
More than 300 Naxals have surrendered to the police voluntarily due to shortage of funds. [citation needed]
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.[176]

Evasion attempts

A jewellery store in a shopping mall with a notice "We accept 500 and 1000 notes", even after they were no
longer valid banknotes.

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 45,000 (US$670) from the ruling price
of 31,900 (US$470) per 10 grams (0.35 oz).[177][178]

Donations

Authorities of Sri Jalakanteswarar temple at Vellore discovered cash worth 4.4 million (US$65,000)
from the temple Hundi.[179]

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.[180] People were also getting rid of large amounts of banned currency by
sending people in groups to exchange their money at banks.[181] 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.[182][183][184] On 17 November, the government reduced the exchange amount to 2,000 (US$30)
to discourage attempts to convert black money into legitimate money.[33]

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." [185]

The Railways Ministry and the Railway Board responded swiftly and decided that: cancellation and
refund of tickets of value 10,000 and above will not be allowed by any means involving cash. The
payment can only be through cheque/electronic payment. Tickets above 10,000 can be refunded
by filing ticket deposit receipt only on surrendering the original ticket. A copy of the PAN card must be
submitted for any cash transaction above 50,000. The official 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.[185][186]

See also
Black money in India

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Retrieved 14 November 2016.

132. Jump up^ "Toll tax suspended on national highways till Nov 11, banks open this
weekend". Hindustan Times. Retrieved 10 November 2016.

133. Jump up^ "No toll charges on National Highways till Nov 18 midnight". Business Standard
India. Press Trust of India. 14 November 2016. Retrieved 17 November 2016.

134. Jump up^ "How Demonetisation Has Affected India's Agricultural And Food
Markets". Huffington Post India. Retrieved 2016-11-24.

135. Jump up^ "Demonetisation: Farmers fear loss of crops and income after currency ban -
Firstpost". Firstpost. 2016-11-18. Retrieved 2016-11-24.

136. Jump up^ PTI (2016-11-22). "Demonetisation: Farmers protest in Muzaffarnagar over cash
shortage". http://www.livemint.com/. Retrieved 2016-11-24. External link in |newspaper= (help)

137. Jump up^ "Demonetisation: At Gujarat protests, farmers dump milk, vegetables on
road". The Indian Express. 2016-11-20. Retrieved 2016-11-24.

138. Jump up^ "Farmers in Amritsar stage protest against demonetisation, burn PM Modi's
effigy". http://www.hindustantimes.com/. 2016-11-19. Retrieved 2016-11-24. External link in |
newspaper= (help)
139. Jump up^ "Demonetisation: Gujarat farmers warn of stopping milk supply; demand note-
exchange at co-op banks - Firstpost". Firstpost. 2016-11-19. Retrieved 2016-11-24.

140. Jump up^ "State Bank of India gets Rs 38,677 crore deposit in 2 days". Indian Express. 12
November 2016.

141. Jump up^ "State Bank of India says it has received deposits worth Rs 53,000 crore". 11
November 2016.

142. Jump up^ "Demonetisation drive windfall for banks, coffers richer by Rs 2.2 lakh cr already".
12 November 2016.

143. Jump up^ Saha, Manojit; Rukhaiyar, Ashish (13 November 2016). "Micro lending badly hit;
surge in use of cards". The Hindu.

144. Jump up^ "Pradhan Mantri Garib Kalyan Yojana: Post 'last chance' IDS, comes a new
declaration scheme". The Indian Express. 29 November 2016. Retrieved 29 November 2016.

145. Jump up^ "Exclusive: Bank accounts for sale in West Bengals Malda!".

146. Jump up^ "Life has come to standstill in India's counterfeit capital". The Economic Times.

147. Jump up^ "Cigarette sales down 3040%". Financial Express. Retrieved 18 November 2016.

148. Jump up^ "E-commerce firms see 30% decline in cash on delivery orders post
demonetisation". The Hindu. 2016-11-16. ISSN 0971-751X. Retrieved 2016-11-18.

149. Jump up^ "E-commerce cash-on-delivery orders down by up to 30 per cent". The Indian
Express. 2016-11-17. Retrieved 2016-11-18.

150. Jump up^ "Flipkart, Snapdeal, Shopclues say demonetisation good for e-commerce
industry". Techcircle.in India startups, internet, mobile, e-commerce, software, online businesses,
technology, venture capital, angel, seed funding. 2016-11-17. Retrieved 2016-11-18.

151. ^ Jump up to:a b "Demonetisation gets 'acche din' for swipe-machine makers", The Economic
Times, 15 November 2016

152. Jump up^ "To stay afloat, Coimabtore traders seek card swipe machines", The Times of
India, 20 November 2016

153. Jump up^ "Demonetisation impact: Greater Hyderabad Municipal Corporation collects over
Rs 160 crore in just four days". india.com. 15 November 2016.

154. ^ Jump up to:a b "Enforcement Directorate issues FEMA notices to forex, gold traders". The
Economic Times. Retrieved 16 November 2016.

155. Jump up^ Rai, Arpan (11 November 2016). "Income tax dept conducts raids across India as
illegal financial institutions crop up; shops call it a day". India Today. Retrieved 12 November2016.

156. Jump up^ "Enforcement Directorate raids forex shops making back date entries". The
Economic Times. 16 November 2016.

157. Jump up^ "Rs. 13.22 lakh in cash seized". The Hindu. 11 November 2016.
158. Jump up^ "Rs 4 Crore-Worth Scrapped Notes Seized From Maharashtra Trader".

159. Jump up^ "Rs 76 lakh cash seized from vehicle in Mandi Times of India".

160. Jump up^ "Madhya Pradesh: Rs 4 crore-worth scrapped bank notes seized from trader". 12
November 2016.

161. Jump up^ "Rs. 73 lakh cash seized from two cars near Nashik". Retrieved 2 December 2016.

162. Jump up^ "Chhattisgarh: Cash worth Rs 44 lakhs in Rs 500, Rs 1000 notes seized from a
man". Daily News & Analysis. 11 November 2016.

163. Jump up^ "Cops look for Maoists with old currency Times of India".

164. ^ Jump up to:a b "Modi's demonetization set to cripple Naxalites financially". Times of India.

165. Jump up^ Srinivas, Rajulapudi (13 November 2016). "Maoists depend on sympathisers to
tide over cash crunch". The Hindu.

166. Jump up^ "This Is How Big Note Ban Will Affect Maoist Activities in Chhattisgarh".

167. Jump up^ "Demonetisation to hit Maoist activities in Chhattisgarh: Police". 13 November
2016.

168. Jump up^ "Demonetisation cripples hawala operations: Mumbai Police". The Economic
Times.

169. Jump up^ "Demonetisation effect: Hawala operations come to a grinding halt".

170. Jump up^ "Hawala dealers in Kerala hit hard by demonetisation".

171. Jump up^ "Terror hawala in Kashmir valley rendered trash, thanks to demonetisation".

172. Jump up^ Team, Postcard. "Why all the Violence in Jammu-Kashmir Has Suddenly
Stopped???".

173. Jump up^ "No stone pelting on forces in Kashmir after demonetisation move, says Manohar
Parrikar", The Times of India, 14 November 2016

174. Jump up^ "Kashmir sees sharp decline in stone-pelting cases", Deccan Herald, 15
November 2016

175. Jump up^ "Demonetization ended terror-funding, stone-pelting in Kashmir: Parrikar", Daily
News and Analysis, 15 November 2016

176. Jump up^ "Railways gives green light to go cashless", The Economic Times, 2 December
2016

177. Jump up^ "Gold price recovers on renewed demand". Hindustan Times. 10 November 2016.
Retrieved 10 November 2016.

178. Jump up^ Langa, Mahesh (9 November 2016). "Scramble for gold in Gujarat after
demonetisation". The Hindu. Retrieved 9 November 2016.
 179. Jump up^ "Defunct notes worth Rs. 44 lakh found in temple hundi". The Hindu. 14 November
2016.

