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12/1/2016 Spark Plug: The Demonetization

Spark Plug: The Demonetization


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Spark Plug: The Demonetization

Dear Readers,
In order to keep you one step forward and to boost your General Knowledge and
con dence level, here we are presenting you the most  important topic of the
moment “The Demonetization” in our Spark Plug series. This will surely help you
in your General Awareness Section in the exam and interview preparation.
On 8th November 2016 GOI made history by taking a striking bold step to
demonetize Rs.500 & Rs.1000 note to reform the nance sector.. Making  86 per
cent of the currency in circulation illegal in one stroke.
Demonetization is the most people friendly step ever taken by any government
ever in history.

(http://gs-blog-images.grdp.co/blogs/wp-
content/uploads/2016/11/30182409/51.jpg)
It is a shocking experience for the whole country. The 14.90 lakh crore high
denomination notes almost 70 percent was kept as black money, hidden away
from the banking system by those who have stored safely in a secret place away
from the national wealth.
Black money is the biggest source of corruption. It leads to inequality and price
rise and devaluing the currency.  Equally worrying is the presence of huge chunks
of counterfeit currency funding terror, crime and subversion in the country. All
agree that the share of counterfeit money in circulation is almost equal to the
black money in circulation.
Supporters of Demonetization:
Most well meaning economists including
Former RBI governors K. Subba Rao
C. Rangarajan
Dr Meghnad Desai
Dr Surjit Bhalla

Demonetization:
Withdrawal of a particular form of currency  (such as gold coins) from circulation.
Why Indispensable?

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12/1/2016 Spark Plug: The Demonetization

Demonetization is necessary whenever there is a change of national


currency.
The old unit of currency must be retired and replaced with a new currency
unit.
In economics demonetization is is an excellent tool to curb counterfeit and
black money.

History of Demonetization in India:


First demonetization : Pre Independence era in year 1946.
The highest denomination note ever printed by the Reserve Bank of India
was the Rs 10,000 note in 1938 and again in 1954. But these notes were
demonetized in January 1946 and again in January 1978, according to RBI
data to curb counterfeit and black money.

(http://gs-blog-images.grdp.co/blogs/wp-
content/uploads/2016/11/30182229/4.jpg)
Instructions be issued to banks to report to CBDT or FIU, the transactions
which fall in the following category:
Large cash deposits are made in any account above a particular threshold.
People holding black money may also use poorer people to convert their
money into white by parking the money in their bank accounts.
Cash deposits made by jewelers should be correlated with their sales and
PAN number of the buyers of jewellery.

Sources of Black Money:


Corruption - Corruption may include many activities including bribery and
embezzlement, though it may also involve practices that are legal in many
countries. Government, or 'political', corruption occurs when an of ce-
holder or other governmental employee acts in an of cial capacity for
personal gain.

(http://gs-blog-images.grdp.co/blogs/wp-
content/uploads/2016/11/30181912/3.jpg)
Tax evasion - Tax evasion is the illegal evasion of taxes by individuals,
corporations, and trusts. Tax evasion often entails taxpayers deliberately
misrepresenting the true state of their affairs to the tax authorities to
reduce their tax liability and includes dishonest tax reporting, such as
declaring less income, pro ts or gains than the amounts actually earned, or
overstating deductions.Tax (http://deductions.Tax) evasion is an activity
commonly associated with the informal economy.

Positive effects:
The crackdown on black money by demonetization will bring down the
in ation
The move will ensure that transactions will now go much more through the
banking systemwhich will ensure transparency.
This will bring prices and lending rates down. This is bound to encourage
investment. This will stop the use of black and fake money in crime and
terror activities and make life safer for the common man.
The drive on black money will bring more revenue to the government’s kitty
making it possible to spend more on infrastructure, welfare schemes, health
and education. The days of capitation fees are over. Education will no more
be business as usual.
The road map the government has aims at creation of an egalitarian social
structure, eliminating power brokers, black money and corruption with a
focus on equitable distribution of wealth.

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12/1/2016 Spark Plug: The Demonetization

Countries Implemented Demonetisation:


1. Nigeria: During the government of Muhammadu Buhari in 1984, Nigeria
introduced new currency and banned the old notes. However, the debt-ridden
and in ation hit country did not take the change well and the economy collapsed.
2. Ghana: In 1982, Ghana ditched their 50 cedis note to tackle tax evasion and
empty excess liquidity. This made the people of the country support the black
market and they started investing in physical assets which obviously made the
economy weak.
3. Pakistan: From December 2016, Pakistan will phase out the old notes as it will
bring in new designs. Pakistan legally issued the tender a year and a half back, and
therefore, the citizens had time to exchange the old notes and get newly designed
notes.
4. Zimbabwe: Zimbabwe used to have $100,000,000,000,000 note. Yes, a one
hundred trillion dollar note! The Zimbabwean economy went for a toss when
President Robert Mugabe issued edicts to ban in ation through laughable value
notes. After demonetisation, the value of trillion dollars dropped to $0.5 dollar
and were also put up on eBay.
5. North Korea: The demonetisation that happened in North Korea in 2010 left
people with no food and shelter. Kim-Jong ll introduced a reform that knocked off
two zeros from the face value of the old currency in order to banish black market.
6. Soviet Union: Mikhail Gorbachev ordered to withdrew large-ruble bills from
circulation to take over the black market. The move didn’t go well with the citizens
which resulted into a coup attempt which brought down his authority and the led
to Soviet breakup.
7. Australia: Australia became the rst country to release polymer (plastic) notes
to stop widespread counterfeiting. Since the purpose was to replace paper with
plastic and only the material changed, it did not had any side-effects on the
economy.
8. Myanmar: In 1987, Myanmar’s military invalidated around 80% value of money
to curb black market. The decision led to economic disruption which in turn led to
mass protests that killed many people.
Possible Risks
Cash rush: The scarcity of cash due to demonetisation

