Group Study onDemonetization inIndia – ImpactAnalysisSubmitted To:Dr. Venkatraja BMA, Ph.DSubmitted By:Aman Dhawan – 16065Ishan Kapoor – 16076Nagendra – 16086Rahul Srivastava – 16096Shruthi Hegde – 16106Venkat Vasist Reddy – 16117
What is Demonetization?Demonetization is the act of stripping the legal status of currency. Demonetization is used tocurb black money and counterfeit currency. At times it involves exchange of old currencywith the new one. It is an excellent and most effective tool to curb the counterfeit currency asone has to exchange the old currency notes with new ones with banks, where counterfeitcurrency cannot be presented. This step is also taken whenever there is a change of nationalcurrency, replacing the old unit with a new one. For example, when European MonetaryUnion nations decided to adopt Euro as their currency. To ensure a smooth transition throughdemonetization they allowed exchange of old currencies for a period of time. Other countriesthat adopted demonetization were Zimbabwe, Fiji, Singapore and Philippines. However inIndiaAn overview of Demonetization with respect to Indian RupeeIn India the management of currency is done by Reserve Bank of India on the basis ofReserve Bank of India Act, 1934. Government’s recent move of Demonetization of 500 and1000 rupees currency note is not new to India. Reserve Bank of India printed 1000, 5000 and10000 notes in 1938 and again in 1954, but those currency notes were demonetized in 1946by exchanging with new notes and again in 1978 respectively with no replacement of 5000and 10000 rupee notes but 1000 rupee notes were replaced. [nca16]The first demonetization did not show great positive effects. By the end of 1947, out of a totalissue of Rs.143.97 crores of the high denomination notes, notes of the value Rs.134.9 coreswere exchanged. Thus, notes worth of only Rs.9.07 crores were ‘demonetized’, not havingbeen presented.An extract of RBI’s history volume sourced from “Mostly Economics”, a blog on economicdevelopment in India tells about the effect of demonetization. The extract is presented below:“Sir Chintaman Deshmukh (governor) felt that we may not get even as much as Rs.10 croresas additional tax revenue from tax evasion and that the contemplated measure, if designed toachieve such a purpose, has no precedent or parallel anywhere. If value is going to be paidfor value (no matter whether such value is in lower denomination notes), it is not going toobliterate black markets. His advice is that we should think very seriously if for the object inview (as he deduces from the declaration form) whether this is an opportune time to proceedwith the scheme. Provided Government are satisfied on the points of(i)sparing harassment to the unoffending holders and(ii)A worthwhile minimum of results in the shape of extra tax revenue, he does not wishto object to the scheme as drafted, if Government wish to proceed with itnotwithstanding the administrative difficulties involved.”[Toi]
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- Fall '14
- Economics, demonetization, black money