NOTES

Chapter 3 Business environment

What is Business Environment ? | Meaning
and Features
What is Business Environment?
The word environment is derived from the French word ‘environ’,
which means surrounding, i.e., external conditions involving manifold
variables like objects or conditions affecting the development and
growth of all living organisms, including human beings. There is close
and continuous interaction between a business and its environment,
and to sustain the business, a proper understanding of the
environment is a must.
Business Environment means the total of all individuals, institutions,
and other forces that are outside the control of a business enterprise,
but that may affect its performance. In other words, the business
environment can be defined as all those conditions and forces under
which a business is operated. These forces affect the working of the
business, and it has to deal effectively with them. It encompasses the
climate or the set of conditions: economic, social, political, or
institutional, in which business operations are conducted.

Features of Business Environment

The features of Business Environment are as follows:

1. Totality of external forces:

The business environment is the total of all the external forces that
directly or indirectly influences the working of a business system. The
external forces refer to those individuals and groups, also known as
stakeholders, with which a particular organization comes into direct
and frequent contact in the course of its functioning.

2. Specific and General Forces:

The business environment is made up of both specific and general

forces. Specific forces such as investors, customers, competitors, and
suppliers affect individual enterprises directly and immediately in their
everyday work. General forces such as social, political, legal, and
technological conditions indirectly affect the business environment.

3. Inter Relatedness:

The various elements of the business environment are closely

interrelated, which means a change in one element affects the other
elements of the business environment. In the present social
environment, there has been a health-conscious and fitness trend
amongst people, and demand for some product and services have
increased, like low-fat cooking oil, low-fat milk, sugarfree products,
yoga centers, health restoration, etc., at the same time demand for
spicy and oily foods, etc., has decreased to an extent. These health
products have changed the lifestyle of people, and also because of the
rise in the number of working women in nuclear families, certain
setups in India have led to the introduction of semi-cooked or
processed food facilities.
4. Dynamic Nature:

The business environment is dynamic in nature, i.e. it keeps on

changing whether in terms of technological improvement, a shift in
consumer preferences or entry of new competition in the market. For
example, changes like invention of new techniques of production,
changes in industrial policies, or a new minister in the government, etc.
Business is required to remain highly alert and adaptable so that they
can survive for long period.

5. Uncertainty:

It is very difficult to predict the happenings in the future, especially

when frequent changes are taking place in the environment. As in the
case of IT or fashion designing due to technological advancements,
smartphones have mostly replaced ordinary cell phones, or earlier
women in India used traditional attire only, but in recent times most of
them prefer western outfits.

6. Complexity:

Business environment consists of numerous interrelated and dynamic

forces which arise from different sources. So, it becomes difficult to
understand what exactly constitutes a given environment. The
environment is a complex phenomenon that is relatively easier to
understand in parts, but difficult to know the relative influence on the
functioning of the business enterprise.

7. Relativity:

Business environment is a relative concept because it differs from

country to country or from one organization to another. For example,
demand for traditional wear may be high in India, but it is not static in
Japan, or a shift of a preference from soft drinks to juice will be
welcomed as an opportunity by the juice company, while the soft
drinks company takes it as a threat.
Importance of Business Environment: Business environment is
important because of various reasons. It helps in coping with rapid
changes, tapping useful resources, building corporate image, etc.
Dimensions of Business Environment: The different dimensions of
business environment include Economic Environment, Social
Environment, Technological Environment, Political Environment, and
Legal Environment
Importance of Business Environment

What is Business Environment?

Business environment means the total of all individuals, institutions,
and other forces that are outside the control of a business enterprise,
but that may affect its performance. In other words, the business
environment can be defined as all those conditions and forces under
which a business is operated. These forces affect the working of the
business, and it has to deal effectively with them. It encompasses the
climate or the set of conditions: economic, social, political, or
institutional, in which business operations are conducted.

