Demonetization

Presented by:
SHUBHAM
MBA Ist Sem
Year- 2016-2018
Meaning:
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.

Legal tender: a medium of payment recognized by a legal system to be

valid for meeting a financial obligation. Paper currency and coins are
common forms of legal tender in many countries.
 Introduction
 On November 8, 2016, it was decided to demonetize high
value currency notes of denomination of Rs. 1000 and Rs.
500 (called specified bank notes - SBNs).

 Such notes, valued at Rs.15.4 trillion, constituted 86.9 per

cent of the value of total currency in circulation.

The decision was in continuation of a series of measures

taken by the Government of India during last two years
aimed at eliminating corruption, black money, counterfeit
currency and terror funding.
 Objectives
Reaping its enormous potential medium-term benefits in the form of
 reduced corruption,
 greater digitization of the economy,
 increased flow of financial savings and
 greater formalization of the economy.

All of these would lead to higher GDP growth and tax revenues that
could be used by the Government for inclusive and stronger economic
growth within the norms of fiscal prudence, besides contributing to
overall improvement in business environment
 Impact
1. Growth: Growth of Gross Value Added (GVA) adversely affected due to
liquidity shock subsequent to shortage of cash and temporary loss of work
in labor intensive unorganized sector where wages are paid in cash like in
textiles, leather and gems and jwellery sector.

2. Inflation: Moderation in food inflation, especially perishables, as

inflation excluding food and fuel remained broadly unaffected.

3. Financial sector: Surge in bank deposits, increased profitability of banks

due to reduction in cost of aggregate deposits, surplus liquidity conditions
in banking system, reduction in domestic term deposit rates and lending
rates.

4. External sector: Temporary reduction in labor intensive merchandise

exports and reduction in merchandise imports due to reduction in
domestic consumption.
 Impact
5. Digital mode of payments: Picked up sharply due to Govt. support in
promoting transition from cash to non-cash transactions through:
i) reduction in the merchant discount rate (MDR) and point of sale
(POS) fees;
ii) monetary incentives in the form of discounts and prizes;
iii) service tax relief on MDR for small transactions;
iv) waiver of charges for small value transactions under Immediate
Payment Service (IMPS), Unified Payment Interface (UPI) and
Unstructured Supplementary Service Data (USSD) based *99#
platform;
v)broadening Prepaid Payment Instrument (PPI) reach by enhancement
of limits;
vi) introduction of a new category of PPIs;
vii) permitting banks to issue PPIs to a larger set of entities; and
viii) permitting National Payments Corporation of India (NPCI) to launch
(a) the common app for UPI; and (b) National Electronic Toll
Collection (NETC) system.