Impact of Digital Money Post Demonetization on the Indian Economy - A Descriptive Study

Mr. Raghunandan G¹*, Ms. Harshita GK², Ms. Jyothi A³

¹Assistant Professor, Dept of Commerce, Christ (Deemed to be University), Bangalore Karnataka India

²MCOM Research Scholar, Christ (Deemed to be University), Bangalore Karnataka India

³MCOM Research Scholar, Christ (Deemed to be University), Bangalore Karnataka India

*Corresponding Author E-mail: raghunandan.g@christuniversity.in, gkharshitasagai@gmail.com. jyothiable17@gmail.com,

ABSTRACT:

The use of digital money has become widespread with astonishing spread all over the country, particularly after demonetization. At the phase of pre-demonetization the entire country used physical cash for their day to day transactions, but after demonetization, the use of digital money increased drastically. Digital money was used mostly in urban areas in the form of e-wallets where banks acted as intermediary. Demonetization is an economic policy that was implemented by the Government of India in which 500 and 1000 rupee notes were eliminated from its legal tender and a new 500 and 2000 rupee note was introduced. This policy was taken by the Government to go towards Cashless Economy. Through the introduction of this policy, it has helped Government in many ways such as curbing black money, stopping terrorist funding and has also increased the revenue to the Government. The use of digital money has increased after demonetization in which people were forced to store their money in their bank accounts which helped them transact at less cost and safety, also helped the Government to track their income where banks played a major role in it. This paper studies the impact of digital money post demonetization on the Indian Economy.

KEYWORDS: Digital money, digitalization, demonetization, e-wallets, cashless economy.

INTRODUCTION:

Digital money also called for Digital currency is a means of payment that is done in electronic form which includes electronic money, bitcoins, and cryptocurrencies. Digital money is accessible through mobile phones, cards and web services. Financial institutions play a vital role in monitoring the payments done using virtual money. Digital money is used in the form of E-wallets such as Paytm, Freecharge etc.

The use of digital money has become vital after demonetization. Demonetization is the process of eliminating currency denominations from its legal usage. It arises when there is a change in monetary policy.

Demonetization in India:

In 2016, the Indian government decided to ban the use of 500 and 1000 rupee notes, the biggest denominations in its currency system, they accounted for about 86% of the country’s cash flow. The Indian Prime Minister Narendra Modi announced to the people on November 8, 2016, that 500 and 1000 rupee notes were not valid and new 2000 rupee and 500 rupee notes were introduced. Chaotic situation prevailed as India is a cash-dependent economy where 78% of all Indian customer transactions are cash-based. ATMs and banks had to shut down for a day due to a long queue of people waiting to get their money exchanged for new currency. The rupee notes introduced were made of different material, size, and thickness, requiring re-calibration of ATMs. Lower denomination notes such as 100 and 50 faced a fall in supply. The daily withdrawal amount was restricted which added to the misery of the general public. The government’s objective to bring India into the forefront in many aspects such as: remove forged currency, fight tax avoidance, abolish black money received from money laundering and terrorist financing activities, and to promote a cashless economy. Individuals and businesses with a huge amount of black money had to bring those funds into the formal financial framework such as deposits of funds in the bank which thereby comes under the preview of taxation. The ownership of the funds in the hands of the individuals if proved guilty he would be fined to the extent of 200% on the owed money.

Importance of Cashless Transaction:

· Taxation:

The Tax rate will come down as most of the taxpayers will not be able to avoid taxes as there is a high level of transparency in all the transactions done by an individual. It at the same time reduces the burden of taxation but to an extent curbs tax evasion.

· Transparency and accountability:

Each and every transaction done by businesses can now to be tracked as it more transparent. It creates a confidence among the sellers and the buyers indirectly boosting the growth of the economy.

· Reduction in Bank Rates:

The availability of more funds in the banking sectors results in lending at a lower interest rate.