Importance of Business Environment

A business environment can not exist in isolation rather each business
enterprise exists, survive, and grows within various forces of the
business environment. The enterprises have insignificant or no control
over the environment and are left with no other alternative, but to
adapt themselves according to these forces. A detailed understanding
of the environment by the business enables them not only to identify
and evaluate, but also to react to these changing external forces in
order to survive, and grow a good analysis by a business manager.
This helps them to take suitable actions at the right time by
formulating the right strategies, which help in improving business
performance, looping with the changes to increase profits, combat
competitors, and maintain the existing market share. The importance
of the business environment has arisen due to the following benefits:
1. It enables the firm to identify opportunities and get the first-mover
advantage:
A business environment provides numerous opportunities for the
success of the business. Here, opportunities refer to the positive
external changes or trends that will help in improving the performance
of the business enterprise, and early identification of environmental
opportunities will help the enterprise to capitalize or exploit the
opportunities by being the first to exploit instead of losing the
opportunities to the competitors.
For example, Maruti Suzuki India Ltd. became the leader of the small
car segment in India because it was the first to recognize the need for
low maintenance, low mileage, and small family cars in an
environment with rising petroleum prices and an increasing middle-
class population, likewise Tata Motor made the low priced car. Later
other automobile manufacturers came up with similar products, but
they were unable to exploit the market to the extent Tata Motors did.
2. Helps the firm to identify threats and early warning signals:
Besides opportunities, a business environment is also a source of
varied threats of crisis. Threats refer to that trend or changes in the
external environment, which hinders the performance of the business
enterprise. A proper environmental understanding and awareness can
help business managers to recognize various threats on time, which
also serves as a warning signal.
For example, especially in India, they come up with many innovative
products and substitutes, so the existing business enterprise must
consider this as a warning signal and must handle the threat
proactively well ahead of the launch of the MNCs products. They must
adopt various methods, like improving the quality of the product
identifying areas where the cost of production can be due, and
engaging in aggressive advertising, publicity and sales promotion.
When other car manufacturing companies entered the small and mid-
segment cars, Maruti Suzuki increased the production of its cars to
make faster delivery. This way company could become a market
leader.
3. Helps in tapping useful resources:
Business enterprises depend upon the environment as a source of
input or resources (such as raw materials, water, labour, machines,
finance, etc.) and as outlets for their output (goods and services). The
business managers must design the policies that allow the enterprise
to get the resources so that they can convert them into outputs that
the consumers desire. Business arranges for payments of taxes to the
government, providing reasonable and fair returns to their investors,
fulfilling corporate social responsibilities, and so on. All these can be
done very effectively by understanding what the environment has to
offer and what it needs.
For example, with the rise in demand for LED, the company started
arranging raw materials for LED instead of a CRT monitor.
4. Helps in coping with rapid changes:
The business environment should be monitored regularly by the
organizations in order to remain updated. The business Environment
enables the business to cope with the changes in the external
environment and make relevant changes in their external environment.
Besides, decision-making should be faster and procedural delays
should be eliminated.
For example, the management of Google is continuously busy adding
new features to its search engine to remain ahead of changes made by
other competitive search engines.
5. Helps in better reputation or building corporate image:
An understanding of the business environment helps business
managers to make realistic plans and policies, and also ensure their
effective implementation. Consequently, the business environment
will surely achieve its goals smoothly and consistently, and this fact
also generates a feeling amongst the people that the business
environment is sensitive to its environment, and as a result, the
reputation gets enhanced.
For example, earlier General Electric Company had various products,
including air condensers, computers, etc., but they discontinued
making A.C and computers, as they could not achieve reasonable
market share. General Electric had the policy that either captures
major market share for their products supplying best to its customers
or else moves out from the concerned business.
6. Help in continuous learning and improving performance:
All types of business environments are facing an increasingly dynamic
business environment where changes are taking place at a fast pace.
Rapid changes in technology, instant global competitors, more
demanding customers, low brand loyalty, division and subdivision of
markets are just a few of the images that describe the present
business environment, and the future of the business environment is
closely associated with what is happening in the environment, so the
business environment that continuously monitors the environment,
and adopts suitable ways of action based on their environment
learning experience will be the one to succeed in the market for a
longer period.
For example, Indigo is a low-cost airway affordable to the masses.
They fly their plains on time, and that becomes their strength. The
company used to collect feedback from the customers about their
preferred timings and set their flight timings accordingly to get seats
filled up. People choose Indigo over full-price airlines for their
reliability. This is how they improved their performance.
Features of Business Environment: Different features of business
environment include totality of external forces, specific and general
forces, dynamic nature, inter relatedness, etc.
Dimensions of Business Environment: The different dimensions of
business environment include Economic Environment, Social
Environment, Technological Environment, Political Environment, and
Legal Environment.
Dimensions of Business Environment
What is Business Environment?
Business Environment means the total of all individuals, institutions,
and other forces that are outside the control of a business enterprise,
but that may affect its performance. In other words, a business
environment can be defined as all those conditions and forces under
which a business is operated. These forces affect the working of
business and it has to deal effectively with them. It encompasses the
climate or the set of conditions: economic, social, political, or
institutional, in which business operations are conducted.

