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Published : April 01, 2017 | Author : SONAM HASSIM
Category : Banking and Finance laws | Total Views : 3373 | Rating :

4th year Student of Law, At MAB Institute of Juridical Science.

Demonetization-Challenges In Cash Less Economy

Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency.

The demonetization move which is presently considered as the mother of all change in India has begun demonstrating its positive effects in brief time. The demonetization assertion expresses that 500 and 1000 notes reformative move has brought some hard life for ordinary citizens yet it will pass soon. The general population of this nation appears to be exceptionally excited about it and prepared to take this torment. This is the means by which majority rule government works where subject takes an interest in country building and strategy making.

On the 8th of November Prime Minister Narendar Modi made a very bold and historical move by demonetizing the Indian currency notes of Rs. 500 and Rs. 1000 and introduction of Rs 2000 notes. Which created a buzz in the country leading to serpentine lines outside the ATMs. Prime Minister Modi made the decision in a secret meeting where very people were present so that the very reason behind the demonetization is not hampered by the disclosure of the news by giving chance to hoarder of black money to find the solution of their problem.

Demonetization was introduced to tackle three main problems which are counterfeit currency, terrorist financing and black money. These are the 3 major problems that our country is facing, which have to be given priority in order to give a push for development.

History of Demonetization

Facing support and condemnation in equal amounts, the measure of demonetization is not a new concept for the world. There were other nations too that have tried changing their currency in the past. Let us take a look on some of these countries:
1) Ghana
In 1982, Ghana rolled out the decision to demonetize their 50 cedi currency notes in order to monitor money laundering and corruption. The change was not welcomed warmly, creating chaos across the country and finally resulted in a move back to physical assets and foreign currency.

2) Nigeria
Nigeria’s economy collapsed after the 1984 demonetization move that did not go as planned. The military government of then President Muhammadu Buhari introduced different coloured notes to invalidate their old currency in order to fight black money.

3) Myanmar
Around 80% of Myanmar’s currency was demonetized in 1987 by the military to curb black money, but the move resulted in a lot of protests and the country witnessed several killings.

Zimbabwe once had hundred trillion dollar note, which was demonetized and was exchanged in a mocking way dropping trillion dollars to $0.5 dollar.

4) Soviet Union
Under the governance of Mikhail Gorbachev in 1991, the then Soviet Union demonetized the higher denominations of ruble bills, the 50s and 100s. The move did not go well and resulted in takeover of Mikhail’s leadership within eight months of the plan.

5) North Korea
North Korea faced demonetization of their currency in 2010, which led to major economy breakdown with people left to starve for basics.

India’s history with demonetization
The first currency ban:
In 1946, the currency note of Rs 1,000 and Rs 10,000 were removed from circulation. The ban really did not have much impact, as the currency of such higher denomination was not accessible to the common people. However, both the notes were reintroduced in 1954 with an additional introduction of Rs 5,000 currency.
Rs 500 and Rs 1000 notes were introduce in 1934 and after four years in 1938, Rs 10,000 notes were introduce.

The second:
That came in 1978; the then Prime Minister of India Morarji Desai announced the currency ban taking Rs 1000, Rs 5000 and Rs 10,000 out of circulation. The sole aim of the ban was to curb black money generation in the country.

Demonetization and Cashless Economy In India
In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest denominations in its currency system; these notes accounted for 86% of the country’s circulating cash. With little warning, India's Prime Minister Narendra Modi announced to the citizenry on Nov. 8 that those notes were worthless, effective immediately – and they had until the end of the year to deposit or exchange them for newly introduced 2000 rupee and 500 rupee bills

India continues to be driven by the use of cash; less than 5% of all payments happen electronically however the finance minister, in 2016 budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money.

Even the RBI has also recently unveiled unveiled a document — “Payments and Settlement Systems in India: Vision 2018” — setting out a plan to encourage electronic payments and to enable India to move towards a cashless society or economy in the medium and long term.

