DEMONETARIZATION IN INDIA AND ITS IMPACT ON FOREIGN TRADE WITH A SPECIAL FOCUS ON THE TEXTILE SECTOR IN THE WAKE OF THE 2016 DEMONETIZATION, SPANNING THE YEARS 2013 T

 

DEMONETARIZATION IN INDIA AND ITS IMPACT ON FOREIGN TRADE WITH A SPECIAL FOCUS ON THE TEXTILE SECTOR IN THE WAKE OF THE 2016 DEMONETIZATION, SPANNING THE YEARS 2013 TO 2018

 

ABSTRACT

This research paper delves into the historical instances of demonetization in India, occurring in 1946, 1978, 2016, and most recently in 2023. It aims to assess the impact of demonetization on international trade, particularly examining how India's foreign trade has been influenced. To comprehensively analyze this impact, the study takes into account various internal and external factors affecting foreign trade, both pre and post demonetization. Moreover, it specifically focuses on the textile product sector, analyzing its exports and imports to gauge the consequences of the 2016 demonetization, a significant event in the period from 2013 to 2018. Data analysis employs Weight Rating Analysis and the percentage method. The findings of this research are expected to provide valuable insights for government officials and industrialists, shedding light on the effects of demonetization and other factors on India's foreign trade in a broader economic context.

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Key words –demonetization, export, import, internal factors, influence, foreign trade 

 SECTION 1-   INTRODUCTION

Demonetization is a method of stripping a currency unit of its status as legal tender. In simple words, demonetized notes are no longer applicable as officially permitted currency. Usually, a new currency replaces the old currency unit(s). During the process, people are given time to exchange their existing banknotes and coins for the new currency before it is officially discontinued. After a currency has been withdrawn, it is no longer legal tender and contains no monetary value.

 SECTION 1.2 - History of demonetization

. The first demonetization occurred on January 12, 1946, targeting currency notes of Rs 500, Rs 1,000, and Rs 10,000. The second demonetization took place in 1978, invalidating Rs 1,000, Rs 5,000, and Rs 10,000 notes. The most significant demonetization event happened on November 8, 2016, when all Rs 500 and Rs 1,000 banknotes were demonetized. Finally, in 2023, the Reserve Bank of India decided to withdraw the Rs 2,000 banknotes from circulation.

Each demonetization event aimed to address different objectives, such as curbing black money and promoting cashless transactions. However, the effectiveness of these measures varied. During the 1978 demonetization, approximately 14.76% of the demonetized currency notes were extinguished. In contrast, the 2016 demonetization faced challenges, including prolonged cash shortages and lengthy queues for exchanging banknotes. Despite these disruptions, a significant portion of the demonetized banknotes were deposited in banks, indicating limited success in eliminating black money.

The recent decision in 2023 involves the withdrawal of Rs. 2,000 banknotes from circulation. While these banknotes will remain legal tender, they must be exchanged before September 30, 2023. The value of Rs. 2,000 notes in circulation is significant, accounting for about 10.8% of the currency in circulation.

SECTION 1.3 Demonetization in the world

Demonetization is not executed in India but also in other part of world especially in countries of United States, Great Britain, Ghana, Nigeria, Congo, Myanmar, Venezuela, Russia, and Zimbabwe. The detail is as follows.

United States of America: One of the oldest examples of demonetization may be found in the United States, where the Coinage Act of 1873 ordered the elimination of silver as a legal tender in favor of the gold standard. Again, in 1969, to combat the existence of black money in the country and restore the country’s economy, President Richard Nixon declared all currencies over $100 to be null. Great Britain: Before the year 1971, the currency of the pound and penny used to be in circulation in Britain, but to bring uniformity in currency, the government stopped the circulation of the old currency in 1971 and introduced coins of 5 and 10 pounds. Ghana: In 1982, Ghana demonetized notes of the 50 cedi denomination to tackle tax evasion and excess liquidity. Nigeria: Demonetization was carried out by the government of Muhammad Buhari in 1984 when Nigeria introduced a new currency and banned old notes. Congo: President Mobutu Sese Seko made some changes with respect to the currency in circulation in Congo for the smooth running of its economy during the nineties. Myanmar (1987 and 2018): Myanmar, also known as Burma, has implemented demonetization twice in recent decades. In 1987, the government demonetized the 25, 35, and 75 kyat banknotes to counter inflation. In 2018, Myanmar demonetized the 1,000 kyat banknote, aiming to crack down on illicit activities and counterfeit currency. Venezuela experienced multiple rounds of demonetization in recent years due to its severe economic crisis. In December 2016, the Venezuelan government withdrew the 100 bolivar note, which was the highest denomination at the time, leading to chaos and protests. In August 2018, the government introduced a new currency, the Sovereign Bolivar, by removing five zeros from the previous currency. In Russia (formerly USSR), in 1991, under the leadership of Mikhail Gorbachev, the 50 and 100 Ruble notes were removed from circulation in an attempt to combat the parallel economy. Zimbabwe demonetized its local currency, the Zimbabwean dollar, in June 2019. The move was a response to hyperinflation and the dominance of foreign currencies, mainly the US dollar and South African rand, in the country's economy. The government introduced a new currency called the Zimbabwean dollar and required people to exchange the old currency at a specified rate within a limited timeframe.

Overall, the study aims to shed light on the evolving dynamics, challenges, and opportunities experienced by India's foreign trade during the demonetization period, providing valuable insights for policymakers, economists, and business professionals.

