DEMONITISATION AND ITS EFFECTS

On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the Demonetised banknotes. Prime Minister Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.  

The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.  People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.

According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had been demonetised, were deposited with the banking system, But the banknotes that were not deposited were worth ₹10,720 crore (107.2 billion), leading analysts to state that the effort had failed to remove black money from the economy. The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the announcement. The move reduced the country’s industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost.

The shortage of Cash

The scarcity of cash due to demonetisation led to chaos, and people faced difficulties in depositing or exchanging the demonetised banknotes due to long queues outside banks and ATMs across India. The ATMs were short of cash for months after demonetisation.

During the demonetisation, the unaccounted money worth ₹610 crore were seized by the police and tax officials across India which included ₹110 crore in new banknotes. Reports in the media noted that although the general public faced a severe cash shortage, some individuals were able to amass crores in new banknotes; they thus described the demonetisation exercise as being futile.

Transport

The All-India Motor Transport Congress claimed that about 800,000 truck drivers and conductors were affected with the shortage of cash, with around 400,000 trucks stranded at major highways across India. Major toll plazas in Gujarat and on the Delhi-Mumbai highways also saw long queues as toll plaza operators refused the demonetised banknotes. The Ministry of Road Transport and Highways subsequently announced a suspension of toll collections on all national highways across the country until 2 December as well as acceptance of demonetised ₹500 banknotes as a toll from 2 to 15 December.

Stock market

As a combined effect of demonetisation and the 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. 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. There were marginal effects on the stock market during November–December 2016. A data study (July 2016 – February 2017) of 54 companies across 13 sectors listed with the NSE showed that companies in cement, cotton and rubber sectors showed an increase in total trades while companies in automotive, clothing, foods, paper, real estate, retail, steel, sugar, tea and textiles sectors showed a decrease in total trades after demonetisation. Demonetisation had a negative impact on stock market returns evidenced from NIFTY 50 and other NIFTY sectoral indices.

Industrial output

There was a reduction in industrial output as industries were hit by the cash shortage. The Purchasing Managers’ Index (PMI) fell to 46.7 in November 2016 from 54.5 in October 2016, recording its sharpest reduction in three years. A reading above 50 indicates growth and a reading below shows contraction. This indicates a slowdown in both manufacturing and services industries. The PMI report also showed that the reduction in inflation in November 2016 was due to a shortage in money supply.

The growth in eight core sectors such as cement, steel and refinery products, which constitute 38% of the Index of industrial production (IIP), was only to 4.9 percent in November 2016 as compared with 6.6 percent a month ago.

Agriculture

Transactions in the agriculture sector are heavily dependent on cash and were adversely affected by the demonetisation. Due to scarcity of the new banknotes, many farmers have insufficient cash to purchase seeds, fertilisers and pesticides needed for the plantation of rabi crops usually sown around mid-November. 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

The shortage of cash led to plunge in demand which in turn led to a crash in the prices of crops. Farmers were unable to recover even the costs of transportation from their fields to the market from the low prices offered. Some farmers dumped their produce in protest against the government.

Demonetisation resulted in the relative erosion of agricultural wages and weak bargaining power of farmers for their produce.

Categories: Social Issues