(http://gs-blog-images.grdp.co/blogs/wp-
content/uploads/2016/11/30181650/2.jpg)
Transportation halts: After the demonetisation was announced, about
800,000 truck drivers were affected with scarcity of cash, with around
400,000 trucks stranded at major highways across India were reported.
Agriculture: Transactions in the Indian agriculture sector are heavily
dependent on cash and were adversely affected by the demonetisation of
500 and 1000 banknotes
Banking: In the rst four days after the announcement of the step, about 3
trillion rupees in the form of old 500 and 1000 banknotes had been
deposited in the banking system and about 500 billion rupees had been
dispensed via withdrawals from bank accounts, ATMs as well as exchanges
over the bank counters.
Business: By the second week after demonetisation of 500 and 1000
banknotes, cigarette sales across India witnessed a fall of 30–40%,[145]
while E-commerce companies saw up to a 30% decline in cash on delivery
(COD) orders.
Municipal and local tax payments: As the use of the demonetised notes had
been allowed by the government for the payment of municipal and local

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12/1/2016 Spark Plug: The Demonetization

body taxes, it led to people using the demonetised 500 and 1000 notes
to pay large amounts of outstanding and advance taxes.
Income tax raids and cash seizures
Stock market crash

Loopholes
Gold purchases - In Gujarat, Delhi and many other major cities, sales of gold
increased on 9 November, with an increased 20 to 30% premium surging the
price as much as 45,000 from the ruling price of 31,900 per 10 grams

(http://gs-blog-images.grdp.co/blogs/wp-
content/uploads/2016/11/30181549/1.jpg)
Donations - Authorities of Sri Jalakanteswarar temple at Vellore discovered
cash worth 4.4 million from the temple Hundi.
Multiple bank transactions - There have also been reports of people
circumventing the restrictions imposed on exchange transactions and also
attempting to convert black money into white by making multiple
transactions at different bank branches.
Railway bookings - As soon as the demonetisation was announced, it was
observed by the Indian Railways authorities that large number of people
started booking tickets particularly in classes 1A and 2A for the longest
distance possible, to get rid of unaccounted cash.

Thanks 
Team GradeUp..!!

Tags : Bank & Insurance (/banking-insurance) IBPS Clerk (/banking-insurance/ibps-clerk)

General Awareness (/banking-insurance/general-awareness)

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Ankush Sagane (/user/ankush-sagane-i-d735df20-b3c5-11e6-b66b-


(/user/ankush-
sagane- 23b60b6bafb1) Yesterday, 06 am
Thank u sir
UPVOTE 0

Gaurav Gupta (/user/gaurav-gupta-i-b04a8668-4a72-11e6-8dec-


(/user/gaurav-
gupta- 62acc17286bc) 10 hours ago
very useful ..thanks a lot sir
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Pallavi Sharma (/user/pallavi-sharma-i-36d7a27c-72b0-11e6-992f-


(/user/pallavi-
sharma-022caf58993f) 10 hours ago
nice ...& thank u
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Shikha (/user/shikha-i-6fdcbcc9-1f69-11e6-96c9-e84cfea21298) 10 hours ago


(/user/shikha- Login / Register
(/) i- Thanks sir
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(/user/ankita-

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12/1/2016 Spark Plug: The Demonetization
gupta- Ankita Gupta (/user/ankita-gupta-i-21c790f9-e396-11e5-88f5-f34813ef5abe)
9 hours ago
Thanku sir..... plz add imp limit n  % in this post
UPVOTE 0

Monu Basera (/user/monu-basera-i-805d8cc0-939a-11e6-8408-fd11be744fca)


(/user/monu-
basera- 8 hours ago
Sir hindi m
UPVOTE 0

Nijeesh (/user/nijeesh-i-9f0261e5-e095-11e5-b6e1-27d151962837)
(/user/nijeesh-
i- 6 hours ago

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Rishikesh Panchwadkar (/user/rishikesh-panchwadkar-i-41101430-b3c9-11e6-


(/user/rishikesh-
81ca-0d4f2b8b9ce7) 4 hours ago
panchwadkar-
Very nice information keep it up
UPVOTE 0

Abhishek Kukkar (/user/abhishek-kukkar-i-3c1d745e-9387-11e6-9213-


(/user/abhishek-
kukkar- 8486bd8594e6) 4 hours ago
Can anyone please give me link or pdf le for latest banking awareness...... Forrb
mains.... Please
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Niranjan Dave (/user/niranjan-dave-i-14c37e02-e4f6-11e5-850f-


(/user/niranjan-
dave- 066183a67e4a) 2 hours ago
Best effordt sir  sir please give in hindi language bcz highly demond
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