SECTION 2 ­ REVIEW OF LITERATURE

Sujoy Dhar (2015) The researcher identifies the changing role of RBI, interprets the changes that have taken place with the implementation of Basel norms, analyses the role of the central banks as controllers of the liquidity of the nation, demonstrates the challenges of measuring, mitigating, and managing different types of risks, develops strategies to combat non-performing assets, and critically analyses the corporate governance framework of the banks. This paper has focused on the paradigm shift in the role of the RBI. It also provides a new dimension in the literature of corporate governance, risk management in banking, and ethical obligations of banks, as well as the successful implantation of the International Basel Norms on the capital adequacy framework through the issuance of relevant norms and guidelines. Modern banking was going through numerous changes, fostering increased competition; hence, the traditional inward focus had to become more market-oriented. The imperative is much more evident in transitional markets. Owing to the opening up of these markets to external competition, transitional economies, including India, faced stiff competition from the banks of developed countries. (Kolar, 2006) The central bank of each nation primarily monitors four items, which include the scope and direction of the bank, its capital adequacy ratio, level of exposure to market risk, and degree of off-balance-sheet operations. The level of control maintained by regulators determines the system's resiliency, which refers to its ability to recover from both internal and external shocks, whether cyclical or unexpected. (Maxwell, 1990) According to Farzad Javidanrad (2021), this study is a theoretical attempt to shed light on these features through the lens of the paradox of monetary profit and its manifestation in the capitalist economy, specifically the shortage of money in circulation. The investigation aims to demonstrate how the paradox of monetary profit provides a theoretical framework for analyzing the mechanism by which capitalist economies move towards financialization. The theoretical argument presented in this investigation establishes a connection between the shortage of money in circulation and financialization. The core idea proposed is that financialization is a direct result of the shortage of money in circulation, and this shortage can be explained through the paradox of monetary profit.Shanbhogue Girish, Kumar, A. Prashanth, Bhat, Swathi, and Shettigar, Chethan (2016) defined currency ban as a move to stop counterfeit banknotes allegedly used for terror financing, as well as a surgical strike against black money and corruption in the country. Demonetization leads to cash shortages in the country, which prove detrimental to numerous small businesses, agriculture, and transportation. The shortage of cash resulted in chaos, and most people faced difficulties exchanging their banknotes due to long queues outside banks and ATMs nationwide. This demonetization step was proven to be the biggest attack on black money and corruption in the history of the Indian economy, also promoting digitalization and encouraging digital payments. The authors concluded that demonetization is advantageous in the short, medium, and long term. Muthulakshmi, E. Kamatchi (2017), in her paper entitled "Impacts of Demonetization on Indian Economy - Issues & Challenges," states that when money is withdrawn from the economy, the country does not benefit in the short term. On the other hand, if the money circulates within the economy, it would have a positive and meaningful impact. She also states that the demonetization move was a serious attack on black money, corruption, hawala transactions, counterfeit currency, and terror financing. However, it had a negative impact on various sectors such as commodities and real estate.Shah, Ayash Yousuf (2017) stated that demonetization is a significant step in the fight against corruption, black money, and terror funding. However, this decision was taken without proper preparation and adversely affected the public. Without printing enough new currency notes, 86% of the currency notes were withdrawn, disrupting all market transactions. Only common people had to face problems exchanging their notes, while the intended targets seemed unaffected. With the intention of ridding the country of black money and identifying tax defaulters and black money holders, the government demonetized Rs 500 and Rs 1000 notes. The sudden announcement and lack of proper planning created chaos among the general public. Common people faced difficulties in making purchases without money in their hands, wasting their time in endless queues, which could have been easily avoided with proper advance planning. Veerakumar, K. (2017) suggests that the government's announcement of demonetizing 500 and 1000 currency notes came as a significant shock to the citizens of India. The withdrawal of the highest denomination notes aimed to address issues of tax evasion, counterfeit currency, and the financing of terrorist activities. It has been observed that a substantial amount of money has been deposited into bank accounts exceeding specified limits, leading to penalties and taxes. The usage of e-wallets, debit cards, and credit cards has significantly increased, contributing to the development of a more robust cashless infrastructure

Abhani Dhara K. (2017) suggests that this round of demonetization is proving to be more successful than the previous ones. The landscape is changing, with more people embracing online banking as a mode of payment. Bank employees are making dedicated efforts to ensure the success of demonetization, and their support is crucial. Although demonetization has not completely eliminated black money from the economy, it has instilled fear in individuals holding such funds. The author concludes that demonetization was a necessary step to address issues of black money, terrorism, and corruption, among others.

Shukla, Bal Govind, and Gupta, Hariom (2018), in their paper titled "An Exploratory Study of Business Students' Perspectives on Demonetization in India: With Special Reference to Allahabad City," utilized primary data for their study. They concluded that people actively support government initiatives aimed at eradicating corruption, black money, and other threats like terrorism and naxalism in the country. Shukla, Bal Govind, and Gupta, Hariom (2018), in their paper titled "An Exploratory Study of Business Students' Perspectives on Demonetization in India: With Special Reference to Allahabad City," utilized primary data for their study. They concluded that people actively support government initiatives aimed at eradicating corruption, black money, and other threats like terrorism and naxalism in the country.