180. Jump up^ Parmar, Beena (13 November 2016). "Despite Rs 4000-cap on money exchange,
loophole allows multiple transactions". Hindustan Times. Retrieved 13 November 2016.

181. Jump up^ "Demonetisation: In Chennai, To beat cash limit, they send full teams to
bank". The Indian Express. 15 November 2016.

182. Jump up^ "To reduce crowds at banks, ATMs, indelible ink to mark fingers of those who have
exchanged old notes". The Times of India. Retrieved 15 November 2016.

183. Jump up^ "Demonetisation: Banks to use indelible ink to stop multiple transactions, curb
crowd". firstpost. 15 November 2016.

184. Jump up^ "Demonetisation: Indelible ink mark seems like the government is
panicking?". The Indian Express. 15 November 2016.

185. ^ Jump up to:a b "Rlys sets 5000 as cash refund limit for tickets". Retrieved 15
November 2016.

186. Jump up^ "Railways say, no cash refund for tickets booked between Nov 9-11". Retrieved 15
November 2016.

External links

RBI to hold maiden monetary policy review post-demonetisation today

(Reuters)

RBI to hold maiden monetary policy review post-demonetisation today

The Reserve Bank of India (RBI) will announce monetary policy review later in
the day, the first after demonetization of old Rs 500 and 1000 notes, amid
expectations of interest rate cut.

Ahead of the policy statement, the six-member Monetary Policy Committee

(MPC) met on Tuesday amid widespread expectations of at least 0.25% (25-basis
point) cut in the policy rate to cushion the impact of demonetization.

This is the second meeting of MPC headed by RBI Governor Urjit Patel after the
first in October, when it had cut repo, or the short-term lending rate, by 0.25% to
6.25%.

RBI has reduced the policy rate by 1.75% since January 2015.
If RBI cuts rates on Wednesday, it will be for the second time that the monetary
policy would be based on the recommendation of the MPC.

There are expectations of a rate cut in repo as banks are flushed with funds
following demonetization of old high value notes from November 9.

RBI has already taken a host of steps, including 100% incremental increase in
Cash Reserve Ratio, CRR, to suck out excess liquidity from banks.
This is the html version of the
file http://www.nipfp.org.in/media/medialibrary/2016/11/WP_2016_182.pdf.
Google automatically generates html versions of documents as we crawl the web.
Page 1
WorkingPaperNo.182
Demonetisation:ImpactontheEconomy
No.182
14Nov2016
TaxResearchTeam
NationalInstituteofPublicFinanceandPolicy
NewDelhi
NIPFPWorkingpaperseries

Page 2
WorkingPaperNo.182
Demonetisation:ImpactontheEconomy
TaxResearchTeam
*
Abstract
Theargumentpositedinfavourofdemonetisationisthatthecashthatwouldbeextinguished
wouldbeblackmoneyandhence,shouldberightfullyextinguishedtosetrighttheperverse
incentivestructureintheeconomy.Whilethefactsarenotavailabletoanybody,itwouldbe
foolhardytoarguethatthisistheonlypossibility.Therefore,itisimperativetoevaluatethe
shortrunandmediumtermimpactsthatsuchashockisexpectedtohaveontheeconomy.
Further,theimpactofsuchamovewouldvarydependingontheextenttowhichthe
governmentdecidestoremonetise.Thispaperelucidatestheimpactofsuchamoveonthe
availabilityofcredit,spending,levelofactivityandgovernmentfinances.
Keywords:demonetization,cashlesstransactions,credit,taxevasion
JELclassificationcodes:H25,H27
TheauthorsareDr.KavitaRao,Dr.SacchidanandaMukherjee,Dr.SudhanshuKumar,
Mr.D.P.Sengupta,SuranjaliTandonandSriHariNayudu,NIPFP,NewDelhi.
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WorkingPaperNo.182
1.Introduction
Thegovernmenthasimplementedamajorchangeintheeconomicenvironmentbydemonetising
thehighvaluecurrencynotesofRs500andRs1000denomination.Theseceasedtobelegaltender
fromthemidnightof8thofNovember2016.PeoplehavebeengivenuptoDecember30,2016to
exchangethenotesheldbythem.1Theproposalbythegovernmentinvolvestheeliminationofthese
existingnotesfromcirculationandagradualreplacementwithanewsetofnotes.Intheshortterm,itis
intendedthatthecashincirculationwouldbesubstantiallysqueezedsincetherearelimitsplacedon
theamountthatindividualscanwithdraw.Inthemonthstocome,thissqueezemayberelaxed
somewhat.Thereasonsofferedfordemonetisationaretwofold:one,tocontrolcounterfeitnotesthat
couldbecontributingtoterrorism,inotherwordsanationalsecurityconcernandsecond,toundermine
oreliminatetheblackeconomy.
Therearepotentiallytwowaysinwhichthepredemonetisationmoneysupplywillstandalteredin
thenewregime:one,therewouldbeagentsintheeconomywhoareholdingcashwhichtheycannot
explainandhencetheycannotdepositinthebankingsystem.Thispartofthecurrencywillbe
extinguishedsinceitwouldnotbereplacedinanymanner.Second,thegovernmentmightchooseto
replaceonlyapartofthecurrencywhichwasincirculationascash.Intheotherwords,therestwould
beavailableonlyaselectronicmoney.Thiscouldbeamechanismusedtoforceatransitionto
cashlessmediumofexchange.Theempiricalextentofthesetwocomponentswillbeunravelledonly
overthenextsixmonths.Thesetwowouldhavedifferenteffectsontheeconomyintheshorttermand
inthemediumterm,aswillbeexploredbelow.
Tounderstandtheeffectsofthesedimensions,itisimportanttofirstunderstandwhatisitthat
cashdoesintheeconomy?Therearebroadlyfourkindsoftransactionsintheeconomy:accounted
transactions,unaccountedtransactions,thosethatbelongtotheinformalsectorandillegal
transactions.Thefirsttwocategoriesrelatetowhethertransactionsandthecorrespondingincomesare
reportedfortaxpurposesornot.Thethirdcategorywouldconsistlargelyofagentswhoearnincomes
belowtheexemptionthresholdandthereforedonothaveanytaxliabilities.Theusesthatcashisputto
forthesevarioussegmentsoftheeconomycanbesummarisedintheformofTable1.Finally,there
wouldbedemandforcashforillegalpurposeslikebribesinelections,spendingoversanctionedlimits,
dealingsincrimeandcorruption.Ifonetakesasnapshotofthelocationofcashatanygivenpointof
time,itisdifficulttopredictwhatthebreakupofthecashaccordingtothesecategorieswouldbe,butit
wouldbesafetosaythateachofthesecomponentswouldberepresentedinthatsnapshot.
Table1:DemandforCashbyvariousagentsintheeconomy
Description
ofthe
activity
Unaccounted
transactions
(legitimate
transactionsbut
nottaxpaid)
Illegaltransactions
(corruption,crime,
etc.)
Informalsector
transactions
Accounted
transactions
Mediumof
Exchange
Incomesare
earnedthrough
exchangesin
Paymentsfor
crime
Incomesare
earnedincash
andspentin
Transaction
demandfor
money
1UndercertaincircumstancespeoplecanexchangetheircurrencyatspecifiedofficesofRBItillMarch31,2017.