Dimensions of Business Environment

Dimension of the business environment involves the ‘Micro and Macro’
environment. Micro environment means small or pertaining to one item
in the environment. It refers to those internal and external factors,
which exercise a direct influence on the working and performance of
an individual business organization. A micro environment is also called
a Direct Section Environment or Task Environment. Micro environment
may be classified into two broad categories: internal and external
factors.
Whereas Macro environment refers to the general environment or
remote environment under which a business enterprise and forces in
its micro environment operate. The macro environment is not
interacted with regularly or directly by any enterprise. The forces of
micro environment create opportunities for the organization and pose
threats to the company. The micro environment forces are less
controllable than the micro forces. The macro environment consists of
the following components- economic, social, technological, political,
and legal environments. We will be studying all these components in
detail.
1. Economic Environment
It refers to all these forces that have an economic impact on business
activities. We know that business is an economic organization.
Therefore, its survival and growth are dependent on economic factors.
The economic environment includes various factors, such as
inflammation, interest rate, price level, money supply in the market,
etc. These factors serve a business as an opportunity or as a threat to
a business. Therefore, management always remains active to grab the
opportunity and tries to change threats into opportunities.
For example, the rise in interest rate increases the production cost due
to an increase in the price of raw materials and wages.
2. Social Environment
The social environment of a business involves customs, cultures, and
traditions that have lasted for many years. Any change in the social
environment will affect the demand for a product, supply of labour,
and capital. Business is a part of the society in which it operates, and
cooperation between business enterprises and society will see a boom
and will help in the growth of the enterprise. Whereas any
confrontation between them may lead to a disaster, resulting in
dissatisfaction amongst its customers and rejection of its products. If
the business enterprise failed to adapt to the changes, then its survival
becomes difficult. They have to take care of the various forms of
society and all economic activities must be focused on the scheme of
social responsibility, like the same basis of wage payment for male
and female workers, reservation of jobs for minorities, differently-
abled people, and women.
For example, in India, various festive occasions, like Holi, Diwali, Eid,
Christmas, New year, etc., provide lots of opportunities for
manufacturing greeting cards and sweets, producing garments, and
many other businesses and services. Social trends usually provide
various opportunities and also threats to business enterprises, like at
present there has been a health-conscious and fitness trend,
especially amongst urban people that has brought in lots of change in
this system.
3. Technological Environment
The technological environment of a business refers to the broad
features of science and technology in which a business enterprise
operates. It includes forces relating to innovation and scientific
development, which provides a newer base for producing goods and
services, and also effective methods and techniques for operating a
business enterprise. Now, it is very common to see that retailers have
a direct link with the suppliers who update their stocks when needed.
By using the internet, people can look for flight timings, destinations,
and fairs and book tickets online. Technological development has
made it possible to book railways tickets from home or office at a
convenient time instead of standing in queues at the railway booking
counters, and today almost all commercial banks have started internet
banking services whereby account holders can view their account at
any point in time. Technological advance creates new methods of
production and production techniques. Therefore, a business
enterprise must be adaptable to new technology for its survival.
For example, LED replace CRT monitors, and computers with multiple
word processors replace single word processors. Digital watches have
killed the business of traditional watches.
4. Political Environment
It refers to the broad features of the political system in which a
business enterprise operates, including political conditions such as
general stability and peace in the country, and specific attitudes that
the elected government representatives hold towards the business
enterprise. These forces significantly affect the day-to-day functioning
of the business enterprise. Whenever there is political stability, it
increases the confidence of businessmen towards the political parties
as they function within the framework of the political environment.
