Demonetization in India: Merits & Demerits

Demonetization is the process of stripping down a currency of its status as a legal tender (a legal tender is anything that is recognized by the law of a country as a means to settle public, or private, debt; or to meet any financial obligation). In doing so, the current form of currency is removed from circulation, and is retired; usually, a new currency replaces it.

On November 8, 2016, led by PM Narendra Modi, the government of India announced the withdrawal of 1000- and 500-rupee notes from circulation. The government also announced the issuance of new 500- and 2000-rupee notes in exchange for the demonetized notes.

Even after four years, the impact of demonetization can be seen in various segments of the economy. This article provides an insight into the positives and negatives of demonetization in India, along with a brief history of this process. As a banking aspirant, you should have a clear understanding of this topic. You may be asked about your opinion on it during the interview round. It is also an important topic for essay writing.

History of Demonetization in India

While the 2016 demonetization was the largest one of its kind in India, but it was not the first. Let us take a look at the history of demonetization in India:

  • In 1946, the Reserve Bank of India demonetized 1000- and 10000-rupee notes, as these were under-circulated at that time.
  • In 1978, under PM Morarji Desai, the government demonetized 1000-, 5000-, and 10000-rupee notes in order to curb the menace of black money.

Objectives of Demonetization in India

The government of India put forth many objectives of demonetization. Some of them are:

  • To curb the menace of black money/shadow economy.
  • To reduce cash circulation and tackle corruption.
  • To counter the perils of counterfeit currency
  • To promote cashless transactions, so as to increase transparency in economic transactions
  • To prevent terror-funding, which thrives on a cash economy.

Positive Impact of Demonetization

Increase in Tax Collection: There was a considerable increase in the number of ITRs filed after demonetization, according to government reports.

Tackling Black Money: The government was able to identify more than 37,000 shell companies that were engaged in hawala transactions and money laundering.

Increase in Digital Transactions: Digital transactions increased by 50-55% since demonetization.

Reduction in Human Trafficking: According to Nobel Laureate Kailash Satyarthi and several others who fight the perils of human trafficking in India, the currency-ban led to a severe decline in activities like human trafficking and child trafficking.

Negative Impact of Demonetization in India

According to a report issued by the Reserve Bank of India in 2018, approximately 99.3% of the demonetized notes having a valuation of 15.30 lakh crore were deposited in the bank. The banknotes that were not deposited valued only 10,720 crores. It led the analysts to conclude that this effort to curb the menace of black money from the market was not completely successful in meeting its objectives.

Moreover, not only did this hastily-executed decision lower industrial production, but it also affected the GDP growth rate. A report by Azim Premji University also revealed that 50 lakh people lost their jobs since demonetization.

This was a brief overview of demonetization and its impact. Keep a tab on recent reports to supplement your answer with recent developments on this issue. Read more such informative articles under academic articles section on our RBI Grade B website.

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