Purpose/ Need For Demonetization
There is some purpose/need for demonetization. These are-
1. High denomination notes are known to facilitate generation/ circulation of black money.
2. Total number of bank notes in circulation rose by 40 percent between 2011 and 2016
3. Increase in number of notes of INR 500 denomination was 76 percent and for INR 1,000 denomination was 109 percent during this period
4. Infusion of new series bank notes will be monitored and regulated by RBI
5. The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7 percent of the GDP in 1999 and rising to 23.2 percent in 2007
6. A parallel shadow economy corrodes and eats into the vitals of the country's economy resulting in: –Inflation adversely affects the poor and the middle classes –Depriving the Government of its legitimate revenues –Forged cash used to fund terrorist activities against India.
Accordingly, steps have been taken to demonetize the high denomination notes and help to:
1. Curb financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN)
2. curb the use of FICN funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and
3. for eliminating Black Money which casts a long shadow of parallel economy on our real economy

Merits of Demonetization
1. One of the biggest positive impact of demonetization is to bring more people onto the dominant economic grid, where can be easily looked upon and taxed and also generation of more revenue.
2. Through the demonetization there has been kick start of cashless economy, where many people have started using internet channels for payment of money.
3. This step has given a major foundation base to various e-payment portals and the drive towards the digitization on the nation.
4. Large amount of people and business are brought into the bosom of the formal economy via demonetization program which has led to bosom in liquidity and an apparent in its recorded economic growth.
5. Transaction through banking channels have led to moving informal business into formal business as the transaction are now being recorded in banks as payments are made via them.
6. Curbing the black money which has been one of the main agenda of demonetization will get the major push as the black money hoarded in the form of banned currency will no longer be of use, leading to publication of such amount or throwing away of these notes.
7. Fake Indian Currency Notes (FICN) which were mainly used to fund the terrorists will be dismantled.
8. The true tax paying people will get reward in the form of lower price of real estate as most of the black money is converted into assets in which real estate and gold tops the lists.
9. Various additional facilities have been provided like no charge by bank on banking transactions.
10. The introduction of new currency notes of Rs. 2000 and Rs. 500 has come with fine security design to avoid the production of counterfeit notes.
11. Due to demonetization many tax evaders and hoarders came into light where heavy duty was imposed on them.
12. This out of the blue step of the government, it has given a major setback to money hoarders about the dynamic plan of the government.

Demerits of Demonetization
1. In the country where 90% of transaction takes place in cash in the market, where only 40% have bank account in that country government banned those notes which had 86%of share in the market which led to great hustle in the market.
2. The bulk of black money is not in money at all so such step of demonetization has affected the middle class tax payers.
3. Demonetization had an adverse effect on farmers and villagers who did not have bank account and had mostly the demonization of 500 and 1000 rupee notes after the sale of their crops.
4. Due to the demonetization many people lost their life either because of standing in long queues or denial by hospitals to give treatment in exchange of old currency notes which led to death of many people.
5. Small business faced the major loss and people also had to skip their work in order to withdraw money from ATMs by standing in serpentine queues.
6. There was poor coordination between the banks and the government,
7. The frequent changes of the policy gave the idea about the lack in preparation of the government for such change.
8. This off-guard step was greatly criticized by the oppositions where many rally were taken out in protest of such change.
9. Families which were having marriage ceremony were greatly affected as they had withdrawn cash which were mostly in the currency notes of Rs500 and Rs1000

What is a cashless economy and where does India stand?
1. A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.
2. India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil.
3. Less than 5% of all payments happen electronically
4. The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
5. Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.

Benefits of Cashless economy
1. Reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left.
2. It will curb generation of black money
3. Will reduce real estate prices because of curbs on black money as most of black money is invested in Real estate prices which inflates the prices of Real estate markets
4. In Financial year 2015, RBI spent Rs 27 billion on just the activity of currency issuance and management. This could be avoided if we become cashless society.
5. It will pave way for universal availability of banking services to all as no physical infrastructure is needed other than digital.
6. There will be greater efficiency in welfare programmers as money is wired directly into the accounts of recipients. Thus once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs.
7. There will be efficiency gains as transaction costs across the economy should also come down.
8. 1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided.
9. Hygiene – Soiled, tobacco stained notes full of germs are a norm in India. There are many such incidents in our life where we knowingly or unknowingly give and take germs in the form of rupee notes. This could be avoided if we move towards Cashless economy.
10. In a cashless economy there will be no problem of soiled notes or counterfeit currency
11. Reduced costs of operating ATMs.
12. Speed and satisfaction of operations for customers, no delays and queues, no interactions with bank staff required.
13. A Moody’s report pegged the impact of electronic transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because of increased velocity of money.