The business managers are required to understand the changes in the
political environment and also respect the orders of the judiciary
system that it gives from time to time. All business firms are affected
by the policy and practices of the government. Therefore, the business
firm must study and analyze the political environment to adjust it as
per changes.
For example, after opening up the economies in the 90s, the
government of India allowed MNCs to boost the various types of
industries, namely food processing industries like Pepsi Coca. IT
companies have found Hyderabad, Bangalore, Chennai, Pune, Noida,
Kolkata, etc., to be the most suitable locations primarily due to the
supportive political environment in these cities.
5. Legal Environment
It refers to the broad features of the legislature in which a business
enterprise operates, including various legislations, which are placed
and passed by the government in the parliament or state legislature. It
also involves administrative orders issued by the government
authorities, and courts, and also on recommendations made by the
various committees. It is imperative for the management of all
business enterprises to obey the law of the land for proper and
smooth functioning. Non-compliance with the law will attract
punishment as per the statutory provisions. Therefore, business
managers must have adequate knowledge of various rules and
regulations. In fact, such awareness and knowledge are pre-requisite
for better business coordination and performance.
For example, the Companies Act, Consumer Protection
Act, Trademark Act, Trade Union Act, etc. These acts have been
passed by the parliament, which have to be followed by all
organizations.
Economic Environment in India
Economic environment refers to all these forces that have an economic
impact on business activities. We know that business is an economic
organization. Therefore, its survival and growth are dependent on
economic factors. The economic environment includes various factors,
such as inflammation, interest rate, price level, money supply in the
market, etc. These factors serve a business as an opportunity or as a
threat to a business. Therefore, management always remains active to
grab the opportunity and tries to change threats into opportunities.
Important Factors of Economic Environment
Economic environment is one of the most crucial elements of the
business environment. In India, the economic environment consists of
various macro-level factors that are related to the production and
distribution of the organization. These factors have an impact on the
wealth of businesses and industries. Some of the important factors are
as follows:
 Stage of Economic Development: The stage of economic
development of the country means the physical frame and
framework environment.
 Economical Structure: The type of economic system
determines the role of the public and private sectors in India.
A mixed economic system operates where both public and
private sectors exist, and India is an example of a mixed
economy.
 Economic Planning: Economic planning gives direction to the
changes in the economic environment. It includes five years
plan, an annual budget, etc.
 Economic Policy: There are various important economic
policies that influence the business decisions, such as
monetary policies, fiscal policies, etc.
 Fluctuations and trends in Economic Indicator: The
functioning of an economic indicator like national income,
distribution of income, growth rate, GDP, NDP, etc. Any
change or fluctuation in these will affect the Economic
environment.
 Infrastructural Factors: Infrastructure refers to all such
activities and facilities which are needed to provide different
kinds of services in an economy. It includes financial
institutions, banks, modes of transportation, communication
facilities, etc. Poor infrastructural facilities hamper the
economic growth of the country.
Economic Environment at the Time of Independence
The economic environment of India has been rapidly changing mainly
due to government policies. The main features of economic
environment at the time of independence are as follows:
  At the time of Independence, the Indian economy was mostly
agricultural and rural in nature. With almost 85% of the
population of the county living and carrying out their
occupations in villages.
 Low productivity or inefficient techniques of production were
used for performing any operation.
 There was no good public health care system due to which
several communicable diseases were spreading everywhere.
 There was a high infant mortality rate as there was no proper
health care system.
Economic Environment Since Independence
The government opted for ‘Economic Planning’ to revive the economy
from the damages caused by the British Rule.
The main objectives of the development plan adopted by India are as
follows:
 India’s development plans aimed at initiating rapid economic
growth in order to decrease unemployment and poverty,
thereby increasing the standard of living of the people.
 It aimed at establishing a well-built industrial base focusing
on heavy and primary industries.