· Reduced red-tapism and bureaucracy: Unethical practices can be avoided as it keeps a check on the transactions. It improves the service quality of the transactions done.

· Less availability of cash for illegal activities: Due to digitalization there is no physical currency in the hands of people which thereby avoids channels like hawala (illegal remittance), terrorists funding who will ultimately suffer the impact of a cashless economy.

REVIEW OF LITERATURE:

Dr. Karmider Ghuman, CS Shruti Srivastava (2015)1 "Recharging the right way??" A case study on e-payment giants: Free charge and Paytm. This article result shows that payment through mobile saves time and efforts. It has given the license from reserve bank of India to run a payments bank. India is mostly cash-based economy, but now it has changed to digital world. Technology has brought new innovations like E-wallet, M-wallets, digital payments like transfer of money, banking transactions, shopping, online tickets, recharging and bill payments. This paper results that payments through banks has helped in going towards a cashless economy, development of industries and overall growth of the economy.

Nikhilpahwa (2016)2 "cash vs digital money: why going cashless is going to be tough in India ". This article states that due to Demonetization black money was eradicated but it has given more space for technology to grow rapidly. This paper confirms that there is a positive and negative side of digital money. It concludes telling that cashless economy leads to transparency issues conflicting the interest of individuals.

Bappaditya Mukhopadhyay (2016)3 "Understanding cashless payments in India". The article concludes that India is moving or taking transition towards a cashless economy and by it proves theoretically that the decision made by the consumers and sellers was to proceed with cashless payments and this paper also analyzes that Make in India initiative helps in moving towards a cashless economy.

Sriram K.V and Rodrigues Lewlyn LR (2017)4 "Effect of demonetization in India: an economic, political and social perspective". This article studies the effect of demonetization focusing on economic, political, and social aspects. Due to Modi's government, India is doing well in the economy and demonetization has helped to flush out or reduce the black money in the economy which results in the developments of the economy.

OBJECTIVES:

· To know the after effects of demonetization on the Indian Economy.

· To study the impact of digital currency on the Indian Economy.

Four Ways Digital Currencies will change the world:

1. Ease of Bank Transfers:

Nowadays banks are growing faster and with various facilities cheaper bank transfers happen which is moving money from one bank to another bank easily. When compared to olden day’s bank transactions now it’s all digitally done.The world is slowly moving towards digital currency. Banks can transfer currency with more safety and at cheaper costs and a wide range of protocol, this network helps clients to transfer funds from one currency to another by using the digital currency or technology. It also helps in finding out the foreign exchange traders and transactions of various banks.

2. Safe currency to the low- income population:

When referred to Africa, developing countries mobile technology has increased and that leads to 60% more of commerce in Kenya using mobile phones for credit exchange which act as the medium of exchange and anyone can store money in their mobile phones and use it for other purposes. Consumers spend more by paying more fees for credits since most of them do not have bank account digital currency helps to make payment with safe mode and with the cheap transaction. For example, people will store money at home by purchasing gold so how much would that be safe, to store at home or someone who is holding bit coin as a medium of exchange. It leads to stability of currency which helps international financial markets to expand their business in which they can protect bank operations and save money from inflation.

3. Technological advancement of e-commerce business:

Nowadays E-commerce is moving or spreading across the world as well as frauds is also increasing in credit card system which turns an ethical business into unethical business forcefully. Frauds are more in global transactions which leads many firms not to accept the international payments. Once the digital currency, like bit coins, is used as a medium of transfer it cannot be changed. Digital payment reduces the risk of frauds. Due to virtual currency, the consumer can now send money through email which makes them shop online more conveniently.

For example, E-commerce involved in various business activities may be the American merchant can sell handcrafted goods all over the world. Similarly, the Chinese teenager can offer a mandarin tutorial through online classes or Skype. Also, an African businessman can do online advertisements for his product promotion. E-commerce helps in the making small fee through apps who buy the article news and can also read online media across the world.