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WorkingPaperNo.182
cash,payments
aremadeincash
cash
Store
ofvalue
Balances
heldintheinterim
until
alternative
investmentoptions
becomeavailable
(thereexista
number
of
instrumentswhich
yieldbetterreturn
thancashreal
estate,lendingin
theunaccounted
orinformalsector,
andsoon.)
Balances
heldintheinterim
until
alternative
investment
optionsbecome
available(there
existanumberof
instrumentswhich
yieldbetterreturn
thancashreal
estate,lendingin
theunaccounted
orinformalsector,
andsoon.)
Savings
aswellas
precautionary
purposes(as
yetunbankedin
the
psychological
sense)
For
emergencies
(precautionary
demand
for
money)
Turningtotheeffectsofdemonetisation,thefirstmajorandsustainedeffectofdemonetisation
wouldfollowfromtheextenttowhichthecurrencyisextinguishedandwhatthiscurrencywasbeing
usedfor.Itisbeingassumedthatallcurrencywhichwillpotentiallybeextinguishedwouldbecurrency
beingusedasastoreofvalueinthefirstandsecondcategoryoftransactionsinthetableabove.Ifthis
assumptioniscorrect,thentheimpactofextinguishingthiscurrencywouldbelimited.Ontheotherhand,
ifthecurrencyisusedforanyoftheothertransactionsintheeconomy,eitherasastoreofvalueormore
importantly,asamediumofexchange,thentheimpactontheeconomyandtheagentsintheeconomy
couldbesubstantial.If,forinstance,theextinguishedcashwasusedasamediumofexchangein
financingunaccountedincomegenerationorincomeintheinformalsector,demonetisationwouldresult
intheseactivitiesclosingdownandacorrespondingreductionintheincomesandemployment
associatedwiththeseactivities.Thespillovereffectwouldbefeltbytheorganisedsectoraswellsince
theconsumptionfromtheincomesgeneratedwouldextendtotheformalsectoraswell.Thenext
questiontoaskwouldbe:wouldtheseactivities/agentschoosetocomewithinthefoldsoftheformal
sectorasaresultofthechangedeconomicenvironmentorwouldtheyremainoutsideorworsenthe
activitiesandwouldbeextinguishedalongwiththelossesgeneratedfromthecashthatwas
extinguished.
Thesecondchangeasdiscussedabove,fromdemonetisationwouldariseifonlyapartofthe
currencydepositedinthebanksisreturnedtocirculationascash.Thischange,ifitisexecuted,would
dramaticallychangetheeconomicenvironmentinthecountrybyforcingagentstomovefromusing
cashasamediumofexchangetousingcashsubstitutes.Thisappearstobearealpossibilitygiven
thattheFinanceMinisteraswellastheGovernoroftheReserveBankofIndiahaverepeatedly
emphasisedthatagentsshouldbemovingtotheuseofcashlessmediumwheretherearenoproblems
incomparisontothecashbasedmedium.Forinstance,TheHindureportedthatReserveBankof
India(RBI)hasurgedcitizenstoswitchtoalternativemodesofpaymentssuchasprepaidcards,credit
anddebitcards,mobilebanking,andInternetbanking.2InapressconferenceonNovember12,the
UnionFinanceMinistertoosaidthatThoseinbusinessesshouldstartusingdigitalpaymentgateways,
cardsandbankingsystem.Lifewillbecomesimplerinthenewfinancialsystemthatistheonlyviable
2
http://www.thehindu.com/business/Economy/rbiurgespublictoadoptdigitalasatmsrun
dry/article9339020.ece

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option.3Theeffectofthischangetoowouldbefeltdifferentlyacrossthedifferentsegmentsofthe
economyagentsoperatingwithintheformalsectorandagentswhoarefamiliarwiththemodern
technologywouldbeplacedondifferentfootingcomparedtootheragentswhoneedtomakethe
transition.
Inwhatfollows,anattemptismadetopresentadiscussionofthelikelyeffectsclassifiedintovery
shorttermasinthenexttwomonths,theshorttermasinasixmonthstoayearandtherestas
mediumterm.Withinthese,anattemptismadetodistinguishbetweentheeffectsifthereisfull
remonetisationtotheextentofdepositsmadeinbanksandascenarioofpartialremonetisation.
2.Shorttermandmediumtermimpacts
Veryshorttermimpact
Thedemonetisation,byremoving86percentofthecurrencyincirculation,hasresultedinavery
severecontractioninmoneysupplyintheeconomy.Thiscontraction,bywipingoutcashbalancesin
theeconomy,willeliminateanumberoftransactionsforawhile,sincethereisnoornotenoughofa
mediumofexchangeavailable.Sinceincomeandconsumptionareintrinsicallyrelatedtotransactions
intheeconomy,theabovewouldmeanaseverecontractioninincomeandconsumptioninthe
economy.Thiseffectwouldbemoresevereonindividualswhoearnincomesincashandspenditin
cash.Toalesserextentitwouldalsoaffectindividualswhoearnincomesinnoncashformsbutneed
towithdrawincashforconsumptionpurposes,sinceanumberofsectorsintheeconomystillwork
predominantlywithcash.
Intermsofthesectorsintheeconomy,thesectorstobeadverselyaffectedareallthosesectors
wheredemandisusuallybackedbycash,especiallythosenotwithintheorganisedretailing.For
instance,transportservices,kirana,fruitsandvegetablesandallotherperishables,wouldface
compressionindemandwhichisbackedbypurchasingpower.Thisinturncanhavetwoeffects:while
itisexpectedthatsupplyexceedsdemand,therewouldbeafallinprices,however,ifsupplytoogets
curtailedforwantofamediumofexchange,pricesmight,infact,rise.Thus,whilegenerallypeople
seemtoexpectpricestofall,itisquitepossiblethatpriceswouldinsteadrise.
Alternatively,tokeeptheflowsgoing,peoplemighttakerecoursetocreditboththeretailersand
otheragentsintheeconomymightmakesuppliesoncreditinthehopethatwhentheliquiditystatusis
corrected,thepaymentscanberealised.Inthesecases,thepriceofcommoditiesmightriseinsteadof
falling.Inotherwords,theimpactofanincrementalreductioninmoneysupplywherethedemandand
thesupplychainremainunaffectedwouldbedifferentfromacasewherethereisadrasticreductionin
moneysupplyandoutputsmightadjustratherthantheadjustmentbeinginprices.Inotherwords,the
expectationthatinflationwoulddeclinemightbebelied.
Afurtherimpactwouldbeacompressionofthedemandfornonessentialsbyalltheagentsin
theeconomyinthefaceofuncertaintyintheavailabilityofcash.Thedemandfromsegmentswhich
haveaccesstodigitalmediumofexchangewouldremainunaffected,butthatfromtherestofthe
economywouldgetcompressed.Thiswouldtransmittheeffecttotherestofthesectorsinthe
economyaswell.
Anothersectorwhereoneexpectstoseeeffectsintheveryshortrunistherealestatespace.
Withcontractionindemandfromonesetofagentssayagentswhohaveearnedunaccounted
incomesandplacedthemwithintherealestatespaceeitherpriceswithinthissegmentwouldfallor
transactionswouldceasetohappen.Whileofitself,thiswouldbeconsideredapositivedevelopment
andevidenceofacorrectionintheunaccountedincomes,itcouldleadtoacompressionininvestments
intheconstructionsectorwhichcanhaveadverseincomeandemploymentconsequencesforthe
economy.
3http://www.thehindu.com/news/national/demonetisationarunjaitleyonatmsgoingdry/article9338238.ece

