Indian Demonetisation

1. DEMONETISATION:
Impact & Challenges
By
Dr. Prabodha Kumar Hota
Utkal University

3. A Historical Change…..
Witnessed by us on 8-12-2016, 8 p.m.

4. Shocking News to Whole of South Asia
• Killed 86.5% of the currency in circulation in one
stroke.
Purpose: To
1. Flush out black money
2. Stop terror funding
3. Keep out counterfeit currencies
4. Combat corruption
5. Control tax evasion
6. Encourage cashless transaction

5. Heavy Dose to a Chronic Patient!
Reactions:
• Long queues before ATMs
• Vehicles at petrol pumps
• Gold rush at jewelry shops
• Counting started at several homes
• Social and other media became busy
• RBI came up with prescriptions
• And so on and on………

6. Reaction was Total
political
social
economical

7. Demonetisation in World History:
• Ghana- 1982
• Nigeria – 1984
• Myanmar - 1987
• Soviet Union – 1991
• Australia – 1996
• European Union - 2002
• North Korea – 2010
• Zimbabwe - 2014
• India – 1946, 1978, 2016

8. Will it be Successful in India?
• Short-term success – fake currency notes,
terror funding
• Long- term success – transformation into a
cashless society
• Time/You will say – checking black money

9. Black Money?
• Also known as: ‘unaccounted income’, ‘black
income’, ‘dirty money’, ‘black wealth’,
‘underground wealth’, ‘black economy’, ‘parallel
economy’, ‘shadow economy’,
• ‘Black money’ can be defined as assets or
resources that have neither been reported to the
public authorities at the time of their generation
nor disclosed at any point of time during their
possession.
• Demonetisation targets at ‘Black cash’ not ‘Black
money’ which is a small fraction of Black money.

10. The Vicious Circle
Black Cash
Illegal
Activities
Legal
Activities

13. Probable Amount of Black Cash?
• Demand for Money by transaction theory:
62% - 45% (difference between India and Ems
cash requirement) = 17% of M1(28T)=4.8T
• Demand for currency by consumption theory:
Household consumption is estimated to be
around R89 T in 2016, so black cash in India
(.092*89) was close to R8 T.
• Proportion to GDP theory(PC): black economy is
estimated to be 25 % of GDP and black cash is
6%(?) of black economy. 25%of 40T*6%=2.4 T

14. So What Amount is Black Cash?
• Let’s make a conservative estimation: average
of the lowest two estimates:
( 4.8+2.4 )/2 = 3.6 T
• 50% of it will never return and other 50% will
return to bank in the 50-50 scheme.(expected)
• So, the raise in Govt. Revenue this fiscal year:
1.8 T + 50% of 1.8 T = 2.7 T

15. Is the gain worth the pain?
• Probable Loss to economy:
• Estimator GDP Loss
HSBC -1%
CARE -.5%
RBI -.5%
MMS -2%
PC -1%
CITI Group -.3%
JPMorgan -1%
• Accept the majority. GDP loss 1% of 150 T = 1.5 T
• Direct Gain to Economy: 2.7 – 1.5 = 1.2 T

16. • The Return of 3.6 T p.a. will in all likely hood
be permanent. Thus additional tax revenue
@30% p.a. = 1.08 T which at 5% discounting
factor is equivalent to a massive 21.6 T.
• When all these will go to productive sector
through banks and other mediums will create
high growth and large quality employment.

17. • A less cash dependant economy
• Low Amount of Black money
• Low Interest Rate Regime
• Tight Monetary Control
• Less Investment in Unproductive sector like
Gold and diamond
• Leap Frog Theory

18. Further Reforms to be Successful-
• Complete Transparency in Political Funding
and Spending
• Income Tax for Rich Farmers
• Reduction in Income Tax, Wealth Tax and
Stamp Duty
• SIT for Corporate Frauds
• No Income Tax Free Zone
• Stricter Control on Bureaucrats and IT officials.