4. Programmable money and smart contracts:

Programmable money and smart contracts can be used when an asset is digitalized and that helps in automated moves. It can be called as digital property. For example escrow accounts which are used in large transactions, such as property dealings. The buyer puts his money into an escrow account and only then gets into the deal with the seller and the seller gets the money once the title is handed over to the buyer without any middleman. Similarly another example for multisig, where money can be transferred from one account to another only when the concerned people authenticate the transaction. .This method helps in eliminating the theft of digital frauds and also ensures that the business would not lose its money while transferring across the world.

DISCUSSION:

The Impact of digital money may be viewed and outlined as under

1. Financial/Business impact

2. Social impact

3. Impact on Indian economy

Financial/ Business impact:

· An attempt by business tycoons to take advantage of the current market conditions and convert their black money into genuine currency.

· E-commerce Company’s market capitalization is boosted.

· SMEs who deal with cash transactions are finding it difficult to earn their operating expenses.

· Gems and Jewellery business will have a negative impact.

· Real estate prices will drop and the customer base will face a diminishing trend.

· Banks will have to work exhaustive hours to meet their customer needs. The cash flow will be increased due to digitalization.

Social impact:

· Delay in payment to low -income groups will affect their daily needs and requirements.

· Medicines will be supplied at fair prices. Abolition of drug mafia

· Gambling business will deteriorate.

· Terrorism funds will decline.

· Accessibility of banks to poor and downtrodden people.

Impact on Indian economy:

· GDP will increase.

· Indirect tax collection will be reduced due to the introduction of GST since payment of GST is completely digitalized.

· An organized form of work culture to be enhanced.

Demonetization may benefit India in long-term:

· Tax rates will fall with respect to income earned by an individual.

· Loans will be provided at an affordable rate.

· Real estate prices will have a downward sloping curve.

· The country’s fiscal deficit will be curtailed to a large extent.

· The Indian rupee value will be strengthened.

· The productivity of Industries will improve.

· FDI flow into the country will be at a rapid rate.

· Corruption will be eradicated to the extent possible.

CONCLUSION:

The real accomplishment of demonetization has been that it has helped the government in curbing black money flow into the economy. Unethical practices such as terrorism funding, gambling have come to a standstill. The cost of assets like land and gold has deflated to a large extent. Due to digitalization, people are now forced to store their money in bank accounts which have helped the government to map the income of the working class. Through this, the revenue flow of government has enhanced which makes them provide better infrastructure, hospitals, and educational facilities to the poor and needy sections of the country. Another objective of the government was to move towards a cashless economy which they succeeded in encouraging people to use the digital money to make payments and transfers such as Paytm, Freecharge and, BHIM app. The economy has observed a 20% decline in physical currency circulation, the number of taxpayers as significantly increased. This paper concludes that there is a positive impact of digital money post demonization on Indian economy.

REFERENCES:

1. Ghuman, et al..“Recharging: the Right Way??” A case study on e-payment giants: Freecharge and PayTM. IOSR Journal of Business and Management. 2015 .01. 87-92. 10.9790/487X-15010010187-92.

2. Pahwa. Cash vs Digital Money: why going cashless is going to be tough in India. MEDIANAMA. 2016.

3. Mukhopadhyay. Understanding cashless payments in India. Financial Innovation. 2016.2(1). doi:10.1186/s40854-016-0047-4

4. Sriram, et al. Effect of Demonetization in India- Economic, Political and Social Perspective.2017. ISBN: 978-1-925488-30-2.

5. Abhinav, et al."Demonetization in India: an overview". ICPESS (International Congress on Politic, Economic and Social Studies). 2017

6. Mamatha, et al..“Demonetization and its effect on Banking Sector”. IOSR Journal of Business and Management (IOSR-JBM). 2017. P-ISSN: 2319-7668.

Received on 05.01.2018 Modified on 29.01.2018

Asian Journal of Management. 2018; 9(1):741-744.

DOI: 10.5958/2321-5763.2018.00115.4