An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers.
This will eventually have the following chain effect:
a. Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run.
b. Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
c. The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.

Challenges in making India a cashless economy
1. Availability of internet connection and financial literacy.
2. Though bank accounts have been opened through Jan Dhan Yojana, most of them are lying un operational. Unless people start operating bank accounts cashless economy is not possible.
3. There is also vested interest in not moving towards cashless economy.
4. India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure.
5. The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
6. Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
7. Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. It could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulators will have to take a tough stand against such rent-seeking behavior by the banks.

What else needs to be done?
1. Open Bank accounts and ensures they are operationalized.
2. Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
3. Tax rebates for consumers and for merchants who adopt electronic payments.
4. Making Electronic payment infrastructure completely safe and secure so that incidents of Cyber-crimes could be minimized and people develop faith in electronic payment system.
5. Create a culture of saving and faith in financial system among the rural poor.
6. The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
7. RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
8. The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.

Cashless society is dangerous 2000 notes are a very good move. We don't want corporations to know which food we ate or where we spent or our weekend privacy will be finished.
If the INTERNET or electricity fails entire country will fail especially during war time. Hackers will have a hay day.

Master card and Visa which do 85 % of world transactions will have control on our country. Bankers will become kings and manipulate everyone else by providing anonymous servers to preferred clients as the recent hacking attack just revealed .

We won’t be able to protect ourselves from negative interest rates or draconian measures like 65% inheritance tax by ensuing governments. There will be no run on banks so they will take higher risks.
Governments around the world will always want to penalize savers and encourage spending by way of negative interest rates and people will have no means to save themselves from negative rates by withdrawing cash. Governments can track donations made to political parties - purpose of secret ballot will be compromised.

Bear with me please but I don’t think it’s going to work properly in India. These types of systems can be used when everybody is under one roof. Here in India some people are well educated while others are thumb users. How can we use this system? Also it keeps track of a person’s spending isn’t it an attack on the privacy of a person’s life. We live in a country where some people don’t even know how to use mobile phone. People don’t have food to eat, forget about credit cards. Beggars, where will they go? How will they get money to eat food?

I am not saying that this system is bad but totally using this system and eliminating cash system will be a disaster.

This system should be like of net banking. It should be at the discretion of the account holder whether to use this payment option or not. It should not be made mandatory. It will create chaos.
First we are not fully equipped with required technology to use this system.

Unified system means that everyone should accept this payment system from a shopping mall to a cobbler , only then this system can prevail in our country otherwise it’s of no importance it will be like net banking. Yes it will make payment hassle free but at the same time it will create confusion.

People will need to be alert what they are spending how much they are spending. They need to keep track of everything. It will prompt people to spend more as it will be easy for them to make easy payment. Corruption can be reduced by other means. If upsc gives more preference to ethics type of paper rather than old age art questions may be we can select some honest people. First of all remove reservation because that is the biggest corruption in this country. To be honest i am 50-50 in favor of this system. It should not be mandatory.
# http://www.lawof.in/positive-imapcts-demonetization-must-know-tunisha-thakurlloyd-law collegegreate-noida/
# https://www.forbes.com/sites/wadeshepard/2016/12/14/inside-indias-cashless-revolution/#410638c54d12
# http://www.civilsdaily.com/story/cashless-society/
# http://m.thehindubusinessline.com/portfolio/your-money/cashless-economy/article9391830.ece
# http://m.economictimes.com/news/economy/policy/sunday-et-making-rural-india-pay-digitally-and-challenges-post-demonetisation/articleshow/55640316.cms
# http://www.businesstoday.in/opinion/columns/money-today/cashless-indian-economy-â€"a-reality-/story/241987.html
# http://www.google.co.in/url?sa=t&source=web&cd=1&ved=0ahUKEwir6r253PHSAhVEk5QKHSbzC3AQFgghMAA&url=https://www.slideshare.net/mobile/SandeepJ99/demonetisation-2016-sandeep-jhunjhunwala&usg=AFQjCNFlGrs_Q2r_cth4g26kSPN5kbzaRw


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