BESINESS

ENVIRONMENT
Introduction

Demonetization is the process through which a nation’s economic unit

of exchange loses its legally enforceable validity.
Currencies that are terminated are no more legally considered
exchanges and have no financial value.
• Demonetization is a process by which countries opt to reintroduce
defunct currencies as legal money.
Meaning

• Demonetization is the process of eliminating the lawful acceptance

status of a monetary unit. It arises whenever the official currency is
changed. The existing kind or types of currency are withdrawn
through circulation and supplanted with new currency.
Definition
• As the demonetization definition says, Demonetization is the process
of removing a monetary unit’s statutory acceptance validity. It
happens when the monetary system is changed. The present
incarnation or types of currency is withdrawn through circulation and
replaced by new banknotes or coinage.
Reasons behind
Demonetization:
Whilst demonetization is exceptional, governments around the globe
have used it because of several reasons.
If problems like hyperinflation happen in any country, then the
government considers demonetization as a solution to take back
control and minimise the adverse situation.
Some negative situations or actions like counterfeit currency, terror,
and tax fraud can all be eliminated with demonetization.
• Demonetization is also used to introduce a new monetary system in
some circumstances.
Advantages of Demonetization
Through the demonetization of currency, a country can receive benefits
ranging from crime prevention to greater currency standardization.
1. Reduces various criminal activities
One of the benefits of demonetization is the reduction of various
forms of criminal activity. Through the demonetization process, old
banknotes and coins are discontinued and taken out of circulation, and
effectively become worthless. For groups conducting criminal
activities, such as terrorism, their supply of money effectively becomes
worthless, as the currency is no longer legal tender.
Advantages of Demonetization
2. Prevents tax evasion
Demonetization of currency can also prevent tax evasion, as those that are
evading taxes must exchange their existing currency or risk their money
becoming worthless. In the currency exchange process, the government can
catch those who have evaded taxes and retroactive tax their unreported
earnings.

3. Promotes a cashless economy

Demonetization can also further the push towards a cashless economy, as the
government can slow the circulation of physical currency and move towards
more digital options.
Disadvantages of
Demonetization
On the other hand, some disadvantages can arise from the demonetization process,
including:
1. Incurs costs from printing new banknotes and minting of coins
One of the initial drawbacks is the costs involved with the printing of new banknotes and
the minting of coins, as well as the discontinuation of existing currency.
2. May not entirely reduce criminal activity
In addition, demonetization may not reduce criminal activity, as criminals may keep their
assets in other forms, such as gold or real estate.
3. Can trigger chaos among citizens
Finally, if the demonetization process isn’t implemented successfully, it can result in
chaos among the population, as people scramble to exchange their currency before
discontinuation.
Why did the Government decide
to Demonetize Its Currency?
Demonetization is used to sustain a currency’s worth or control
inflation. Several other nations had already demonetised their
currencies to support the market or establish monetary unions.
Demonetization is used to improve a cash-based emerging economy as
well as fight corruption and criminality.
• Demonetization is a massive economic activity in which a country’s
currency’s legal acceptance validity is removed.
Why did the Government decide
to Demonetize Its Currency?

• If performed improperly, demonetization might bring

pandemonium or a severe economic crisis.
• It is used to help strengthen the economy and combat inflation,
promote business and marketplace participation, and help move
unofficial financial involvement away from the illegal and
underground markets.
Demonetization is good or bad
for the economy?
Both, if there is any nation’s need to perform this action or to fight
some situations like hyperinflations, stop criminal activities, etc.
• Bad, if it does not perform correctly, then it can cause huge economic
harm and will create a crisis.
Demonetization’s effect in
India?
• As there is less liquidity and currency movement into the economy as
a result of demonetization, inflation declines.
• The monetary supply will decline to some extent as black or illegal
money flushes. In the absence of any Reserve Bank of India open
demand operations, it will decrease inflation.
Real-World Examples
1. India (2016)
A recent example of demonetization was India in 2016 when the
government announced the discontinuation of all ₹500 and ₹1,000
banknotes. It was done to reduce the presence of counterfeit cash to
fund criminal activity.
When the demonetization was announced, there were shortages of
cash across the country, as people scrambled to exchange their existing
banknotes. It led to disruptions to the economy, reducing India’s
industrial production and hindering its GDP growth rate.
Real-World Examples
2. Eurozone (2002)
Another example of demonetization was the European transition to the
euro in 2002. To facilitate the process, the European Central Bank
needed to ensure that there was enough currency to be circulated and
began printing banknotes and minting coins as early as 1998.
When the euro was introduced, the central bank ensured that all
citizens were able to access to the new currency and began providing
banks with the new banknotes and coins several months in advance.
How Does Demonetization
Impact GDP?
In the short-term, demonetization usually stunts economic growth and
causes GDP to decline. During the conversion process, many industries
and sectors may temporarily come to a halt. Some industries may not
be able to pay laborers as the demonetization process occurs.
• Once demonetization is finished, it often creates long-term economic
benefits that increase GDP in the long run. Demonetization attempts
to fight financial crime; by making transactions more transparent or
discouraging the trade of illegal bills, a government is usually able to
collect more tax revenue and invest heavier into their country.
Effects of Demonetisation on
various sections of Indian
Economy
• Demonetisation, that sent a shockwave across the Indian economy,
completes one month since its announcement on the midnight of
November 9. To uproot the problems of corruption, black money, and
counterfeiting, Prime Minister Narendra Modi orchestrated this master plan
which has reportedly swept off a mammoth portion of India’s monetary
base.
• It is anticipated that this surgical strike on black money will also increase
cashless transactions in the country and untie all knots in tax collection. But
on the other hand, rural households and elder citizens have been worst hit
due to the sudden monetary reform. The decision to scrap all Rs.1000 and
Rs.500 notes have made it to headlines all over the world, attracting both
positive and negative comments.
Effect of Demonetisation on
bullion market
Demonetisation is expected to bring sharp changes in the prices of gold, and it is
likely to start reflecting from the first quarter of 2017. At present, gold rates are
not being announced by most of the jewelers due to dampening trade. Recently,
government also announced the exemption limits on gold ornaments as the
next giant move to curb black money. The notification comes within weeks after
invalidation of Rs.500 and Rs.1000 notes. The following restrictions have been
placed on the possession of gold:
A married woman in India cannot keep more than 500 grams of gold in custody
The limits for unmarried women are 250 grams
Male members of the family can keep only 100 grams of gold.
• The rule is not applicable for legitimate gold belongings
CONCLUSION