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Therearelikelytobetwospinoffsfromthischangeone,therewouldbesomeincreaseintax
collectionsintheshortterm,andsecond;variousIOUscouldemergeascurrencysubstitutes.Tothe
extentpeopleattempttogetridofunaccountedcashbalancesthroughpurchaseofgoodsandservices
and/orpaymentofpropertytaxes,oneshouldwitnessaspurtintaxcollectionsinindirecttaxesaswell
aspropertytaxinthemonthafterdemonetisationwhichwoulddisappearthereafter.Thereisevidence
alreadythatpropertytaxcollectionsinsomecitiesarehigherthanlastyear.Similarly,inthecaseof
currencysubstitutes,atMCDtaxcollectioncentresattheborder,peoplearebeinggivenIOUsinlieuof
thebalancetheywereentitledto,whichwouldbevalidforsixmonths.
Shorttermeffectwithcompletereplacement:
Theshorttermeffectontheeconomywoulddependonthespeedwithwhichandtheextentto
whichthecashisreplacedbytheauthorities.Iftheentirecashisreplacedwithinashortdurationof
time,theeffectsbeyondtheveryshorttermof12monthsmightbelittle.Butafewsectorsarelikelyto
beseriouslyaffected.Togiveanexamplefromtwosectorswhicharesupposedtohavelarge
employmenteffectontheeconomy,wecantalkaboutagriculture,automobilesandconstruction.
ThisisthesowingseasonfortheRabicropinsomepartsofthecountryandtheharvesting
seasonfortheKharifcrop.Mostofthepurchasesandsalesinthissegmentoftheeconomyarecarried
outthroughcash.Withtheeliminationofcashfromtheeconomy,saleofkharifcropwouldbedifficult
unlessthecropissoldonthepromiseofpaymentinfuture.Giventhelimitedbargainingpowerofthe
farmer,thepricetheycanrealiseforthecropcanbeadverselyaffected.Ontheotherhand,inthe
sowingactivity,peoplewouldnotgetaccesstotheinputsrequiredsincemostoftheinputsarenow
purchasedfromthemarketunlesstheyseekaccesstocreditfromthesupplier.Inotherwords,with
demonetisation,therewouldbeasignificantstrengtheningoftheinformalsectorcreditmarketinthe
ruraleconomy.Further,ifthereareagentswhodonotgetaccesstocreditfromtheinformalsector
agents,theirsowingactivityandhencetheirincomesinthenextseasonwouldbeadverselyaffected.
Thus,inspiteofagoodmonsooninlargepartsofthecountry,thefarmermightnotgetthebenefits.
Thesecondsectorwhichcouldbeadverselyaffectedwouldbetheconstructionsector.The
sector,itisoftenargued,workswithasignificantamountofcash.Paymentstoworkersaswellasa
varietyofpurchasesmightbecarriedoutincash.So,onthesupplyside,thissectorcanbeadversely
affected.Ontheotherhand,onthedemandside,thedemandforhousesandbuildingswouldappear
asademandfornonessentialsandmightbepushedontothebackburneruntiltheeconomicsituation
normalises.Thus,totheextentthereareagentsintheeconomywhosedemandwasbackedby
savingsfromunaccountedincomesheldintheformofcashwhichgotextinguishedondemonetisation,
therewouldbeacompressionofdemand.
Shorttermeffectwithincompletereplacement:
If,ontheotherhand,theauthoritieschoosetoreplaceonlyafractionofthetotalcashthatwas
surrenderedbythepeopletothebankingsector,thenonewouldwitnesssomeotherchanges/effects
intheeconomy.Fortransactionstoberestoredtotheprechangelevel,anumberofagentswhoare
usingcashasamediumofexchangehavetomovetousingdigitalversionsofmoneyasthemedium
ofexchange.Whilethischangeisgraduallyhappeningintheeconomy,ifitisforcedbymakingcash
inaccessible,thecompressionindemandaswellasinincomegenerationintheeconomywould
continueforalongerperioduntilpeoplegetfamiliarwiththefunctioninganduseofthesemedia.
Mediumtermeffects:
Inthemediumterm,theeffectswouldberelatedtotheextenttowhichthecurrencyisnot
replacedwithintheeconomy.Iftheentirecurrencyisreplaced,therewouldnotbeanymajoreffectson
theeconomy.However,itistobeexpectedthattheentirecurrencywouldnotbereplacedtothe
extentcurrencyisextinguishedandtotheextentsomeofthecurrencyremainsasbankdeposits,there
wouldbesomeimpactontheeconomy.Thefirsteffectwouldbeacompressionoftheeconomytothe
extenttheextinguishedcurrencywasworkingasamediumofexchange.Thecurrencythatisplacedin

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WorkingPaperNo.182
thebanksbutnotwithdrawn,itisargued,wouldgenerateanexpansionindepositsintheeconomy.In
thediscussionsondemonetisation,thereisaconsistentreferencetotheresultantincreaseincredit
creationintheeconomy.LikeFinanceMinisterArunJaitleysays,Bankdepositswillincreaseandthey
willhavemorecapacitytosupporttheeconomy.4Thetotalcumulativecreditthatcanpotentiallybe
generatedisdefinedintermsofthereserveratio.Totalcreditpotential=incrementaldeposit
generated*(1/reserveratio)
InIndia,thecashreserveratiois4percentwhilethereisastatutoryliquidityratioof22percent5.
Indeterminingthecreditcreation,itisimportanttotakeintoaccountonlytheCRRandtheadditional
creditcreationcanbe25timestheamountofmoneydepositedinthebanksasaresultoftheproposed
demonetisation.6Thisamounthowever,willbegeneratedonlyifthereexistsanequivalentdemandfor
creditintheeconomy.
Table2:PotentialcreditcreationbasedonReserveRatios
Percentage
remainingin
account
Valuein
account
Potential
credit
creation
Potentialcredit
asmultipleof
stockofdebt
today
70
992600
24815000
3.082345
60
850800
21270000
2.64201
50
709000
17725000
2.201675
40
567200
14180000
1.76134
30
425400
10635000
1.321005
4http://www.thehindubusinessline.com/economy/demonetisationtoincreaseecosizeenhancerevenuebasesays
jaitley/article9324312.ece
5TheofficialSLRis22percentbutsometransactionsanddepositswiththebankshavebeenexcludedfromthe
requirementofSLR.ThereforetheeffectiverateofSLRislower(itseemstherewasadiscussiononthesame
pleasefindthereference.)
6SLRisnottreatedasareserveforthebanksince,itrestrictsonlytheinstrumentsintowhichthebankcaninvestbut
doesnotlimitcreditcreation.Further,amountinvestedingovernmentbondsasapartoftheSLRrequirementwould
accruetothegovernmentandbespent.Allexpenditurebythegovernment,aslongasitisexpenditurewithinthe
domesticeconomy,willreturntheborrowedfundstotheeconomytherebyallowingforfurtherdepositsandcredit
creationakintothelendingtoprivatesector.Onlytotheextenttheborrowingisusedforpurchasesfromthe
internationalmarket,eitherbythegovernmentorbytheprivateagents,willtheborrowingnotcreatefurthercreditin
theeconomy.