Himanshu Kushwaha, Ashwani Kumar, and Zainab Abbas (2018) conducted a study aiming to examine the meaning and reasons behind demonetization, as well as the sector-wise impact on the Indian economy. The study utilized a descriptive approach, gathering information from various journals, magazines, published papers, and websites. The currency ban implemented by the government of India created chaos in the short term, as individuals holding old currency notes faced difficulties exchanging them in long queues outside banks and ATMs across the country. Abhani (2017) found that the 2016 demonetization exercise would be more successful than the previous ones. The study observed an increasing trend in the use of online payment modes. Though the demonetization drive did not fully eliminate black money from the economy, it instilled fear among hoarders of such funds. Muthulaxmi (2017) concluded that when currency is withdrawn from the system, the country does not benefit in the short term. While demonetization had a significant impact on corruption, hawala transactions, and counterfeit currency, it also negatively affected various sectors of the economy. Neeraj (2017) analyzed the impact of demonetization on black money in India and concluded that it primarily affected the existing black cash, rather than the generation of future black money. The study noted that demonetization created awareness and fear among black market participants. Sumathy and Savitha (2017) examined the impact of demonetization on the agriculture sector and found adverse effects, particularly on small farmers and fruit and vegetable vendors..Shukla et al. (2018) concluded that people actively support government initiatives aimed at eliminating black money, corruption, terror, and naxal financing.Tandon and Kulkarni (2017) analyzed the impact of demonetization on black money and corruption, noting that it curbed tax evasion and improved tax collections..Dr. Vinay Chandra, Surabhi Srivastava, and Mayank Jindal (2022) analyzed the 2016 demonetization and found that although the primary objective of eliminating black money and corruption had limited success, the initiative effectively tackled tax evasion, terror funding, cashless transactions, and counterfeit currency Mohammad Shameen, Javad Amol S. Dhaigude, Archit Vinod Tapar, and Yogesh Paip (2019) investigated the impact of the 2016 demonetization on listed stocks across various sectors in the Indian economy. The study found that group-affiliated firms experienced the highest negative abnormal returns, while PSUs (Public Sector Undertakings) fared relatively better. The impact on different sectors varied, with sectors like banking initially hit hard but others experiencing positive effects in the long run, such as pharma, paper, and wholesale trading.Ravi Kishore Kumar Vadlamani (2017) studied the impact of demonetization on India's external trade, particularly on exports and imports. The study concluded that the impact of demonetization on foreign trade was minimal, with the currency crunch influencing the trade sector only in the short term, from November 2016 to January 2017. The study also noted that foreign exchange reserves and the exchange rate of the Indian Rupee were influenced in a similar manner by the demonetization policy, but overall, the impact on the trade sector was not significant.

The reviewed studies provide comprehensive insights into the impacts of demonetization in India, highlighting its advantages and disadvantages. Collectively, the literature acknowledges the effectiveness of demonetization in combating corruption and black money while acknowledging the short-term disruptions it caused across various sectors of the economy. Additionally, the studies emphasize the promotion of digital payments and the importance of better planning and preparation to minimize the adverse consequences faced by the public. Further research is needed to explore the impact of demonetization on India's external sector, including import dependency and the competitiveness of domestic goods. By analyzing trade patterns, foreign exchange reserves, and industry performance, future studies can offer valuable insights into how demonetization has shaped India's trade dynamics and overall economic health in the global market.

Section 3: Analysis and Discussion

Section 3.1: Demonetization in 1946

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In 1946, the correct term for demonetization in India was "currency devaluation" rather than demonetization. In 1946, the Indian government, under the leadership of the British colonial administration, decided to devalue the Indian currency, the rupee. During World War II, the British government borrowed substantial amounts of money from India to fund the war effort. This led to a severe balance of payment crisis and inflationary pressures in India. To address this situation, the British government decided to devalue the Indian rupee. To address this situation, the British government decided to devalue the Indian rupee. On June 18, 1946, the British government announced a 57% devaluation of the Indian rupee. This meant that the value of the rupee in terms of other currencies was reduced. Previously, the exchange rate was set at 1 pound sterling = 13.33 rupees, and after devaluation, it became 1 pound sterling = 30 rupees.

The finance department passed two ordinances in January 1946. The first ordinance was the Bank Notes (Declaration of Holdings) Ordinance, which required all banks and government treasuries in British India to furnish to the Reserve Bank of India a statement of their holdings of banknotes of Rs 100, Rs 500, Rs 1,000, and Rs 10,000 as at the close of business on the previous day by 3 p.m. on January 12, 1946. That day was declared a bank holiday. During World War II, the British government borrowed a substantial amount of money from India to fund the war effort. This led to a severe balance of payment crisis and inflationary pressures in India.

To understand the impact of the devaluation of the currency in 1946 on foreign trade, the weighted rating method is used. In the below table, internal and external factors, including currency devaluation, were developed. Assigning weight to each factor depends on its relative importance. The rating column assigns a rating from 1 to 10 to indicate the perceived impact of demonetization on each factor. The impact on the external sector column briefly describes the expected effects of demonetization on India's external sector based on the specific factor. A composite score is developed by multiplying the rating scores by weightage. The maximum composite score indicates the maximum impact of external factors.

 

S NO	Factors	Weightage	Rating (1-10)	composite score	Impact on External Sector
1	Internal Factors
a	Reconstruction	0.6	8	4.8	Increased infrastructure investment for trade facilitation
b	Partition of India	0.3	9	2.7	Disruption of trade routes and economic integration
c	Trade Policies and Industrial	0.1	5	0.5	Changes in trade regulations and industrial competitiveness
d	Infrastructure Development	0.1	7	0.7	Improved logistics and connectivity for international trade
2	External Factors
a	Agricultural Exports	0.9	6	5.4	Fluctuations in agricultural export volumes and prices
b	Global Economic Conditions	0.2	9	1.8	Changes in global demand and economic growth
c	Bilateral Trade Agreements	0.4	3	1.2	Impact of trade agreements on market access and tariffs
3	Currency Devaluation	0.5	4	2	Effect on export competitiveness and import costs

Table 1: Internal and external factors responsible for the increase and decrease in India’s foreign trade from 1945 to 1952 (Weight Rating Analysis)

Output: Internal factors play an important role in influencing the external sector (Export and import). The role of currency devaluation in 1946 was negligible.

Impact on Indian Economy:

·         Inflation: Currency devaluation resulted in a sharp rise in inflation as the cost of imported goods increased significantly. The devaluation made imports more expensive, leading to higher prices for essential goods and raw materials, which negatively affected the purchasing power of the people.

·         Export Competitiveness: Devaluation made Indian exports relatively cheaper in international markets. This helped boost the competitiveness of Indian goods, and exports increased in the short term. However, the long-term impact on export growth was limited due to various other factors, like limited production capacity and market access.

