23 April 2024 02:09
The objectives of demonetization in India, particularly the demonetization
implemented on November 8, 2016, included:
Curbing Black Money: One of the primary aims was to crack down on black money
or unaccounted wealth that was often hoarded in the form of high-denomination
currency notes.
Combating Corruption: Demonetization aimed to reduce corruption by making it
difficult to transact in large sums of unaccounted cash, thereby promoting
transparency in financial transactions.
Addressing Counterfeit Currency: By invalidating existing high-denomination
currency notes, the government sought to tackle the issue of counterfeit currency,
which had been circulating in the economy.
Promoting Digital Payments: The move was intended to promote the use of digital
payment methods and formal banking channels, thus reducing reliance on cash
transactions and increasing financial inclusion.
Disrupting Terror Financing: It was also aimed at disrupting the funding of illegal
activities such as terrorism, by making it harder to use unaccounted cash for such
purposes.
Encouraging Tax Compliance: Demonetization aimed to increase tax compliance by
bringing more transactions into the formal economy, making it easier for the
government to track and tax income and expenditures.
Overall, demonetization was a multi-pronged effort by the Indian government to
address various issues plaguing the economy, with a focus on reducing the
prevalence of black money, corruption, and counterfeit currency, while
simultaneously promoting digital transactions and formalization of the economy.
Advantages and Disadvantages of Demonetization
Demonetization is the process in which the legal currency of a nation is declared
invalid for physical monetary transactions by the government. In this, the particular
denomination of notes or coins ceases to exist as legal tender. The objective of
demonetizing a nation's currency can be different in each case. Still, the most likely
objectives behind this are to curb corruption or remove currency of higher
denomination that is unnecessary, to counter counterfeit currency, etc.
New Section 3 Page 1
Therefore, under demonetization, the legal tender of the existing currency is
canceled and pulled out from circulation in the country, and the new currency is
issued. The reason for such a decision varies depending on the country, but the
core aim behind this is to safeguard national interest
Advantages of Demonetization
1) Increases Deposits with the Banks
Demonetization impacts the tendency of people to store physical notes in their
homes. It is due to the cancellation of the legal tender of the banknotes, as it
makes it very difficult for people to exchange their money with the newly issued
currency in banks. This increases the liquidity with the banks as they receive more
funds now, as people abstain from keeping cash in their homes.
2) Improves Currency Circulation
Due to demonetization, people deposit their physical cash in the banks for
exchange with valid currency; this helps extract all the struck cash piled in the
homes that were out of circulation. For a healthy economy, the continuous flow of
currency is very important; if the currency is in circulation, there will be less stress
on the government to print new notes and incur extra expenses.
3) Helps in Contouring Counterfeit Currency
One of the biggest advantages of demonetization is that it completely thrashes the
counterfeit currency lobby. The cancellation of legal tender destroys the usage of
printed counterfeit currency notes. It is a major blow to the counterfeit currency
industry, and governments often make such decisions in case the problem of
counterfeit notes spreads widely in the country.
4) Helpful in Tracing Black Money
Countering the problem of black money is the most used reason for
demonetization. In demonetization, the old currency ceases to exist, so the black
money held by the corrupt people in physical form becomes useless as they are
unable to exchange that money in the bank.
If they will go and exchange that money from the bank, those corrupt people will
come under the radar of tax and vigilance departments. It makes it easier for the
authorities to track corrupt people because they cannot provide true information
regarding their income.
Therefore, it is a win-win situation for the government from both sides as they get
New Section 3 Page 2
Therefore, it is a win-win situation for the government from both sides as they get
the chance to track the corrupt person when he comes to exchange the money,
and even if that person does not come to exchange the money in the bank, the
money has no value and remain as a piece of paper.
5) Downside Movement of Lending Rates
As a result of demonetization, the circulation of money improves, and the banks'
deposit base grows positively; this helps reduce lending rates. Banks are better
positioned to lend more to businesses due to increased liquidity at low rates. This
leads to the growth of more infrastructural activities and provides growth
opportunities.