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WorkingPaperNo.182
Table3:Potentialcreditcreationbasedonhistoricaltrends
Percentage
remainingin
bank
account
Valuein
bank
account
credit
potential
%oftotal
credit
%oftotal
incremental
credit
100
1,418,000
1,684,119
20.9
198.4
90
1276200
1,515,707
18.8
178.6
80
1134400
1,347,295
16.7
158.8
70
992600
1,178,883
14.6
138.9
60
850800
1,010,471
12.6
119.1
50
709000
842,059
10.5
99.2
40
567200
673,648
8.4
79.4
30
425400
505,236
6.3
59.5
Note:Thesefiguresarebasedontheratioofdeposittocreditfortheyear201112 7
Clearly,theadditionaldepositsappeartobecapableofstimulatingasignificantincreaseinthe
potentialcreditthatcanbecreatedintheeconomy.Allthesechangesimplysometransitionsforthe
consumersandthebankingsystemandcanhavesomeseriousimplicationsforconsumerbehaviour
andthemacroeconomywhicharediscussedbelow.
3.TransitionIssues
Thereareanumberoftransitionissuesthatneedtobemanagedforthistransitiontobe
effective:
7Theprojectionsaredoneusingtheratiofor201112sinceinsubsequentyearstheratiodeclinedduetolowofftake
ofcreditintheeconomy.

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1.InfrastructureIssues:Thereisneedforasignificantupgradeofthebankingsystemaswellas
inthetelecominfrastructurethatwouldprovidethebackbonefordigitaltransactions.Forpeople
tobeabletotransactatanytimeandplaceaswellasforthemtoconsideritareliablemedium
ofexchange,itisimportantthatnotonlythebankingsystemisupgradedtoensurethat
transactionscanbecompletedwithoutahitch,butthesupportinginfrastructuretooisuptothe
mark.Forinstance,inmanypartsoftheeconomy,thereislimitedandintermittentsupplyof
electricityaswellasmobileconnectivity.Intheseareas,itwouldbedifficulttoexpectpeopleto
shifttoelectronicmediumofexchange.
2.ConsumerbehaviourIssues:Apartfromthetechnologicalissues,thereisabehavioural
changethatisbeingexpectedinpeoplefromusingcashasamediumofexchangetousing
othercashsubstitutesbothformakingpaymentsandreceivingpayments.Thistransition
requiresindividualstomaketwochangesintheirbehaviour:one,agentsneedtomovefrom
tangiblemeanswhichcanbeseenandfelttoformswhicharelesstangibleornottangible,and
second,theyhavetolearntorelyontechnologicallyadvancedtoolstoundertakeregulardayto
dayoperations.Thelatterrequiresagentstobeeducatedtotheextentofcomprehendingthe
contentoftransactions.Ifthistransitionisnotsuitablymanaged,agentsmightbetemptedto
movetononofficialcashsubstitutes.
3.Accessibilityinlanguage:Inadditiontoalloftheabove,mostofthebanksandthemobile
instrumentsfortransactionarecurrentlyadaptedtoasingletotwolanguages.Ifthebulkofthe
populationofthiscountryneedstocomeonboard,itmightbeimportanttomakethesefacilities
availableinamyriadofIndianlanguagestoensurethattheusercancomprehendthe
transactionthattheyareenteringinto.
4.Transitionissuesforbankingsector:Therearemultipleissueshere.
a.Thebankstoomighthaveatransitionissuetodealwith.Bankswouldhaveamodelof
thefractionofdepositsthattheycansafelylendwithoutanexcessiveriskofwithdrawal
oftheamount.Thisisimportantsince,whilebankscanborrowmoneyfromthecall
moneymarket,thecostsofsuchborrowingscanbelarge.Thesemodels,however,
mightneedtobealteredinthenewregimesincethecharacterofthenewdepositsthat
comeintothebankwouldbedifferentfromthepreexistingdeposits.Inthelatter,while
afractionofthedepositswouldbefortransactionalpurposese.g.salaryearners
anotherfractionwouldbedepositingonlysavingsintotheaccount.Byeliminatinghigh
valuecurrencynotes,theseagentswhowereoperatingthroughcash,wouldnowhave
tomovetononcashinstrumentsandhence,thebalancesintheiraccountswouldnot
besavingsbuttransactionvalueswhichwillberetainedintheaccountforshorter
durationsoftime.Thebanksthereforewouldneedtoremodeltheirdecisionsonhow
muchofthedepositscanbelentoutandforwhatduration.Itis,forinstancepossible,
thatalargerproportionofthedepositswouldberetainedforshorttermlendingandcan
evenbededicatedtothecallmoneymarket.
b.Second,while1/reserveratiodefinesthepotentialmaximumamountofcreditthatcan
begeneratedintheeconomy,theactualcreditgenerationwouldbedefinedbothbythe
demandforcreditandtheextenttowhichcashintervenesinthefunctioningofthe
economy.Forinstance,ifpeoplewhoreceivecreditfromthebankmakepayments
throughchequesaloneandtheyinturnmakepaymentsthroughcheques,thenthe
potentialcreditcreationcanberealised.However,ifonreceiptofpayment,theagent
withdrawsthemoneytocashandmakespayments,onlyafractionofthecredit/deposit
willreturntothebankingsystem.Thus,largeristheextenttowhichcashisusedasa
meansoftransacting,smalleristhetotalcreditthatcanbegenerated.Withawithdrawal
ofcashfromcirculation,thedepositswillcontinuetoremaininthebank,itwouldmerely
shiftfromaccounttoaccountorfrombanktobank.Thus,evenontheearlierdeposits,
theamountofcreditthatcanbegeneratedwouldbelarger.Thisisanotherreasonwhy
thebankswouldneedtoremodeltheirinvestmentdecisionscorrespondingtoagiven
levelofdeposits.