·         . Fiscal Challenges: The devaluation had implications for India's fiscal situation. India had to service its external debt, which became more expensive due to the devaluation. Additionally, the government had to bear the cost of increased subsidies and public expenditures to counter the inflationary pressures.

·         Social Unrest: The devaluation led to widespread protests and social unrest in India as people were angered by the sudden reduction in the value of their savings and the increased hardships caused by rising prices. Strikes and protests against the devaluation took place in various parts of the country.

·         Long-term Economic Policies: The devaluation of 1946 was a significant event in Indian economic history. It highlighted the need for India to have control over its monetary policy and currency. It influenced the thinking of Indian policymakers and set the stage for future economic policies after India gained independence in 1947.

In the Princely State of Hyderabad, Nizam Mir Osman Ali Khan was in possession of high denomination notes, which he subsequently turned in, totaling $3 million when he recalled them from circulation. After independence, the Indian government in April 1948 repaid the Nizam the amount due in 100 rupee notes, which if adjusted for inflation would be worth $33.4 million or Rs 242 crores today.

Demonetization was not successful then, because only a very small proportion of total notes in circulation were demonetized in 1946 and its worth was Rs. 1,235.93 crores. It is not simple to analysis impact of demonetization on the import and export data, as 6 t0 8 months India got independence and after effect of partition was emerged in economy which had ruined the Indian economy. The year 1947 marked a significant period of transition for India, with the country gaining independence from British rule and the subsequent partition leading to the creation of India and Pakistan as separate nations. During this time, the Indian economy faced numerous challenges and disruptions. The partition resulted in the displacement of millions of people and the division of resources, infrastructure, and industries. The process of economic reconstruction and stabilizing the newly formed nations was a complex task. While demonetization itself is not commonly associated with the events of India's independence and partition in 1947, it's true that the broader economic and political circumstances of that time could have influenced the import and export data of the region.

Section 3.2: Demonetization in 1978

 

Demonetization in 1978 did not have a direct impact on imports, as its primary target was domestic currency. However, it had indirect effects on imports due to broader economic consequences. The disruption caused by demonetization led to an economic slowdown and a liquidity crunch, affecting businesses' ability to engage in international trade. The overall economic slowdown likely resulted in reduced import demand. Additionally, fluctuations in the exchange rate, influenced by demonetization, could have made imported goods relatively more expensive. The impact on imports would have been influenced by other factors like trade policies, global economic conditions, and the informal sector's role in import-export activities.

To understand the impact of the devaluation of the currency in 1946 on foreign trade, the weightage rating method is used. In the below table, internal and external factors, including currency devaluation, were developed. Assigning weight to each factor depends on its relative importance. The rating column assigns a rating from 1 to 10 to indicate the perceived impact of demonetization on each factor. The impact on the external sector column briefly describes the expected effects of demonetization on India's external sector based on the specific factor. A composite score is developed by multiplying the rating scores by weightage. The maximum composite score indicates the maximum impact on an external factor.

Sno	Factors	Weightage	Rating (1-10)	composite score	Impact on External Sector
1	Internal Factors
a	adverse weather conditions & fluctuation in global community market	0.4	4	1.6	adversely effected agriculture sector
b	declaration of emergency	0.6	7	4.2	export and import slow down
c	Green revolution	0.5	6	3	export of agriculture sector increased
d	railway strike	0.3	3	0.9	slow down the transportation of export and import
e	reducing subsidies ,rationalizing public expenditure	0.4	3	1.2	improve industrialization
f	economic slowdown	0.6	4	2.4	trade stagnated
g	Streamline labor laws and lunch the rural development program	0.2	2	0.4	business expansion
h	modern farming techniques & enhance rural infrastructure	0.1	4	0.4	agriculture sector start growing
i	expansion of public sector undertaking -steel power and telecommunication	0.3	5	1.5	it gear the industrialization
2	External Factors
a	oil shocks and price hikes	0.6	6	3.6	adverse effect on BOP
b	relaxation of import control	0.4	5	2	import & export increased
c	reduction in tariff	0.3	4	1.2	facilities the international trade
d	simplification of export procedures	0.2	5	1	facilities the international trade
e	multi fibre arrangement (MFA) QUOTA restriction on textile export	0.1	4	-0.6	textile export slow down
f	Import restriction by importing countries of India	0.2	3	0.6	export slow down
g	Widening trade deficit & current account deficit strain on its foreign exchange reserves	0.3	4	1.2	foreign exchange reserve decreased
h	foreign exchange regulation act 1976	0.2	5	1	problems to exporters and importers
i	Reduction in govt control and industrial licensing and encouragement of foreign investment	0.4	6	2.4	expansion of foreign trade
j	encourage export oriented industries by providing incentives and subsidies	0.4	5	2	expansion of foreign trade
k	reducing non-essential imports and BOP CRISIS	0.5	4	2	balancing the BOP
l	debt rescheduling & financial assistance from international organization	0.3	3	0.9	balancing the BOP
3	Currency Devaluation	0.3	4	1.2	curbing the black money

Table 2: Internal and external factors responsible for the increase and decrease in India’s foreign trade from 1974 to 1982 (Weight Rating Analysis)

 

 

 

 

 

 

	years	export us $ million	percentage change	import us $	percentage change
1	1974-75	4174		5666
2	1975-76	4665	11.7	6084	7.37
3	1976-77	5753	23.3	5677	-6.68
4	1977-78	6316	34.9	7031	20.73
5	1978-79	6978	46.5	8300	34.78
6	1979-80	7947	58.1	11321	48.83
7	1980-81	8486	69.7	15869	62.88
8	1981-82	8704	81.3	15174	-4.37
	average	6627.88	46.5	9390.25	23.36

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Table 3 shows export and import trends from 1974–75 to 1881–82 (pre and Post-Demonetization periods).