6) Helps in Countering Illegal Activities
Demonetization halts the circulation of current currency; this affects various illegal
activities operationalized in the country, like hawala, terror financing, etc. The
stripping of the legal tender status of the currency nullifies the existing currency
used for financing such criminal activities and puts the brake on their operation. It
is a very important weapon in the fight against such illegal activities.
Disadvantages of Demonetization
1) Causes Panic Among the Public
Canceling the legal tender of currently available money is disturbing news for the
common public. It creates havoc among the public regarding their earned money,
leading to panic among them. After that, people have to put some extra effort into
exchanging invalid currency notes, which is an excruciating phase for the public.
This is the inconvenience that people face during demonetization.
2) Halt in the Economic Development
Demonetization disrupts the monetary circulation of the country, and for some
periods, the physical monetary transaction becomes very difficult due to the
cancellation of existing currency. The transaction problem hindrances the business
and economic activities of the country for some moment, resulting in a short
period of standstill in the country's economic growth.
3) Recalibration of ATMs
In demonetization, the government cancels the existing currency and issues a new
currency; this process poses the problem of the recalibration of ATMs.
Recalibration of ATMs means modifying the ATMs as per the requirements of the
New Section 3 Page 3
Recalibration of ATMs means modifying the ATMs as per the requirements of the
newly issued notes and removing the system of pre-existed notes so that it can
dispense the new notes without any error. Recalibrating all the ATMs in the
country is a big challenge for the authorities.
4) Causes Liquidity Crunch
The invalidation of existing currency and improper supply of newly issued currency
creates the situation of liquidity crisis in the market. The non-availability of ample
liquidity in the market obstructs economic activities and the common public's
living.
In a country where the digital transaction is not widely accepted, this becomes the
biggest problem because people can only purchase their bread if they have the
money in their bank accounts. Therefore, a liquidity crisis is a major concern for the
public and the government that comes with demonetization.
5) Short-term Downfall in the GDP
The country that decides to demonize has to bear the curse of downside
movement of GDP in the short run. It is due to the disturbance in the financial
position of the businesses and economic activities. It causes disruption in the
financial sector that destabilizes the growth vehicle. But after some time, the
economy tends to get back on track when the liquidity recovers in the market.
Therefore, even a financially strong country has to face falling GDP for a short time.
6) Payment Crisis
Canceling the legal tender of a country's currency creates a payment crisis. A
country whose payment system is not digital faces the problem of a payment crisis.
The laborers cannot get their payments, the traders do not receive their payments,
and the country's retail business faces difficulties in operation, all due to the non-
availability of legal tender cash among the public. So, all the monetary transactions
get disturbed, from the payment of bills to the retail trade.
Bottom Line
Demonetization is important for fighting various evils like corruption, counterfeit
currency racket, tax evasion, etc. It helps in tracing and restricting illegal economic
activities. As we know, everything comes with a cost, demonetization also has
some major concerns like an inconvenience to the public for a while, a standstill in
the growth of the economy, a liquidity crisis, etc. Therefore, it is a bold decision to
make for the betterment of the country, but authorities should take this step with
proper planning and great precision.
New Section 3 Page 4
The RBI provided an explanation for the decision to remove Rs. 2000 notes from circulation, stating that "the majority of the Rs. 2000
denomination notes were issued prior to March 2017 and are at the end of their expected life-span of 4-5 years.
The "Clean Note Policy" of the Reserve Bank of India has brought about the decision to stop issuing banknotes with the currency of
2000. The 2000 currency notes will still be accepted as legal money, the RBI announced on Friday
Rs 2000 currency notes will no longer be in circulation but still be regarded as a legal tender stunned India. On social media, this news
was often described to as a "soft demonetization" move.
New Section 3 Page 5