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c.Athirdissuethatmightariseasatransitionissueisbecauseofthemismatchbetween
peoplespreferencesforcashandtheavailabilityofcash.Intheinterim,untilpeople
adjusttotheuseofnoncashinstruments,therewouldbeanincreaseddemandforthe
cashthatisavailableandthatmightgenerateasituationwheretheagentshavetopay
apremiumtoaccesslegaltender.Inperiodsofscarcityofcoinsforinstance,itis
commonlyknownthatpeoplepayapremiumtogetthechange.Whilethiscanbe
consideredatransitionissue,therearetwodifferentimplicationsofsuchadevelopment:
i.Ifthepremiumoncashishigh,itwouldencourageboththeshifttononcash
instrumentsononehand,andtoinformalsubstitutesofcashontheother.
ii.Thismightunderminetheconfidencethatpeoplehaveinthecurrencyand
hence,encouragemovetoothercurrencies.
4.Modeofpaymentandspendingbehaviour
Thereisgrowingliteraturethatpointsouttothepossibilityofchangesinspendingbehaviourasa
resultofmovingtoinstrumentsotherthancash.Therearemanysubstitutesforcashinthemodern
economyrangingfromcheques,debitcards,prepaidcards,creditcardsandmobilewallets.When
comparedtocash,theseinstrumentsdifferinanumberofkeycharacteristics.Temporalseparationor
degreeofcouplingistheextenttowhichapurchaseandthepaymentforthetransactionfrom
resourcesareseparatedintime.Ifthetwoaredecoupled,peoplemaynotperceiveasenseof
separationfrommoneyatthetimeofincurringtheexpenditureandhencemayoverspend.8The
secondcharacteristicisrelatedtothepainofpaymentflowingfromsalience.Itisarguedthatpeople
perceivethepainofpaymentdependingonthetangibilityorsalienceoftheoutflow.9Athirdfeatureis
thestringencyofbudgetconstraintwhilecashlimitsonesabilitytospendtotheamountofcashin
hand,adebitcardexpandsittothebalancesavailableintheaccountandacreditcardfurtherrelaxes
ittoincludefutureearningsaswell.10
Thecharacteristicsidentifiedofvariousformsofpaymentsaresummarisedbelowaspresented
inBragaetal.(2013)11.
Table4:Featuresofpaymentsystems
Payment
Mechanism
Salienceof
Form
Salience
ofamount
Transparency
Temporal
Separation
Temporal
Orientation
8Tokunaga,Howard(1993).Theuseandabuseofconsumercredit:applicationofpsychologicaltheoryandresearch.
JournalofEconomicPsychology,14,285316.
Raghubir,P.,Srivastava,J.,(2008).Monopolymoney:Theeffectofpaymentcouplingandformonspending
behavior.JournalofExperimentalPsychologyApplied,14(3),213225.
9Prelec,D.,andG.Lowenstein.1998.TheRedandtheBlack:MentalAccountingofSavingsandDebt.Marketing
Science17:428.Soman(2003)arguesthatsaliencemayalsodependontheformofpayment.(Soman,D.,(2003).
Theeffectofpaymenttransparencyonconsumption:Quasiexperimentsfromthefield.MarketingLetters14(3),173
183.)
10Soma,D.(2001).Effectsofpaymentmechanismonspendingbehaviour:Theroleofrehearsalandimmediacyof
payment.JournalofConsumerResearch,27(4):460474.http://dx.doi.org/10.1086/319621.Morewedgeetal.(2007)
haveshownthatconsumersperceivethepurchaseorconsumptiontobecheaperwhenhe/shehasmorefinancial
resourcesthatarecognitivelyaccessible.(Morewedge,C.K.,Holtzman,L.,&Epley,N.(2007).Unfixedresources:
perceivedcosts,consumption,andtheaccessibleaccounteffect.JournalofConsumerResearch,34(4),459467.)
11Braga,F.D.,IsabellaGandMazzonJA,(2013)digitalwalletsasapaymentmethodinfluenceconsumerintheirbuying

behaviour,availableathttp://www.anpad.org.br/admin/pdf/2013_EnANPAD_MKT1209.pdf

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Cash
VeryHigh
High
High
No,Donot
exist
Perceptionof
presentpresent
Cheque
Medium
High
High
Low
Perceptionof
present
present/future
CreditCardMedium
Medium
Medium
High
Perceptionof
presentfuture
DebitCard
Medium
Medium
Medium
No,Donot
Exist
Perceptionof
presentpresent
StoreValue
Card
Low
Low
Low
Medium
Perceptionof
presentpresent
Auto
Pay(direct
debitfrom
bank
account)
VeryLow
VeryLowVeryLow
Low
Perceptionof
presentpresent
Digital
Wallet
Medium
Medium
Medium
High
Perceptionof
present
present/future
Source:Bragaetal.(2013)
Wesummarisetheresultsofsomeofthesestudieswhichcomparethebehaviourofconsumers
usingalternativeinstrumentsasfollows:
a.Inacomparisonofdebitcardswithcash,studiessuggestthatwiththeuseofdebitcards,the
levelofconsumptiontendstobehigher.12
b.Inacomparisonofcreditcardswithcash,thiseffectismorepronounced.13
12Soetvant(2011),MercantantiandLi(2014),Trutsch(2014).
13Prelec,Drazen,andDuncanSimester."Alwaysleavehomewithoutit:Afurtherinvestigationofthecreditcard
effectonwillingnesstopay."Marketingletters12.1(2001):512.

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c.Creditcardsoftenareassociatedwithmorespendingresultinginanincreaseindebtas
well14.
d.Further,spendingwithcardsseemstoencouragespendingonnonessentials.
Thesechangesinconsumerbehaviourcanhavelongtermconsequencesontheeconomyas
wellasonthebudgetsandlifestylesandprioritiesofagentsintheeconomy.Itcould,forinstance,lead
toaballooningofconsumerdebtwhichinturncouldpushthefinancialsystemtowardsacrisisifnot
suitablymanaged.Further,ifavailabledebtintheeconomyischanneledtowardsconsumerdebt,while
atthesametimeloweringsavingintheeconomy,itcouldadverselyaffecttheinvestmentwithinthe
domesticeconomy.
5.ImpactonMacroVariables
Apartfromthetransitionissuesfacedbybanks,injudgingtheimpactontheeconomy,itis
importanttodifferentiatebetweenthetwochangesthatthedemonetisationcanbringaboutinmoney
supply.Thefirstchange,i.e.,cashbeingextinguished,totheextentitwasbeingusedasmediumof
exchange,wouldresultinacompressioninincomes,employmentandconsumptionintheeconomy.
Ontheotherhand,theeffectofthesecondchange,i.e.,cashbeingonlypartiallyreplacedinthe
systemwouldhavetheoppositeeffectsofexpansioninpotentialcreditcreation.Thepotentialcredit
creationwouldtranslateintoactualcreditcreationprovidedthereissufficientdemandforcredit.Ifthe
demandforcreditintheeconomyislargeenough,thepotentialcreditcanberealised.Ofthecredit
created,otherthingsremainingthesame,itcanbeexpectedthatatleastapartofthecredit,willbefor
productivepurposes.Thiswouldmeanexpansionininvestmentintheeconomyandsubsequentlyan
increaseinGDPandemployment.
Ifthereisincreaseininvestmentintheeconomy,thedemandforcapitalgoodsrises.Ifoutput
canexpandinthissector,therewouldbeanexpansionintheincomegenerationandindemandfor
goodsandservices.Sectorsthatarenotoperatingwithexcesscapacitycannotmeettheexpanded
demandwithincreasedoutput,leadingtoincreaseinprices.Thiswouldholdforagricultureaswellas
anyindustrywithlonggestationlagstoinvestment.Inotherwords,intheshortrunthereisapossibility
ofincreaseininflation.
WithincreaseinGDP,sinceimportsaresupposedtoberelatedtothesizeoftheeconomy,itis
expectedthatimportswillrise,butthesamecannotbesaidaboutexports.Inotherwords,thebalance
oftradecouldworsen.Thiscouldresultinpressuresontherupeetowardsdepreciation.Anyincrease
ininflationarypressurestoocouldaugmentthesepressures.
MSMEisonesegmentoftheeconomywhichiscreditconstrained15.Expansioninthepotential
creditintheeconomycouldexpandthecreditavailabletothissegmentoftheeconomywhichismore
employmentintensivethantheorganisedmanufacturing.Inotherwords,iftheaccesstocreditforthis
segmentcanbeimproved,itcangeneratemanypositivespinoffs.Onereasonwhythissegmentmight
getbetteraccesstoformalsectorcreditwouldbeifalltheirtransactionsmovetothedigitalformat,
therebymakingavailabletothelendinginstitutionsevidenceofcreditworthiness.However,forthisthe
transactionsneedtomovedigitalbeforetheycangetaccesstocredit.Inotherwords,unlessthe
bankingsectorisexploringmoreriskyassetcategories,theywouldnotbethebeneficiariesofthe
expansioninpotentialcredit.
ItshouldbekeptinmindthatcreditisnottheonlyconstraintfacedbytheMSMEs.Thereisa
costofcompliancewithregulationintheformalsectorbothoftaxlegislationandotherlegislationwhich
wouldincreasethecostofoperation.Intheabsenceofeconomiesofscale,afterincurringallthese
costs,someoftheMSMEsmightnotbeviableinthenewenvironment.Inotherwords,thedecisionto
14Lee,Jinkook,FahzyAbdulRahman,andHyungsooKim."Debitcardusage:anexaminationofitsimpacton
householddebt."FinancialServicesReview16.1(2007):73.
15IFC(2010)