To analyses the above table, which presents the export and import figures for India in US dollars from 1974–75 to 1981–82, we can observe the following trends: There was steady growth in exports from 1974–75 to 1980–81, with some fluctuations in growth rates. Notably, there was a significant increase in exports from 1979–80 to 1980–81. Imports show consistent growth from 1974–75 to 1979–80, with fluctuations in growth rates. There was a substantial increase in imports from 1979–80 to 1980–81, with a further rise in 1981–82. From the data, it is evident that India experienced a trade surplus (exports exceeding imports) in most of the years, except for 1980–81 and 1981–82. In 1975, India declared a state of emergency, which lasted until 1977. During this period, several economic measures were implemented, including the imposition of strict controls on imports and exports. The government aimed to stabilize the economy and tackle the prevailing economic crisis. Indo-Soviet Trade Agreement: During the 1974–75 period, this agreement facilitated increased trade between the two countries, with the Soviet Union becoming one of India's major trading partners. In 1975, India signed the Trade Agreement with the European Economic Community (EEC), which aimed to boost trade relations between India and the EEC member countries.

 

During the period of 1974-1982, India faced a balance of payments crisis, leading to restrictions on imports and measures to boost exports. The country implemented import substitution policies, joined the Asian Clearing Union, sought IMF assistance, and launched export promotion efforts. The global trade landscape was influenced by the GSP implemented by the United States, the hostage crisis in Iran, global economic slowdown, trade disputes, and protectionist measures. India also underwent economic reforms focused on trade liberalization and faced a balance of payments crisis in 1980. Overall, these events and policies shaped India's trade strategies and efforts to navigate global challenges.

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Section 3.3: Demonetization in 2016 

Demonetization in India caused temporary disruptions and impacted cash-dependent sectors, leading to increased digitization of financial transactions and a push toward formalizing the economy. The decision aimed to curb black money and corruption, but its effectiveness and overall impact remain subjects of ongoing debate and discussion.

To understand the impact of the devaluation of the currency in 1946 on foreign trade, the weightage rating method is used. In the below table, internal and external factors, including currency devaluation, were developed. Assigning weight to each factor depends on its relative importance. The rating column assigns a rating from 1 to 10 to indicate the perceived impact of demonetization on each factor. The impact on the external sector column briefly describes the expected effects of demonetization on India's external sector based on the specific factor. A composite score is developed by multiplying the rating scores by weightage. The maximum composite score indicates the maximum impact on an external factor.

 

sno	Factors	Weightage	Rating (1-10)	composite score	Impact on External Sector
1	Internal Factors
q	High inflation reaching double-digit levels.	0.5	4	2	Rising prices of essential commodities and food items had an impact on the overall economy and the cost of living for the people.
b	GDP grow at 10.3% but fluctuate to 6.4%	0.4	5	2	Structural reforms such as the introduction of the Real Estate (Regulation and Development) Act and the Benami Transactions (Prohibition) Amendment Act were implemented.
c	Implementation of Goods and Services Tax (GST)	0.4	6	2.4	aim of streamlining indirect taxes and creating a unified market across the country
d	Current Account Deficit (CAD):	0.3	5	1.5	The widening CAD posed challenges to the country's balance of payments and overall economic stability.
e	Volatile Stock Markets:	0.4	3	1.2	Due to global economic uncertainties, concerns over the European debt crisis, and domestic factors such as policy ambiguity and high inflation.
f	Make in India Initiative:	0.6	5	3	The campaign aimed to position India as a global manufacturing hub and boost job creation.
g	Digital India Initiative:	0.7	6	4.2	The initiative had implications for various sectors, including e-commerce and digital payments.
h	Infrastructure Development	0.6	5	3	The government focused on initiatives such as the Bharatmala Project for road development, Sagarmala Project for port-led development, and Pradhan Mantri Awas Yojana for affordable housing. Investments were made to improve connectivity, logistics, and urban infrastructure.
2	External Factors
	Foreign Direct Investment (FDI) Reforms	0.5	4	2	FDI limits in sectors such as single-brand retail, aviation, and broadcasting, aiming to encourage investment inflows into the country. Policy reforms were undertaken to ease FDI norms in sectors such as defense, insurance, and construction, aiming to boost foreign investment inflows into the country.
	Trade Agreements and Negotiations	0.4	5	2	Free Trade Agreement (FTA) with the European Union and explored trade agreements with countries like Japan and South Korea.
	Trade Balance and Exchange Rate	0.5	6	3	The Indian rupee experienced depreciation against major global currencies, which affected import costs and export competitiveness.
	Bilateral and Multilateral Trade Agreements	0.4	6	2.4	Negotiations with the European Union for a free trade agreement (FTA) and participation in discussions for the Regional Comprehensive Economic Partnership (RCEP) agreement. India's participation in the ASEAN-India Commemorative Summit and negotiations for the Regional Comprehensive Economic Partnership (RCEP) agreement.
a	Digital Transformation	0.6	7	4.2	Aadhaar (unique identification system), and digital payments gained momentum. The government focused on promoting digital infrastructure, expanding internet connectivity, and fostering digital literacy.
3	Currency Devaluation	0.5	4	2	Demonetization had a significant impact on India's economy, including the banking sector, cash-dependent industries, and consumption patterns.

Table 4: Internal and external factors responsible for the increase and decrease in India’s foreign trade from 2010 to 2021 (weightage rating analysis)

S.NO	years	export us $ million	% change	import us $	% change
1	2010-11	249816		369769
2	2011-12	305964	22.47	489319	32.33
3	2012-13	300401	-1.8181	490737	0.289
4	2013-14	314405	-18.834	450200	-31.752
5	2014-15	310338	-39.486	448033	-63.793
6	2015-16	262291	-60.138	381008	-95.834
7	2016-17	275852	-80.79	384357	-127.875
8	2017-18	303526	-101.442	465581	-159.916
9	2018-19	330078	-122.094	514078	-191.957
10	2019-20	313361	-142.746	474709	-223.998
11	2020-21	291808	-163.398	394436	-256.039
	AVERGE	296167.2727	-70.82761	442020.64	-111.855

Table 5 shows export-import trends from 1974–75 to 1881–82, pre- and Post-Demonetization periods.