 It aimed to become self-reliant and bring down the
inequalities of income. This plan also included following a
socialist pattern of development, i.e. based on equality by
avoiding capitalism, as it focuses on attaining the welfare of
the society.
 With respect to economic planning, the government gave the
responsibilities for infrastructure industries to the public
sector.
 Private sector industries were responsible for the
development of the consumer goods.
 Mixed economy pattern was adopted by giving more
importance to the socialist pattern.
Crisis of 1991
The government could not get a very positive effect by making a new
economic policy that gave more importance to the public sector and
imposing restrictions on the Private sector. As a result, India faced
foreign trade exchange crisis in 1991.
The major crises of 1991 were:
 The fiscal deficit approximately reached 7% of GDP, which
was a warning situation.
 Internal debt also rose to 50% of GDP.
 Negative growth in agriculture and industrial production.
 The value of the rupee was depreciating day by day. It
depreciated by 26.7 percent (in terms of US Dollars). There
was also a fall in foreign exchange reserves.
 There was a negative balance of payment.
 India was on the verge of becoming a defaulter. As a result,
SBI and RBI sold and Pledged Gold in the international
market.
 Imports fell(in terms of US Dollars) by 19.4 percent and
exports by 26.7 percent.
India borrowed a loan of $600 million from the World Bank and
International Monetary Fund to manage the crisis of 1991. In order to
revive the economy, India decided to reform the economy.
Reform Measures
To save our country from the serious situation of crisis Government of
India took the following reform measures:
 Firstly, the fiscal deficit was reduced, and the New Industrial
Policy was announced in July 1991.
 The abolition of the Industrial Licensing Policy was
established with the amendment of the MRTP Act.
 There was an open entry for the private sector to areas that
were earlier public sector.
 There was a rise in foreign equity holders from 40% to 51%.
 The government set up the Foreign Investment Promotion
Board(FIPB).
 Introduction of Indian development Bond scheme to get funds
from IMF.
 Buying back of gold, pledged with Bank of England and Bank
of Japan.
 Measures were laid to control the imports and encourage
more export.
  There was an introduction of Liberalized Exchange Rate
Management System.
 Government eliminated import licenses on capital goods and
abolished export duties.
New Industrial Policy : Features & Impact
In order to review a backward economy, it was necessary for the
government to plan for new economic planning. The new economic
planning focused on the role of the public sector. The main objective of
the new economic planning was: to initiate rapid economic growth in
order to raise the standard of living and reduce unemployment,
become self-reliant, and set up a strong industrial base providing more
emphasis to heavy industries and giving more importance to the
socialistic pattern of the economy. So, the Indian economy adopted the
system of mixed economy.
Features of New Industrial Policy
The main feature of the new industrial policy was to create a more
competitive environment in the economy and growth of the business.
The main features of the policy are as follows:
 De-licensing Policy: The new policy abolished compulsory
licensing for all projects, except for six industries.
 Decreased role of the Public Sector: The number of
industries that were reserved for the public sector was
reduced to four, and the remaining industries were open for
the private sector.
 Disinvestment: It means selling a part or whole of the share
of the country. Disinvestment was carried out in many public
sector and industrial enterprises.
 Liberalization of foreign capital: The share of foreign equity
participation was increased, and foreign direct investment was
permitted.
 Liberal policy for technical collaboration: Automatic
permission was granted for technology agreements with
foreign companies.
  Setting up of Foreign Investment Promotion Board
(FIBP): To promote and channel foreign investment in
India, FIBP was set up.
 De-reservation under small industries: De-reservation of
many goods produced in small-scale industries was done.
As a part of economic reform, the government of India announced a
new industrial policy in July 1991, which sought to liberate the
industry from the shackles of the licensing system (liberalization). It
drastically reduced the role of the public sector (privatization) and
encouraged foreign private participation in industrial development
(globalization).
1. Liberalization
Liberalization refers to the removal of entry and restriction on the
private sector enterprise. It is any method of how a state raises its
limitations on some private individual investors. For developing
countries, liberalization has opened economic borders to foreign
companies and investments. The main aim of liberalization was to lure
MNCs and foreign investors to invest and expand in India. Earlier,
