Posted by Anjali Kaur on Jun 18, 2020

What is Demonetization?

Demonetization is a tool that is adopted by countries to solve issues related to inflation, corruption, counterfeiting, etc. This is not a commonly used term, but it is important to know about this as a good economics student. Let’s understand this term in detail. Ready? Let’s go.

Meaning

Demonetization as the word says De – which means not and monetization – suggests legal money. It is an act to stop a currency status as a legal tender. Thinking what is legal tender? Well, it means legally accepted. So, when demonetization is conducted the money loses its legal status and turns into a mere meaningless paper.

Demonetization in India

On November 8, 2016, the Government of India announced demonetization of Rs 500 and Rs 1000 notes with immediate effect, with some exceptions like that these currencies will be accepted for the payment of utility bills.

With this announcement, 86% of the cash in circulation was declared invalid. These notes were to be deposited in the banks by December 30, 2016. This date was extended till March 2017 for Non-Resident Indians. Restrictions were also imposed on the number of cash withdrawals per day.

Do you know that India had done demonetization in 1978 as well, during that time Rs 10000, Rs 1000 and Rs 500 notes were declared scrap and people were given one week time to deposit or exchange such currency with their banks.

What were the objectives behind demonetization?

  • To control corruption: The primary objective of this major step in India was to control corruption levels in the country. It was done to stop bribery, money laundering, etc.
  • To Control Counterfeiting: Counterfeiting means fake currency. Demonetization was done to stop fake currency circulation in the economy as the existing one was declared useless.
  • To stop terrorist activities: It was observed that terrorist activities were using old 500 and 1000 rupees notes.
  • To stop black money: Black money is unaccounted money which is not recorded anywhere and it is the income evaded from tax, as this money was not been declared to the tax authorities. In short, people were not paying taxes on this unaccounted money and were conducting cash transactions to settle this money in the economy.

What were the advantages of demonetization?

  1. Demonetization helped in abolishing black money from the economy.
  2. It made the Indian Banking System stronger.
  3. Demonetization led to higher tax collections.
  4. It helped in controlling corruption to some extent and for a certain period.
  5. Demonetization turned India into a cashless economy as people started using digital means for making transactions.

What were the disadvantages with Demonetization?

  1. Primary producers and informal sectors were negatively affected by Demonetization as they mainly deal with cash transactions and were not using any digital payment method.
  2. Extra workload on bank employees to cope up with the difficult situation of exchanging scrapped currency notes with 100 rupees or 50 rupees notes.
  3. The higher cost was involved in printing new currency in the economy.

Check out the below slideshow on demonetization:

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