Analyzing the above table, we can observe the trends and changes in India's exports and imports from the years 2010–11 to 2020–21. The exports increased consistently from 2010–11 to 2013–14, reaching a peak of 314,405 million dollars. There was a slight decline in exports in 2014–15 and a more significant drop in 2015–16 to 262,291 million dollars. From 2016–17 to 2018–19, there was a gradual increase in exports, with the highest value recorded in 2018–19 at 330,078 million dollars. However, exports decreased in 2019–20 and 2020–21, reaching 291,808 million dollars in 2020–21. Imports showed an upward trend throughout the period, with some fluctuations. From 2010–11 to 2013–14, imports increased consistently, peaking at 490,737 million dollars in 2012–13. There was a slight decrease in imports in 2013–14 and 2014–15. Imports continued to rise from 2015-16 to 2018-19, reaching their highest value of 514,078 million dollars in 2018-19. In 2019–20 and 2020–21, imports decreased to 474,709 million dollars and 394,436 million dollars, respectively. India experienced growth in exports during the earlier years, with some fluctuations but a downward trend in recent years. Imports consistently increased, indicating a higher demand for foreign goods and services. The trade deficit (the difference between exports and imports) widened during most of the years, indicating that imports exceeded exports.

During the period from 2010 to 2021, several incidents related to trade took place in India and around the world. Here are a few notable examples: India’s Membership in the BRICS: In 2010, India became a member of the BRICS group (Brazil, Russia, India, China, and South Africa), which represents major emerging economies. This membership provided a platform for increased trade and economic cooperation among the BRICS nations. India-European Union Free Trade Agreement Negotiations: From 2010 on, India engaged in negotiations with the European Union (EU) for a Free Trade Agreement (FTA). The negotiations aimed to increase trade and investment flows between India and the EU, but a comprehensive agreement has yet to be finalized. Goods and Services Tax (GST) Implementation: In 2017, India implemented the Goods and Services Tax, a unified indirect tax system that replaced multiple state and central taxes. The GST aimed to streamline trade and create a common market within India, facilitating interstate trade. Regional Comprehensive Economic Partnership (RCEP): India participated in negotiations for the Regional Comprehensive Economic Partnership, a proposed mega-trade agreement among 15 Asia-Pacific countries. However, in 2019, India withdrew from the RCEP negotiations, citing concerns over its impact on domestic industries and trade imbalances. US-China Trade War: From 2018 onwards, the United States and China engaged in a trade war, imposing tariffs on each other's goods. This trade dispute had global implications and affected trade flows worldwide, including in India. COVID-19 Pandemic and Trade Disruptions: The COVID-19 pandemic, which started in late 2019 and continued into 2021, had a profound impact on global trade. Lockdowns, travel restrictions, and disruptions to supply chains resulted in reduced trade volumes and economic contraction worldwide. These examples highlight some of the significant trade-related incidents that occurred in India and around the world during the period from 2010 to 2021. It's important to note that trade is influenced by a multitude of factors, and numerous other events and policies shaped the trade landscape during this time

To understand the impact of the devaluation of the currency in 1946 on foreign trade, the weightage rating method is used. In the below table, internal and external factors, including currency devaluation, were developed. Assigning weight to each factor depends on its relative importance. The rating column assigns a rating from 1 to 10 to indicate the perceived impact of demonetization on each factor. The impact on the external sector column briefly describes the expected effects of demonetization on India's external sector based on the specific factor. A composite score is developed by multiplying the rating scores by weightage. The maximum composite score indicates the maximum impact on external factors.

Section 3.3: Demonetization in 2023

 

