written by | November 7, 2022

Demonetisation in India - Significance and Effects

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The Currency Note Demonetization was a policy implemented by the government of India on 8th November 2016. The policy entailed the withdrawal of all 500 and 1000 rupee notes from circulation as legal tenders. The policy's objective was to curb the threat of black money and fake currency, which was widely prevalent in the country. The policy was implemented immediately and resulted in immense public inconvenience, as people were left with no choice but to exchange their old notes for new ones. The policy, however, was widely praised by experts and is seen as a key step in the fight against black money. 

Did you know?

In India, demonetization has occurred 3 times in the years 1946, 1978, and 2016. 

What is Demonetization?

Currency note demonetization is the process of withdrawing a certain currency unit from circulation and declaring it no longer a legal tender. The government usually carries out the process to combat inflation, corruption, or other economic problems.  

When a currency is demonetized, the government will often issue a new currency in its place. This new currency may be worth more or less than the old currency, depending on the country's economic situation. For example, in 2016, India demonetized its 500 and 1000 rupee notes to combat corruption. The new 500 and 2000 rupee notes were worth less than the old ones, but the government hoped the move would help curb corruption and increase tax revenue.  

Demonetization can have a major impact on a country's economy. For example, when India demonetized its 500 and 1000 rupee notes in 2016, it caused widespread chaos and disruption. Many businesses were forced to close, and millions of people were left without access to cash. The demonetization also caused a sharp decline in the country's GDP. 

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Why was Indian Currency Demonetized?

The main purpose of demonetization is to reduce the amount of money in circulation to combat inflation. When the money supply is reduced, the value of each currency unit increases, making it more difficult for people to purchase goods and services. This can lead to a decrease in demand for goods and services and prices. 

Demonetization can also help to reduce crime, as it becomes more difficult for criminals to use large amounts of cash to purchase illegal goods and services. Additionally, demonetization can help to increase tax revenue, as people are more likely to declare their income and assets when they are required to exchange their old currency for new currency. 

Effects of Demonetization of Indian Currency

The effects of demonetization have been widespread and have caused disruptions in many sectors of the economy. The most immediate effect has been on businesses that deal in cash, such as small retailers, who have seen a significant drop in sales. The cash crunch has also led to a slowdown in manufacturing and construction activity as companies have been unable to pay workers. The tourism and hospitality sector had also been hit hard as people have cancelled trips and hotel bookings. 

The effects of demonetization are also felt in the rural economy, as farmers cannot buy seeds and fertilizers. The impact of demonetization is expected to be negative in the short term but positive in the long term, as it will lead to greater financial inclusion and a reduction in corruption. 

Also Read: Exempt Income Under Section 10 of Income Tax

Pros of Demonetization 

Demonetization has a few potential pros, such as reducing corruption, black money, and terrorist funding. It may also lead to financial inclusion as people are forced to open bank accounts and use digital payment methods.  

  • Reducing corruption: 

One stated goal of demonetization is to reduce corruption. This is because corruption occurs in cash transactions, which would be eliminated if India moves to a cashless economy.  

  • Reducing black money:

Another goal of demonetization is to reduce black money. This is unaccounted money that is not taxed. By eliminating high-value notes, it becomes more difficult to hoard black money.  

  • Reducing terrorist funding: 

Terrorist groups often rely on cash to fund their activities.

Cons of Demonetization

There are several disadvantages of demonetization.  

  • It can lead to decreased demand for goods and services as people tend to hoard cash. This can lead to a decrease in production and an increase in unemployment.  
  • Demonetization can also lead to inflation as the prices of goods and services increase. This can lead to an increase in the cost of living and a decrease in the purchasing power of people.  
  • Demonetization can also decrease tax revenue as people tend to avoid paying taxes on their income. 
  • It causes inconvenience to the public as they must queue up for long hours outside banks and ATMs to exchange their old currency notes. 

Also Read: Know About Clubbing of Income under Income Tax Act, 1961

Indian Currency Demonetization 

In 2016, the Prime Minister of India, Narendra Modi, made the shocking announcement that all 500 and 1000 rupee notes would be withdrawn from circulation immediately. The move was designed to tackle corruption and root out black money. People rushed to banks and ATMs to exchange their old notes for new ones, but there was a limited supply of cash. This led to long queues and frustration as people struggled to access their money. 

The demonetization also hit the economy hard, as businesses could not transact, and people hoarded cash. The government has since reintroduced 500 and 2000 rupee notes, but the impact of the demonetization is still being felt. 

India has seen the increase in the fake currency notes of higher denomination circulated widely.  The above image is of banned notes of 500 and 1000 during demonetization. 

How to Exchange Old Note in India?

The Reserve Bank of India had announced that the old  ₹500 and  ₹1000 notes will be withdrawn from circulation from midnight of 8th November, 2016. This meant that the old  ₹500 and  ₹1000 notes would no longer be legal tender. The move had been taken to crack down on black money and counterfeit currency.  

The RBI had advised people to exchange their old  ₹500 and  ₹1000 notes at banks, post offices and district cooperative central bank offices. The exchange limit was set at  ₹4,000 per person, and the old notes were also allowed to be deposited in bank accounts.  

Conclusion:

Currency note demonetization is the process of withdrawing a particular currency note from circulation. The primary motive behind currency note demonetization is to curb black money and counterfeit currency. The introduction of new currency notes usually accompanies the process of currency note demonetization. Demonetization of currency notes can have a significant impact on the economy, both in the short and long run. 

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FAQs

Q: Why is demonetization done?

Ans:

There are a few reasons why a government or central bank might demonetize a currency unit. One reason is to combat inflation. If prices are rising too quickly, demonetization can be a way to remove excess currency units from circulation, which can help to slow down inflation.

Q: What is the history of demonetization in India?

Ans:

The history of India demonetized currency dates to 1978 when the government demonetized high-denomination notes to curb black money. In 2016, the government demonetized 500 and 1000 rupee notes to reduce corruption and promote digital transactions.

Q: What are the risks of demonetization?

Ans:

One of the biggest risks of demonetization is that it can cause economic disruption. When a currency is demonetized, businesses and consumers may be left with limited access to cash, leading to a slowdown in economic activity.

Q: What is the purpose of demonetization?

Ans:

The primary purpose of demonetization is to combat inflation by removing excess money from circulation. By making a particular currency unit no longer legal tender, the government can reduce the amount of money in circulation, thereby curbing inflation. Another purpose of demonetization is to crack down on black market activity and corruption.

Q: What is demonetization?

Ans:

Demonetization is withdrawing a currency unit from circulation and declaring it no longer legal tender. Demonetization is usually done to change the currency unit to a new one or to replace an old or damaged currency unit.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.