investors have to face difficulties to enter countries with many barriers.
These barriers included tax laws, foreign investment restrictions, legal
issues, etc. The Indian business industries have been liberalized in the
following ways:
 Abolition of licensing requirements in most of the industries
 No restriction on the expansion or contraction of business
activities
 Removal of restrictions on the movement of goods and
services
 Freedom in fixing the prices of goods and services
 Reduction in tax rates and the unnecessary restrictions were
uplifted
 Imports and Exports procedures were simplified
 The process to attract MNCs, foreign capital and technology
were also simplified and liberalized.
2. Privatization
Privatization means transfer of ownership, management and control of
the public sector to the private sector. India went for privatization in
the historic reforms budget of 1991, also known as the ‘New Economic
Policy or LPG Policy’. The main aim of privatization was the removal of
restrictions on the public sector and to enhance the role of the private
sector. For privatization, the government of India initiated the
following majors:
 Disinvestment: Disinvestment means selling a part or the
whole share of a public sector undertaking. If the private
sector acquires more than 51 percent share of the public
sector, then it would result in the transfer of ownership of the
public sector to the private sector.
 Revival of sick PSUs: The government of India set up
the Board of Industrial and Financial
Reconstruction(BIFR) to revive sick public sector units.
3. Globalization
Globalization means integrating the national economy with the world
economy through removal of barriers on international trade and capital
movement. Till 1991, the Indian government strictly regulated the
import license through licensing of imports, tariff restrictions, and
quantitative restrictions, but the new economic policy aimed to
liberalize foreign trade through the policy of globalization.
Various steps were taken by the Indian government in the direction of
globalization:
 Import liberalization through reduction in import tariffs and
removal of quantitative restrictions on imports
 Export promotions through wide range of incentives
 Simplifications of export and import procedures
 Liberalization of norms for the entry of MNCs and foreign
direct investment
 Liberalization of foreign exchange management regime
 Improvement of trade infrastructure, like port facility
 More freedom to Foreign Institutional Investors to participate
in the money and capital markets.
With Globalization, the interaction and interdependence amongst the
various nations was increased. Whole global economy was integrated
and it became easy to serve customers from different geographical
locations, which increased the standard of living of people.
Impact of Industrial Policy on Business
The policy of LPG made a significant impact on the working of
businesses and industries. The impact of changes in the government
policies is as follows:
 Increasing competition: Before economic reforms, the Indian
firms were enjoying protection due to licensing system and
other restrictions, but after reform, entry of foreign firms was
liberalized which gave tough competition to the Indian firms.
E.g. The entry of Coca-Cola ruined the market of the existing
Indian brands.
 More demanding customers: Increased competition in the
market also increased the choice of customers. Today
customers have become more demanding because they are
well informed. Due to this, the manufacturer tries to satisfy
customers’ expectations. This has created a buyers market in
the country.
 Rapidly changing technological environment: Increased
competition made the Indian firm compulsory to adopt the
latest technology providing a competitive market and helping
in producing a better quality product at a lower cost. E.g.
Handlooms industries shifted to power looms in order to
adopt new technology.
 Necessity for change: Before economic reform the business
environment was stable and business policy use continued for
a long period but after economic reform, LPG policy made the
business environment unstable. Every enterprise has to
continuously modify its operations and policies. E.g. Mobile
phones these days come up with different features from time
to time.
 Need for developing human resources: Indian firms have
suffered a lot due to a shortage of trained employees. In this
dynamic environment, it is not possible to achieve success
with unskilled employees. Therefore, the firms have realized
the need to develop human resources. E.g. Organizations
trained their employees to work from home and came up with
 various management tools in this Covid-19 era. Here, the
human resource was developed.
 Market Orientation: Earlier, the firms used to follow the
selling concept. It means they produce first and then go to
market for sale. However, with an increase in competition, the
firm adopted the marketing concept. It means the study and
analyzing the need of the market, and then producing goods
to satisfy customers effectively. E.g. Organizations carry out
