Demonetisation – Impact, Advantages, Demerits of Demonetisation in India
By BYJU'S Exam Prep
Updated on: November 14th, 2023
Demonetisation in India took place six years ago on 8 November 2016 for Rs 500 and Rs 1000 by the Government of India. It was an attempt made by the Indian government to flush out the black money from the Indian capital circulation and expansion of the formal sector of the market. The Indian government tried to decrease the informal sector’s size with demonetization.
Demonetisation in India led to a significant dump in fake currency notes. Recent reports have said that the supreme court has supported the decision made by the Indian government to demonetize the currency. Let us understand the complete process of Demonetisation in India and its impact on the Indian economy.
Table of content
Demonetisation in India
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. Demonetisation is carried out when a country wants to replace its old currency with a new one.
- Demonetisation Year: 2016
- Demonetisation Date: 8 November 2016
- First Demonetisation in India: It took place in 1946 to remove Rs.1000 and Rs.10,000 currency from circulation.
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 modes of payment.
Objectives of Demonetisation
The Government cited various reasons behind demonetisation in India, and curbing black money and fighting rampant corruption in the country were the main targets. The aim was to reduce counterfeit cash used to fund criminal activities and create a cashless economy. These goals were also recognized and supported by the Reserve Bank of India.
The main objective of Demonetization was to take control of over:
- Black money,
- Fake money,
- Terror financing,
- Tax evasion
Impact of Demonetisation in India
Both positive and negative impacts of Demonetisation on the Indian economy occurred in the past 6 years. One had various positive impacts, such as digitalizing transactions, decreased terror activities, etc. On the other hand, various negative impacts were seen, such as a dip in GDP, major layoffs in the private sector, etc. Because of Demonetization, there was less liquidity and less cash flow in the market; some sectors had a high impact on Demonetisation in India.
Some important impacts of Demonetisation are –
- Digital transactions have increased over the years.
- A Deep Hurt to Economic Sentiment
- Large-scale layoff in the unorganized sector.
- Dent in GDP growth
- The slump in Real Estate
- Inflation Becomes Down
Advantages of Demonetisation
With demonetisation in India, various impacts were seen in India over the past few years on the economy and GDP. The Supreme Court and RBI supporting demonetization have made the decision a positive thought. There are various merits and demerits of Demonetisation seen over the years. Let us explore them individually.
Black Money Recovery
In accordance with the statements of the Reserve Bank of India, more than 99% of the invalid money was returned to banks by the individuals. Demonetisation assisted 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
Demonetization in India put a full stop to the funding of terrorist groups and all unlawful activities. This was an effect of the demonetization in the country. It also curbed the money laundering acts and it was now easy for the income tax department to trace the cash, and made the path difficult for illegal money laundering.
Increase in Tax-filers
Demonetisation in India 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 FY 2016-2017.
Paved Way for Digital Transactions
Demonetisation effectively turned India towards a cashless economy. Digital payments have doubled since demonetization 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.
Demerits of Demonetisation
The sudden announcement of demonetisation in India 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 government expense increased on printing new currencies.
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.
History of Demonetization in India
Demonetisation is not something new to India. Before 2016, demonetisation had been implemented in the country two times. In those cases, like in 2016, the government’s main aim was to fight black money and tax evasion.
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 Rs. 5000 notes.
Demonetisation in India 1978
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. The also aimed to attack the Counterfeit money circulating in the Indian market.
Demonetisation Process
The process of demonetization is a lengthy process. Implementing a plan with such great mass is difficult and needs longer preparation and execution. The complete demonetisation process can be seen in 4 stages:
- Preparation
- Announcement
- Cash Exchange and Withdrawal
- Ordinance and Acts
Preparation of Demonetisation Process
The preparation for the demonization in India started way before the public announcement and implementation of the changes. It started 6-10 months ago. In May 2016, new banknotes were prepared by the RBI, along with 2000 notes in August 2016. The printing did not start before October 2016.
Announcement of Demonetisation in India
The information about the new changes in currency was presented to the Union cabinet on 8 November before PM Narendra Modi addressed the nation in a live nationally televised announcement. The ₹500 and ₹1,000 currency notes became invalid from midnight, and new ₹500 and ₹2,000 currency notes were released.
Cash Exchange and Withdrawal
The citizens were advised to exchange the old currency notes from the banks on or before 30 December 2016. A window of 50 days was given to the people. The following limits were set on the exchange of money:
- ₹4,000 per person from 8 to 13 November,
- ₹4,500 per person from 14 to 17 November,
- ₹2,000 per person from 18 to 25 November.
The cash withdrawal was set with the following limits-
- ₹20,000 per week from 10 to 13 November.
- ₹24,000 per week on 14 November 2016
Ordinance and Acts
The new Specified Bank Notes Ordinance, 2016, was launched. This ended the liability of the government with the demonetized notes. The fines were also imposed on the people carrying the old notes after 30 December 2016.
Demonetisation UPSC
Whether demonetisation was beneficial to the nation or not is arguable. While some support the courageous move, other economists believe that demonetization has failed to meet its goals in many areas. The main purpose of demonetisation in India was to cause hindrances in the circulation of black money and tax fraud. Candidates preparing for the UPSC exam can expect an essay on demonetisation in the upcoming exam.
The Supreme court has also supported the decision and said that it was an RBI-consulted decision and extensive preparations, which included a well thought new design, contemplating new security inks, etc., were done for the implementation of demonetisation in India. Hence, demonetization was an economic policy decision backed by RBI and the Supreme court.
Demonetization in India MCQs
The candidates can check the list of questions related to demonetization in India. Practising the questions facilitates various benefits to the candidates. Along with enhancing the level of preparation it also helps in testing the level of proficiency of the candidates in the subject.
Question: When did the first instance of demonetization occur in India? [A] 1945 [B] 1949 [C] 1946 [D] 1947
Answer: (Option C) 1946
Question: Which currency notes were withdrawn from circulation in 2016? [A] 500 and 1000 [B] 100,500 and 1000 [C] Only 1000 [D] 100 and 500
Answer: (Option A) 500 and 1000
Question: Which denominations were withdrawn from circulation in 1978? [A] 100,500 and 1000 [B] 5000 and 10,000 [C] 1000 and 5000 [D] 1000, 5000 and 10,000
Answer: (Option D) 1000, 5000 and 10,000
