Demonetisation in India – Meaning, Impact, Advantages, Objective
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Demonetisation in India: General Knowledge
Demonetisation refers to withdrawing a coin or a currency from its use as legal tender. The current money is pulled from circulation and is often replaced by new notes or coins. It is carried out when a country wants to replace its old currency with a new one.
On 8th November 2016, Prime Minister Narendra Modi demonetised denominations of Rs 500 and Rs 1000, two of the biggest currency notes in the country. The notes were taken out of circulation and could not be used as means of payment. The government cited the following reasons behind Demonetisation in India:
- To curb black money and fight rampant corruption in the country
- To reduce counterfeit cash used for funding criminal activities
- To create a cash-less economy
History of Demonetisation in India
Demonetisation is not something new to India. Before 2016, demonetisation had been implemented in the country two times:
The 1946 Demonetisation: Currency notes of Rs. 1000 and Rs. 10,000 were first demonetised in 1946. Since these high-value currencies were not accessible to most public, the ban did not have a huge public impact. The notes were re-introduced in 1954 with an addition of Rs. 5000 notes.
The 1978 Demonetisation: The then Prime Minister, Morarji Desai, announced a ban on the currencies of denominations 1000, 5000, and 10,000 in 1978. The aim was to weed out black money.
Impact of Demonetisation in India
Because of Demonization, there is less liquidity and less cash flow in the market, some sectors had a high impact on Demonetisation in India.
- A Deep Hurt to Economic Sentiment
- Large -scale lay off in unorganized sector:
- Dent in GDP growth
- The slump in Real Estate
- Inflation Becomes Down
Advantages of Demonetisation in India
- Black Money Recovery
According to RBI, more than 99% of the invalidated money was returned to the banking system. Demonetisation helped the government officials track the source of unaccounted cash. Individuals with a huge chunk of money had to disclose their source of income and pay taxes on them.
In 2019, the then Finance Minister Piyush Goyal announced Rs 1.3 lakh crore black money recovery through all anti-black money measures, including demonetisation.
- Curbed Terrorism and Anti-National Activities
Funding of terrorist groups and unlawful activities stopped as an immediate effect of demonetisation. Further, demonetisation also curbed money laundering.
It became easier for the income tax department to track cash, making illegal money laundering more difficult.
- Increase in Tax-filers
Demonetisation also had the effect of widening the tax-payers base.
The Income Tax Department added 1.07 crore, new taxpayers, to its base during the FY 2017-2018. Growth of approximately 25% was seen in the number of returns filed in FY 2017-2918 compared to previous FY 2016-2017.
- Paved Way for Digital Transactions
Demonetisation was effective in turning India towards a cashless economy. Digital payments have doubled since demonetisation in most tier-II and tier-III cities in India.
This transparent way of transacting leads to more tax payments and less untaxed money circulating in the market.
Disadvantages of Demonetisation in India
The sudden announcement of demonetisation caused panic and chaos in the country.
It affected daily wage workers. Many were out of work as their employers could not pay them in cash due to the cash crunch. The unemployment rate stood at a four-year high from 2016 to 2017 when demonetisation was undergone.
The cash crunch also affected businesses and caused a slowdown in the economy for some time.
The government expense increased on printing new currencies.
Whether demonetisation was beneficial to the nation or not is arguable. While some support the courageous move, other economists believe that demonetisation has failed to meet its goals in many areas.
Q. What is the main objective of Demonetisation in India?
The main objective of Demonetisation in India was to fight for Black Money, Cashless Economy and Fake Notes.
Q. What are the advantages of Demonetisation in India?
Black money recovery, curbing terror funding, reducing fake notes, and encouraging digital transactions are some advantages of demonetisation.
Q. Why did the Indian economy suffer despite the various advantages of Demonetisation in India?
Despite the various advantages of demonetisation, the Indian economy suffered because of its immediate negative effects, such as cash crunch, loss of jobs, economic slowdown, and increased government expenses on printing new currencies.
Q. Did the advantages of Demonetisation in India outweigh its disadvantages?
While the advantages of demonetisation are many, some economists believe that its disadvantages outweigh its advantages.