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movefromtheinformalsectortoformalsectorisanontrivialdecisionfortheunitsandmerely
changingtheaccesstocreditmightnotbeadequatetoalterthestatusquo.Underthose
circumstances,theymightexploretheuseofalternativecurrenciesasameansforsurvival.
Itis,however,notcorrecttoassumethatexpansionincreditwilldefinitelymaterialise.Inthelast
twoyears,thedemandforcreditintheeconomyhasbeensluggishatbest.Incomparisontoacredit
depositratioof1.53in201112,thefiguresfor201415wereaslowas0.54.Whiletheremightbe
manyfactorsthatcontributedtothisoutcome,whatisofconsequenceisthatthedemonetisationhas
beenintroducedinthisenvironmentwheredemandforcreditisratherlow.Acompressionindemandin
theeconomywouldfurtherdepressthesentimentdrivinginvestments.Inotherwords,demandfor
creditwouldcontinuetobelowandthepotentialcreditwillnotberealisedimmediately.
Thefirstconsequenceofthiswouldbeafallintheinterestratesintheeconomywhichcould
revivesomeofthesentimentsincefirmswithoutstandingdebtwouldhavelowerinterestliabilitiesand
hence,canseeimprovedbalancesheets.
Thecompressionindemandwouldmeanadeclineinimportswhileexportsmightnotbe
adverselyaffected.Thischangeinthebalanceoftradewouldinduceanappreciationofthecurrency.
Alongwithlowerinterestrates,thiscouldresultininflowofinvestmentbyFIIsaswell.
Ifthedemandforcreditisnotverysensitivetointerestratesthenthelowerinterestrateswould
notbringinsufficientdemandandbankswouldneedtoexplorealternativewaysofplacingthe
additionaldepositsavailablewiththem.Thiscouldmeanthatbankstakeinmoreriskyassets
potentiallyopeninguptheeconomytomorevolatilityandrisks.Thiscouldincluderealestate,
consumercreditandconsumercreditcards.ThehousingloanbubbleoftheUSeconomymightbeone
suchexampleoflendingtomoreriskyprojects,therebybringinginmorevolatilityintothesystem.
Twomoreextremepossibilitiesthatmightfolloware:alossintheconfidenceofthepeopleinthe
officialcurrencyleadingtobankrunkindofsituationsifthecurrentdescriptionofwaitingforlonghours
forwithdrawingmoneypersistsandthecapsonwithdrawalarenotrelaxed.Alternatively,theycould
shifttoalternativestocurrency.Second,therecouldbesocialunrestifthecompressioninincomesand
consumptionaresevereandpersistent.
Alternativestocurrency:wouldtheyevolveinthefaceofdemonetisation?
Anumberofagentsintheeconomywouldberequiredtomovefromtheinformalsectortothe
formalsector.Fortheseagentsaswellasforagentswhohavebeenoperatingthroughthemediumof
cashandfindthetransitiondifficult,certaininformalcashsubstitutesmightemerge.Forinstance,even
atpresent,therearecouponsliketheSODEXOcouponswhichareusedforpayingforcertain
purchases.Theseareacceptedbyarangeofestablishmentsinplaceofformalcurrency.Itis,
therefore,possibletoseeanexpandeduseofthesecoupons.Thechangemightinducethegeneration
ofothertokensassubstitutesformoneyaswelltheagencycollectingMCDsgreentaxhasstarted
issuingtokensinplaceofchange.Similarly,forhighvaluetransactionsonecanthinkofbitcoinsand
othersuchcryptocurrenciesononesideandforeignexchangeontheotherasamechanismfor
settlingtransactions.Perhapsthesewouldnottakeonadimensionlargeenoughtochallengethe
officialcurrency,butitcandisturbtheexpectationthattheunaccountedeconomywouldbebroughtinto
theformalsectorsincetheremightexistalternativestotheformalcurrency.Hereitisimportantto
explorethepossibilityandacceptabilityofpeertopeerpaymentinstrumentsacategorywhichhas
beenevolvinginrecenttimes.
Effectsongovernmentfinances:
Theeffectsofdemonetisationongovernmentfinancescanbedividedintothreecategories:the
impactthroughRBIsfinances,theimpactthroughtaxesandtheimpactthroughcreditavailableto
financedeficits.

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ThroughRBIsfinances:TheRBIearnsseignioragethroughtheprintingofcurrency.Inthe
demonetisation,apartofthecurrencywillbeextinguished.Forthispartofthecurrency,theRBIcan
printthenotesgiventheassetsonitsbooks,buttherewouldbenotakers.Inotherwords,thispartof
thecurrencywouldbelikenewmoneythatcanbeintroducedintotheeconomyandhenceyields
seignioragetotheRBIonceagainwhenreleasedintocirculation.RBI,however,cannotlendthistothe
governmentsincethatwouldinvolveadditionalliabilitybuilduponitsbalancesheet.So,thiscurrency
canonlybereleasedwhenforeignexchangeisbeingconvertedtorupeesforinstanceandnot
sterilisedthereafter.Atthispointtherewouldaccruesomedividendstothegovernmentaswell.
However,totheextentthegovernmentandtheRBIseektomovetheeconomytowardsdigital
instruments,thisoptionmightnotbeexercisedandthedividendmightnotaccrue.
Impactthroughtaxes:Therearemultiplechannelsthroughwhichtaxeswillbeaffected:

Atthepointoftransitiontothenewregime,peoplehaveattemptedtoconvertcashbalancesinto
commoditieslikegoldorluxuries.Onthesetransactionsthegovernmentswouldhaveaspurtof
taxes.Thiswouldhowevernotlastbeyondthetransitionphase.

Inthesubsequentperiod,theimpactonindirecttaxeswouldbenegativebecauseofthe
compressionindemand.