sno	Factors	Weightage	Rating (1-10)	composite score	Impact on External Sector
1	Internal Factors
q	digital transformation & promoting digital literacy	0.2	2	0.4	Economic Growth and Job Opportunities:
b	inflation rate is very high	0.4	5	2	Reduced Purchasing Power As domestic prices rise, the cost of goods and services produced within the country increases, making them less attractive to foreign buyers. This can lead to a decline in exports and potentially worsen the trade balance.
c	covid -19 & its impact	0.9	9	8.1	The pandemic resulted in lockdowns and restrictions, disrupting economic activities across sectors. The government implemented various measures to mitigate the impact, including fiscal stimulus packages and support for affected industries.
d	migration of workers from urban to rural areas	0.5	7	3.5	The loss of skilled workers can lead to a shortage of labor in certain industries or sectors, impacting productivity and economic growth in urban areas. Additionally, reduced population in cities can affect tax revenues and strain the provision of public services.
e	slack in domestic demand in domestic market	0.3	5	1.5	Unemployment and Job Losses While slack in domestic demand poses challenges for businesses reliant on the domestic market, it can create opportunities for export-oriented industries. When domestic demand weakens, businesses may look to expand their sales in international markets to compensate for the decline in the domestic market. This can contribute to a rebalancing of trade and stimulate economic activity in export-oriented sectors.
f	lockdown & migration of workers from urban to rural areas	0.4	6	2.4	The influx of workers migrating from urban to rural areas can strain the existing infrastructure and services in rural regions. Rural areas may not be adequately prepared to handle a sudden increase in population, leading to challenges in providing housing, healthcare, education, transportation, and other essential services.
g	scrap of Article 370 & 35A in jammu & kashmir	0.6	8	4.8	The scrapping of these articles is expected to open up new avenues for investment in Jammu and Kashmir. The region's integration with the rest of India may encourage foreign companies to explore business opportunities in various sectors such as tourism, agriculture, horticulture, handicrafts, and infrastructure development.
h	contraction in growth of agriculture industry, resilience of the service sector  & hike in health& pharmaceutical products	0.2	4	0.8	Reduced exports of agricultural products A hike in health and pharmaceutical products can result in an increased demand for imported goods in these sectors. Countries may need to import medical equipment, medicines, or vaccines to meet domestic needs, potentially leading to a rise in import volumes.
i	current account deficit  and start growing in 2021-22	0.1	5	0.5	This depreciation can make exports more competitive and imports relatively more expensive, potentially improving the trade balance over time.
2	External Factors
a	recession in world	0.9	5	4.5	This can impact exporters as their foreign customers may reduce their purchases, resulting in lower export volumes.
b	unemployment in brazil,italy,canda,united states ,france,united kingdom,germany &japan	0.2	6	1.2	High unemployment rates may lead to reduced productivity, higher labor costs, and potential challenges in meeting export orders, which can impact foreign trade performance.
c	strength the bilateral and multilateral trade agreement	0.4	4	1.6	Bilateral and multilateral trade agreements often include provisions for streamlined customs procedures and harmonized trade documentation. This can facilitate smoother trade flows, reduce administrative burdens, and improve efficiency in cross-border trade.
d	Russia's war in ukraine and its impact on international trade	0.8	5	4	Trade volumes can be negatively affected due to trade disruptions, economic sanctions, or changes in trade policies impact energy prices, This may influence India's stance on trade relations with Russia and its broader foreign policy approach
e	foreign direct investment (FDI) Rebounding of portfolio flows and accretion of foreign exchange reserves	0.5	3	1.5	. Increased FDI can stimulate economic growth by providing funds for businesses to expand their operations, introduce new technologies, and enhance productivity. This can result in higher GDP growth rates and an overall improvement in the country's economic performance. This can lead to the acquisition of new skills, improved industry practices, and the development of a more competitive workforce.
f	USA & china relationship & its impact on Indian economy	0.5	2	1	The trade tensions between the US and China have provided India with an opportunity to enhance its competitiveness in various sectors. Indian industries can focus on improving their quality, productivity, and technology to attract global customers and gain a competitive edge
g	RBI intervention in forex market	0.6	4	2.4	The RBI also intervenes to ensure stability in the cost of imports. By managing exchange rate fluctuations, it helps control the prices of imported goods, which can impact inflation and domestic consumption.
h	USA & IRAN geo political tensions & its impact on Indian economy	0.4	2	0.8	Geopolitical tensions may affect India's plans for regional connectivity projects, particularly those involving Iran and Central Asia. Delays or disruptions in these projects can hinder India's efforts to enhance trade and connectivity with these regions.
3	Currency Devaluation	0.5	5	2.5	Currency devaluation can impact a country's balance of payments. While devaluation may improve the trade balance by boosting exports and reducing imports, it can also increase the cost of servicing foreign debt and affect the overall stability of the country's external accounts.

Table 6: Internal and external factors responsible for the increase and decrease in India’s foreign trade from 1220 to 1923 (Weight Rating Analysis)

S.NO	years	export us $ million	% change	import us $	% change
1	2021-22	422004		613052
2	2021-22 (Apr-Dec)	305044	-27.71	441496	-27.98
3	2022-23 (Apr-Dec)(P)	332763	9.08	551704	24.96
	Averge	353270.3333	-9.315	535417.3333	-1.51

Table 7 shows export and import trends from 1921–22 to 1922–23, pre- and Post-Demonetization periods.

Based on the available data for April to December 2021–22 and 2022–23, India experienced an increase in both exports and imports. The exports for the mentioned periods increased from 305,044 million dollars to 332,763 million dollars, while the imports increased from 441,496 million dollars to 551,704 million dollars. These figures indicate a trade deficit as imports exceeded exports. However, it's important to note that the full-year data for 2021–22 and 2022–23 is not available, making it challenging to determine the overall trend accurately. In previous years, India witnessed fluctuations and a downward trend in exports, along with consistent growth in imports. The widening trade deficit indicates a higher demand for foreign goods and services. Factors such as global economic conditions and the impact of the COVID-19 pandemic likely influenced these trends.

Table 8- Export trends of Textiles Items

Export of textile items (in Million US $)
ITEMS	2013-14	% change	2014-15	% change	2015-16	% change	2016-17	% change	2017-18	% change
Fibre incl.	4521.44		2711.85	-40.02	2768.31	13.144	2520.74	-8.9	2792.73	10.79
Yarn	6725.73		5984.31	11.023	5403.98	-9.69	5260.58	-2.65	5487.86	4.32
Fabrics	4676.39		4949.65	5.84	4572.89	-7.611	4316.51	-5.606	4349.51	0.76
RMG	15003.9		16847.2	12.28	16984.1	0.81	17469.4	2.85	16664.8	-4.6
Made Ups	4469.39		4645.26	3.93	4584.91	-1.299	4720.35	0.02	4996.72	5.85
Other textiles	2174.21		2521.27	347.06	2434.2	-3.45	2342.46	-3.76	2328.49	-0.59
average	6261.84	-109.69	6276.59	-155.25	6124.73	-125.94	6105.01	-144.58	6103.36	-148.84
max	15003.9	48.751	16847.2	120.67	16984.1	95.2	17469.4	108.69	16664.8	96.5
min	2174.21	-268.13	2521.27	-431.17	2434.2	-347.08	2342.46	-397.85	2328.49	-394.18

 

Source: Monthly Statistics of the Foreign Trade of india. DGCIS, Kolkata.

