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Overview of Indian Economy

Demonetization

On November 8, 2016, Prime Minister Narendra Modi announced the demonetization of Rs. 500 and Rs. 1,000 currency notes. Furthermore, the government gave two months to deposit demonetized notes in any bank.

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What is demonetization?

Demonetization is a process of stripping a currency unit of its status as a legal tender. In simple words, demonetized notes are no longer valid as legal currency. Usually, a new currency replaces the old currency unit/s.

demonetization

                                                                                                                                      Source: Pixabay

When did demonetization happen in India before 2016?

2016 is not the first instance of demonetization in India. In fact, demonetization happened in India even before 2016.
  • In 1946, the Reserve Bank of India had demonetized Rs. 1,000 and Rs. 10,000 currency notes which were then under circulation.
  • In 1954, the Government introduced new currency notes of Rs. 1,000, Rs. 5,000, and Rs. 10,000.
  • In 1978, the Moraji Desai Government demonetized Rs. 1,000, Rs. 5,000, and Rs. 10,000 to curb illegal transactions and anti-social activities.

Why did the Government demonetize 500 and 1000 notes in 2016?

The objectives and outcomes of the scheme in 2016 were:

  1. To plug financing to terrorists.
  2. To help unearth black money. The unearthed black money will expand the fiscal space of the government.
  3. To help reduce interest rates in the banking system
  4. To help formalize India’s informal economy. It will reduce the extent of cash transactions and help in the creation of a less-cash economy.

The government also offered several incentives to induce people to use digital transactions.

What can demonetization achieve?

The possible benefits are as follows

  • Increased Savings – As a result of demonetization, people will tend to deposit their cash in the bank rather than at home. This will help them save more.
  • Lower lending rates – With currency demonetization, money moves from people to banks and financial institutions. Thus, there is a better circulation of money. This will lead to a lower cost of funds which translates into lower lending rates.
  • Better economy – As more cash is with the banks, there is a higher circulation of money in the economy. The government receives more taxes and can undertake more development projects. This leads to a better-performing economy.
  • Curbing anti-social activities – Usually, cash is the mode of transaction for anti-social activities. Thus demonetization curbs these activities. It also forces anti-social units to find ways to get rid of the old notes. As a result, there is better control over the unaccounted money in the economy.
  • Reducing counterfeit currency notes – Banks check if the old notes are genuine or counterfeit before accepting them. Thus, this allows the government to weed out counterfeit notes from the market.

Solved Question

Q1. When did demonetization happen in India?

Answer:

Demonetization in India occurred on four occasions:

  • In 1946, the RBI demonetized Rs. 1,000 and Rs. 10,000 notes.
  • In 1954, the Government introduced new currency notes of Rs. 1,000, Rs. 5,000, and Rs. 10,000.
  • In 1978, the Government demonetized Rs. 1,000, Rs. 5,000, and Rs. 10,000 notes.
  • And in 2016, when the Government demonetized Rs. 500 and Rs. 1,000 notes.
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