Onpropertytaxes,somelocalbodieshavegivenpeopleawindowofopportunitytopayoldas
wellascurrenttaxesinthescrappednotes.Thiswouldresultinanincreaseinrevenue
collectionsinpropertytax.16

Onincometaxtherecanbetwopotentialeffects:first,withcompressionintheeconomy,there
couldbeareductioninthetaxcollection.Intheunlikelyeventofpeoplechoosingtodeposit
unaccountedbalancesinthebankandpaytaxesandpenaltyonthesame,orifthetax
departmentthroughinvestigation,findsthatsomeofthedepositsarenotexplainedincometax
collectionswouldincrease.ForanyindividualdepositingbalancesaboveRs10lakhs,thetax
andpenaltytogetherwouldabsorbtheover90percentofthedepositedamount.Thiswould
serveasadisincentiveforpeoplewithlargebalancestocomeanddepositthesameinto
accounts.Inotherwords,thegovernmentcannotexpecttogetmajorcollectionsintermsofthe
taxandpenaltyonunaccountedincomesrevealed.
Throughfinancingoffiscaldeficit:Thegenerationofadditionaldepositsandcredit,asaresult
oftheSLRrequirementscanmakemorecreditavailabletogovernments.GiventheFRBM(Fiscal
ResponsibilityandBudgetManagement)limitations,theamountofborrowingthatgovernmentscan
takeonmaybelimitedandtheadditionalsupplycanmeanadeclineintheinterestratethat
governmentspayontheirdebt.Thiscouldbeapositivespinoffforthegovernments.
6.Conclusions
Thedemonetisationundertakenbythegovernmentisalargeshocktotheeconomy.Theimpact
oftheshockinthemediumtermisafunctionofhowmuchofthecurrencywillbereplacedattheendof
thereplacementprocessandtheextenttowhichcurrencyincirculationisextinguished.Whileithas
beenarguedthatthecashthatwouldbeextinguishedwouldbeblackmoneyandhence,shouldbe
rightfullyextinguishedtosetrighttheperverseincentivestructureintheeconomy,thisargumentis
basedonimpressionsratherthanonfacts.Whilethefactsarenotavailabletoanybody,itwouldbe
foolhardytoarguethatthisistheonlypossibility.Asarguedabove,itispossiblethatthesecash
balanceswereusedasamediumofexchange.Inotherwords,whilethecashwasmediatingin
legitimateeconomicactivity,ifthiscurrencyisextinguishedtherewouldbeacontractionofeconomic
16http://timesofindia.indiatimes.com/city/chennai/DemonetisationMaduraiCorporationmakesrecordtax
collectiononasingleday/articleshow/55374378.cms
http://indianexpress.com/article/india/indianewsindia/demonetisationhyderabadcivicbodycollectsrs
65croreofpropertytax4372156/

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activityintheeconomyandthatisacostthatneedstobefactoredinwhileassessingtheimpactofthe
demonetisationontheeconomyanditsagents.
Itislikelythattherewouldbeaspurtinthebankingdeposits.Whileinterpretingthephenomenon,
however,onehastokeepinmindthatalargepartoftheirdepositswereearlierusedfortransactional
purposes.Forexample,ifasmalltraderdeposits2lakhRupeesintheJanDhanaccountsincethe
currencyinwhichheheldthesebalancesinfortransactionalpurposeshasbeenscrapped,itwouldbe
incorrecttointerpretthisassuccessoftheprogrammeinbringinginpeoplewhowerehidingblack
money.Norcantheybeinterpretedasadditionalbalancesthatthebankingsectorcanlendoutonthe
samebasisasearlierdeposits,sincethedepositsnowwouldremaininaccountsformuchshorter
periodsthatdepositsbasedonsavingswouldbe.

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MOREINTHESERIES
BodhisattvaSengupta.(2016).
EndogenousLeadershipina
FederalTransferGame,WPNo.
180(November)
VrindaBhandariandRenukaSane.
(2016).Towardsaprivacy
frameworkforIndiaintheageof
theinternetWPNo.179
(November)
RadhikaPandeyandIlaPatnaik.
(2016).Legislativestrategyfor
settingupanindependentdebt
managementagencyWPNo.178
(October).
Contactemailids:
kavita.rao@nipfp.org.in;
suranjali.tandon@nipfp.org.i
n
NationalInstituteofPublicFinanceandPolicy,
18/2,SatsangViharMarg,
SpecialInstitutionalArea(NearJNU),
NewDelhi110067
Tel.No.26569303,26569780,26569784
Fax:911126852548
www.nipfp.org.in

At the stroke of the hour on midnight of 9 November 2016, th

India lost 86% of its monetary base. The print, electronic and
social media has been praising Prime Ministers masterstroke by
which he has reportedly destroyed the base of corruption in India. In
this single move, the Government has attempted to tackle all
the three issues affecting the economy i.e. a parallel
economy, counterfeit currency in circulation and terror
financing. There is no doubt that Prime Minister has pulled out a
major coop and substantially enhanced his reputation as a strong
leader.
Views and Counterviews:
The idea of demonetization is good but it has to be taken into
consideration that most of the black money is kept in the form
of land, buildings or gold or kept abroad. What is in cash
constitutes only 4% of the total amount of black money on which
taxes are not being paid. Out of this, a lot of money is in circulation
in everyday transaction like if someone is building a house; the bill is
not paid through banks for sand, bricks etc. This money goes into
the other systems though it has been drawn from bank. These
things will come under control with this step.
Small farmers, sellers, merchants, daily wage labourers and
traders are suffering because of lack of proper planning,
intelligence and foresight such as recalibration of ATM
machines. There was need to pile up enough 100 Rupee notes
and other smaller denomination notes in the market before
taking this step. It is being said by critics that this step was taken
only to bolster the image of the Prime Minister as he has been
unable to deliver on GDP growth, inflation and bringing the black
money from abroad.
Demonetization is an established practice in monetary policy to
tackle black money. The Prime Minister has explained why this is a
financial surgical strike. It was meant to be suddenly implemented.
In the past, demonetization has taken place twice but it fails
because the idea is to tackle the black money existing in circulation.
This is not tackle corruption per se or the Government is not saying
that 100% corruption will be tackled. If announcement and time
would have been given, this step might not have been
successful in controlling black money and counterfeit currency
in circulation coming from Pakistan, Nepal or other countries.
People are facing problems because the limit of withdrawal
has not been kept at a higher level. If this would have been kept
at a higher level, there were chances that the recycling of black
money might begin. The ideal money in circulation has to come to
the banking channels.
It is also being said that what is being attempted is replacement of
currency and not demonetization itself which was unnecessary. This
is a terrible setback for the international standing of the Indian
economy. At this time, the economy is struggling with slowdown.
There is demand sluggishness in the economy leading to practically
no private sector investment and stagnant industrial growth. If we
look at the farm sector, this is the harvest time. Farmers generally
deal in cash and India is also largely a cash economy. The cash
transactions in this economy are far more than the total
number of electronic transactions done on a daily basis. In
the tribal heartland of the country, the poor people through
middlemen are getting their currencies exchanged for Rs.300 or
Rs.400 because of lack of proper information which is hitting them.
The stock of the black economy constitutes a major part of the GDP
is significant. Even if 50% of this amount is withdrawn, the kind of
relief that RBI will get on its liabilities and the sort of deposits
commercial banks will get will lead to a rise in the deposit
and later on there will be decrease in lending rates plus
fiscal deficit.The black money in circulation is like a steroid in the
economy which keeps the demand going gives a feeling that
everything is working well. The problem is that investment is
not taking place in the economy and the rate of growth of
capital formation is down. The only way to bring this up is to
divert more funds into investments which will happen when
the cost of capital comes down.
Conclusion:
So far, it can be said that this is a historical step and should be
supported by all. One should look at the bigger picture which will
definitely fetch results in the long term. This is what the people
have been asking for a long time which has finally happened.