various surveys in order to collect the data about likes and
dislikes of customers and then use the data collected for
production or service development.
It can be concluded that New Industrial Policy( Economic
Reforms)have positively affected the Indian economy. Indian firms
have changed their strategy and have become customer-oriented.
They focus more on customers’ needs and satisfaction. The entry of
MNCs has provided employment and increased the foreign capital
investments in India.
Concept and Features of Demonetization
What is Demonetization?
When a currency is stripped of its legal status and replaced with a
new currency, it is known as demonetization. It is also interpreted as a
shift on the part of the government indicating that tax evasion will no
longer be tolerated or accepted. The government of India, announced
the demonetization on November 8, 2016, with profound implications
for the Indian economy. The government decided that the two largest
denomination notes, Rs. 500 and Rs. 1000 were ‘demonetized’ with
immediate effect, ceasing to be legal tender except for a few specified
purposes such as paying utility bills. This led to eight-six percent of
the money in circulation bills. The people of India had to deposit the
invalid currency in the banks, which came along with the restrictions
placed on cash withdrawals. The aim of demonetization was to control
corruption, counterfeiting the use of high denomination notes for
illegal activities, and especially the increase of black money generated
by income that has not been paid to the tax authorities.
The reasons behind taking the step of demonetization are as follows:
 To curb the circulation of fake currency in the economy
  To tackle corruption due to currency upholds
 To make idle money productive and help in reducing
corruption crime
 To promote a cashless society and bring transparency to
financial transactions
 To fight Inflation
 To reduce tax evasion
Features of Demonetization
1. Demonetization is seen as a tax administration measure. Cash
that was there with the people from their income by
performing legal activities, was instantly deposited in the
bank in order to exchange against the new notes. But people
with the money earned through illegal activities, i.e. the black
money had to pay taxes with the penalty rate as their money
was unaccountable. It was also made clear by the government
that demonetization was a change on their part, showing that
tax evasion will no longer be tolerated or accepted.
2. Demonetization led to the withdrawal of nearly 86% of
currency in circulation. As per the report of the income tax
department, an undisclosed income over Rs. 9,334 crore
between November 9, 2016 to February 2017 was reported.
3. It promoted the variable service of launching a mass
awareness campaign against black money. It reduced the
informal transactions in the economy.
4. Demonetization facilitates channelizing savings into the
formal financial system. As a result, some of the new deposit
schemes offered by the banks continued to provide base loans
at the lower interest that can be used for launching new
profitable schemes.
5. Demonetization also helped in creating a less-cash economy
by bringing an understanding within the general people, i.e.,
channeling more savings through the formal financial system
and improving tax compliance that would improve more
chances of a cash-lite economy. This would help in
introducing a formal economy in our country.
Impact of Demonetization
1. Money/Interest rates: Its impact on the money and interest
rate is such that it declined the cash transactions in the
country. For example, when demonetization took place in
India, Paytm and other online payment methods became
famous. People started using them instead of cash
transactions. As there was no currency in the economy.
Demonetization increased bank deposits in India, as it was
notified by the government to deposit their money with the
bank. It also caused an increase in financial savings.
2. Private wealth: The impact of demonetization on private
wealth was such that there was a decline in people’s private
wealth, as the high denomination notes of Rs.500 and
Rs.1000 were not returned. Due to this, real estate prices also
decreased drastically.
3. Public sector wealth: There was no effect of demonetization
on the public sectors’ wealth.
4. Digitization: Digital transactions amongst people increased.
People started using platforms like, RuPay, Paytm, and AEPS
for transactions, as there was a lack of currency in the
economy. Usage of the internet and net banking also
increased as people were using more of these platforms.
5. Real estate: Real estate prices declined, as there was a
shortage of cash in the market, which hampered the property
transactions.
6. Tax collection: There was a rise in income tax collection after
demonetization. People who had cash with them had to
deposit those with the bank. When this money was deposited
into the bank, the government got the chance to charge taxes
upon this money. Hence, this led to a rise in tax collection.