A report on Demonetisation and its effect on the various sectors of

Indian Economy

Date: 1st Feb17

Submitted By:

Jyoti Mishra

GLC-HR(2016-18)
What is Currency Demonetization?

It is a radical financial step in which a currency unit's status as a legal tender is declared invalid. This
move is usually executed when old currencies have to be replaced by new one's or whenever there is a
change of national currency.

On November 8,2016 evening, Prime Minister Modi, in his televised address to the nation, made Rs
500 and Rs 1000 notes invalid

Why was it done?

1) To tackle black money in the economy.

2) To lower the cash circulation in the country which "is directly related to corruption in our country.

3) To eliminate fake currency and dodgy funds which have been used by terror groups to fund
terrorism in India.

4) The move is estimated to scoop out more than more than Rs 5 lakh crore black money from the
economy .

History

This is not the first demonetization drive by government of India.

The Government of India demonetized Rs 1,000, Rs 5,000 and Rs 10,000 notes back in 1978 too.

Indian Scenario

Today, nearly 80% of all transactions in Indian economy are conducted in cash.

India is the biggest cash intensive economies of the world with Cash to GDP ratio of 12%. i.e. the
value of notes and coins in circulation as a percentage of GDP.

Whereas for example Cash to GDP ratio is just 3.93% in Brazil, 3.73% in South Africa, and 5.3%
Mexico.

Impacts of demonetization

It will push up the demand for gold as safe store of wealth.

This would result in gold imports and it will impact balance of payments.

It will push up the demand for dollars as safe store of wealth.

People would be happy to pay the charges/commission for converting black money into gold
and then reconverting it into rupees.The same stands for dollars of other foreign currencies.

It will be a big boost for e-wallets.E-wallet is an online prepaid account where one can
stock money, to be used when required. You can pass on the benefits of your e-wallet to your
friends and family as well.
 It will be a big boost for credit & Debit cards.

Increase in Bank Accounts as India is still a vastly un-banked country and many among
the poor do not have bank accounts.

Immediate impact of the current demonetisation on the people and economy:

To be precise: Unsettling. One can see long queues before banks and ATM machines. Workers in the
unorganised sector, petty shopkeepers and small businesses are finding it difficult to cope. There
seems to be some dip in immediate consumption expenditure. Given the scale of demonetisation, this
was anticipated.

Macro-economic impact:

Demonetisation will reduce money supply in the economy and will create temporary problems as
acknowledged by the prime minister himself.

Reduction in money supply means falling consumer spending, investment spending and net exports,
leaving aside government spending. It is likely to translate into a decline in nominal GDP in the
immediate term. RBI has increased the Cash Reserve Ratio (CRR)the share of total deposits that
commercial banks have to hold as reserves either in cash or as deposits with the central bankto 100
percent on additional deposits. Hence, hopes of a reduction in interest rates have already been
diminished with short-term negative impacts on bank profitability. The unorganised sector, which
forms a major part of the Indian economy, is likely to take a transitory hit as this sector operates
mainly on a cash basis.

According to a study conducted by Indias largest organisation of manufacturers, All India

Manufacturers Organisation (AIMO), micro-small industries segment in India has suffered a 35%
loss in jobs and 50% dip in revenue after the first month of demonetisation. AIMO also projected a
fall in employment of 60% and loss in revenue of 55% till March 2017. Over 3 lakh micro, small,
medium and large scale industries occupied in manufacturing and export activities are represented by
AIMO.
As per the study, the industrial sector has been badly affected, with Small and Medium-sized
Enterprises (SMEs) sector worst-hit.

Impact of Demonetisation on Various sectors:

JOBS
IMPACT: Hiring experts say jobs at senior levels are not and wont be impacted. But overall
hiring is down right now, as managers seek to protect revenue/profit targets

CONSUMER SPEND
IMPACT: Consumption, a big GDP contributor, will take a hit for at least two quarters, say
companies and analysts. Two main problems: Low circulation of lower denomination notes,
which may be temporary, and wealth erosion, that is impacting big ticket purchases. FMCG
sales dropped 20-30% in November. At store levels, impulse buys like snacks, biscuits were
hard hit, as were personal care items, Nielsen data shows. December can be worse than ..

REAL ESTATE
IMPACT: Insiders say theres a 40%-plus drop in enquiries and sales across key markets of
Mumbai, Delhi, Bengaluru and Pune. Deals in secondary market have come to a standstill. In
Bengaluru, drop in deal closings is as much as 60%. Most homebuyers are waiting for big
 price reductions. With fear of black money transactions and cash crunch added to an already
slumping real estate sector, near future is bleak.

E-COMMERCE
IMPACT: Mostly bad, some good. For the online retail market, gross merchandise value
(GMV) of players fell by 40-50% in first few weeks after demonetisation, in the middle of
their biggest quarter for sales. Things may remain bleak till March. Even high-value items
like expensive smartphones are selling less. Products returned are up by 50%. And experts
feel consumer sentiment wont improve quickly. But the boost to digital payments (100%
jump in transactions) has led industry to hope for a bright medium term. Also, grocery and
food delivery set-ups are doing better since they sell essential items. Some saw new customer
orders jump to 25%, from the usual 15-16%.

TOURISM
IMPACT: Peak tourism period of November-December badly hit. For tourist destinations
beyond metros, business may be down by as much as 40%. Tourism business in metros may
go down by 10%. Cash shortage at airports and hotels are a big problem. And many national
monuments entry points dont have card payments facilities. Western countries have issued
advisories on cash crunch in India.

AUTOS
IMPACT: Post-demonetisation, there was some cushion at wholesale level for Maruti
Suzuki, Toyota Kirloskar Motor and Tata Motors from dealer demand for new models or new
variants like Baleno, Brezza, Fortuner, Innova and Tiago. Hyundai India, Honda Cars India
and Mahindra & Mahindra have seen some short-term impact on sales. At the retail level,
sales for cars without waiting period is down 30-50%. Two-wheeler and commercial vehi ..

AVIATION
IMPACT: In worlds fastest growing aviation market, passenger traffic growth will fall below
20% from an average 23-24% growth recorded in previous years. Flight bookings dropped
drastically in days after demonetisation. Recovered somewhat later. Offline travel agents,
who took cash, badly hit. Flights to small towns, where cash payments are the norm, are also
badly hit, may post negative growth.

TELECOM
IMPACT: Mobile phone shipments fell by 26% in November, compared to the previous
month. Smartphone shipments are down by 23%. Inventory pile up with retailers. Big sellers
who do card and online transactions less badly hit. Analysts expect sales for feature phones to
drop by 25% in the quarter, and smartphones to fall by 17.5%.

GOLD
IMPACT: Scared by government warnings, sale of gold against old currency notes fell
drastically. NRI customers have fled. Sales are down sharply, and it was already a bad year
for gold.
 AGRICULTURE
IMPACT: Interestingly, villages have adapted in some ways better than cities. Govt. of India
allowing tax free deposits of any amounts for farmers have led to many of them getting 20%
premium from traders when transacting. Informal credit for daily purchases and use of old
notes for key inputs and selling produce have kept rural economy going. Crop planting
increased 20-35% every week after demonetisation and remained higher than last year in all
weeks after November 8. But a lot depends on cash supply improving quickly in the new
year.