 

A  Secondary data based study was conducted to assess the impact of the 2016 demonetization on textile exports. The analysis involved a comparison of export trends before and after the demonetization. Specifically, the study examined export data from the fiscal years 2013-14 through 2017-18, and analyzed the percentage changes in textile exports during these periods.The total export of textile items remained relatively stable over the five-year period. There was a negligible change from 37,571.03 million US dollars in 2013–14 to 36,620.15 million US dollars in 2017–18. The overall decrease over the five-year period was 2.53%. The year 2014–15 had the highest export value, while 2017–18 had the lowest. Fibre, incl. waste: The export of fibre, including waste, decreased from 4,521.44 million US dollars in 2013–14 to 2,792.73 million US dollars in 2017–18. There was a significant decline of 38.29% over the five-year period. The year 2013–14 had the highest export value, while 2016–17 had the lowest. Yarn: The export of yarn varied during the given period, with fluctuations in values. There was a slight increase from 6,725.73 million US dollars in 2013–14 to 5,487.86 million US dollars in 2017–18. However, there was an overall decline of 18.39% over the five-year period. The year 2013–14 had the highest export value, while 2016–17 had the lowest. Fabrics: The export of fabrics also fluctuated but remained relatively stable. There was a small decrease from 4,676.39 million US dollars in 2013–14 to 4,349.51 million US dollars in 2017–18. The overall decline over the five-year period was 7.00%. The year 2014–15 had the highest export value, while 2017–18 had the lowest. RMG (Ready-made garments): The export of ready-made garments showed fluctuations but had an overall declining trend. There was a decline from 15,003.87 million US dollars in 2013–14 to 16,664.84 million US dollars in 2017–18. The overall increase over the five-year period was 11.08%. The year 2017–18 had the highest export value, while 2013–14 had the lowest. Made-ups: The export of made-ups (textile products other than garments) showed a slight increase over the five-year period. There was an overall increase from 4,469.39 million US dollars in 2013–14 to 4,996.72 million US dollars in 2017–18. The overall increase over the five-year period was 11.80%. The year 2017–18 had the highest export value, while 2013–14 had the lowest. Other textiles: The export of other textiles showed fluctuations but remained relatively stable. There was a slight decrease from 2,174.21 million US dollars in 2013–14 to 2,328.49 million US dollars in 2017–18. The overall increase over the five-year period was 7.10%. The year 2014–15 had the highest export value, while 2017–18 had the lowest.

 

To some extend the textile export is hindered by demonetization.

Table 9 Import of textile items (in Million US $)

 

 

Import of textile items (in Million US $)
ITEMS	2013-14	% changes	2014-15	% changes	2015-16	% changes	2016-17	% changes	2017-18	% changes
Fibre incl	1264.2		1498.54	18.53	1362.61	-9.07	1917.72	40.738	1944.24	1.38
Yarn	1042.2		1112.42	6.737	992.85	-10.74	883.76	-10.98	1069.76	21.04
Fabrics	1175.5		1270.24	8.05	1281.25	0.866	1157.43	-9.664	1471.81	27.16
RMG	431		524.37	21.66	581.93	10.97	595.47	2.32	770.78	29.44
Made Ups	375.85		496.36	32.06	549.01	10.6	430.79	-21.533	459.55	6.67
Other textiles	1009.2		1112.88	10.27	1084.49	-2.55	1058.2	-2.42	1298.27	22.68
MAX	1264.2		1498.54		1362.61		1917.72		1944.24
MIN	375.85		496.36		549.01		430.79		459.55

 

 

Source: Monthly Statistics of the Foreign Trade of India. DGCIS, Kolkata

A  Secondary data based study was conducted to assess the impact of the 2016 demonetization on textile Import. The analysis involved a comparison of import t trends before and after the demonetization. Specifically, the study examined import data from the fiscal years 2013-14 through 2017-18, and analyzed the percentage changes in textile import during these periods During the period of 2013–14 to 2017–18, the import of textile items in India showed fluctuations but had an overall increasing trend. The total textile import increased by 32.37%, from 5,297.83 million US dollars to 7,014.41 million US dollars. The import of fibre, including waste, increased by 53.95%, from 1,264.15 million US dollars to 1,944.24 million US dollars. Yarn imports remained relatively stable with a small increase of 2.65%, from 1,042.18 million US dollars to 1,069.76 million US dollars. Fabric imports increases by 25.18%, from 1,175.47 million US dollars to 1,471.81 million US dollars. Ready-made garment imports showed an overall increasing trend with an increase of 78.91%, from 431.00 million US dollars to 770.78 million US dollars. Made-up imports increased by 22.22%, from 375.85 million US dollars to 459.55 million US dollars. Other textile imports increases by 28.63%, from 1,009.17 million US dollars to 1,298.27 million US dollars. The highest import values were observed in the years 2017–18 for most categories, while 2013–14 generally had the lowest values

During the period of 2013-14 to 2017-18, the import of textile items in India showed an overall increasing trend. Total textile imports increased by 32.37%, with the highest values observed in 2017-18. The import of fiber, yarn, fabric, ready-made garments, made-ups, and other textile items all experienced varying degrees of increase during this period..

Section 4: Concluding Remarks

This comparative study highlights the internal and external factors that have influenced India's foreign trade during the pre- and post-demonetization periods. It is evident that demonetization itself has had a negligible impact on international trade. Instead, other factors such as the participation of India in World War II and the subsequent partition, the declaration of emergency in 1975, oil price hikes, and deficits in the balance of payments (BOP) had a more significant influence on India's foreign trade in 1946. Similarly, in 2016, while devaluation did have some effect on India's foreign trade, it was overshadowed by factors like the COVID-19 pandemic, a heavy burden on import costs, and the collapse of certain export industries. The subsequent recovery was aided by the digital initiatives of the "Digital India" campaign. Currently, in 2023, the ongoing conflict between Ukraine and Russia has emerged as a major factor affecting international trade. This analysis underscores that India's foreign trade is shaped by a multitude of factors beyond demonetization, including geopolitical developments and global economic conditions. The textile industry, in particular, has faced significant challenges in the aftermath of demonetization. Thus, it is crucial to consider the broader context and various contributing factors when evaluating the impact of demonetization on India's international trade.

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