Demonetisation in India

What is Demonetisation?Demonetisation was the abrupt banning of all notes of Rs. 500 and Rs. 1000 and replacing them with new Rs. 2000 notes on the 8th Nov...

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12th March,2020

What is Demonetisation?

Demonetisation was the abrupt banning of all notes of Rs. 500 and Rs. 1000 and replacing them with new Rs. 2000 notes on the 8th Nov 2016 by Narender Modi Govt. Further, a period of 2 months was given to people   to deposit all currency notes. Here in this blog you can go through various benefits and impact of demonetization across the country. During recent times, a lot of questions have been asked related to demonetization in various exams like UPSC, State PSCs and SSC exam. 

Intended benefit:

  1. Push for a cashless/digital economy: Not many debate the one benefit that Demonetization brought. Digital payments have been growing at a CAGR North of 20% in last few years and the trend is likely to continue in next few years. A part of increase could also be attributed to the rise of PayTM, BHIM, Google Pay and other UPI wallets and growing use of smartphones in India. This could also however be argued that the rise has been supported by Demonetization.
  2. Growth of banking system:- As mentioned in the above point, it was towards cashless economy which will further improve the financial and banking system across the country.
  3. Fighting counterfeit currency that was prevalent in some areas of the country: Mostly in the troubled Kashmir region where Terrorist organizations work closely with state and non state actors, the banning of old currency was to act as a dolt and it did for a short while after which the new currency was counterfeited as well.
  4. Unearthing black money: The RBI was expecting to not receive a sizeable chuck of cash in currency however as per RBI publications, 15.31 lakh crore out of 15.41 lakh crore was deposited in the stipulated time. Many columnists argue that there was a deliberate change in the narrative of the govt from the intended benefit being “Push for Digital Economy” from “Unearthing black Money” after having seen the impact.
  5. Reduction in tax invasion:- It was also intended to reduce the tax avoidance, as after demonitisation it was easier to keep a track on all the deposits across the country. It is evident that the tax base increased drastically after demonitisation.
  6. Reduction in interest rates:- As after demonitisation, money goes from people across the country to various banks which results in lower lending rates.

Impact of Demonetisation 

  1. Decrease in Economic Growth:- After demonitisation, economic growth of the country slowed down from 9% to less that 6% in a year. 
  2. The move polarized the nation, economists, bureaucrats, politicians and common man alike. It is said that very people were in the know-how of the move and the then RBI governor Mr. Raghuram Rajan resigned days before because Mr. Modi wanted him to lead the initiative and he was not in favor of the move.

  3. Political Impact:- There was a certain section of media that believed that the move was to temporarily shock political environment with impending election in the state of Uttar Pradesh in a few months. UP accounts of approx. 20% Lok Sabha seats and Lok Saha elections due in 2019 and a landslide victory of BJP in UP in 2019 goes on to show that to some extent the possible desired motive could have been achieved.

  4. Impact on unorganized sector:- The move also had a direct impact on the unorganized sector of our economy. Small businesses were not able to manage any cash for months following the announcement and were left reeling.
  5. Real Estate sector: Real Estate sector was hit in a big way as there were no buyers in the market due to poor cash flow. 
  6. 2000 currency note in place of 500 & 1000:- The replacement for 500 and 1000 notes is 2000 which is a bigger denomination. People have argued that it is easier to store 2000 Rs notes as black money now. 

Other countries have tried Demonetization albeit unsuccessfully e.g. Nigeria, Ghana, Zimbabwe, North Korea, Soviet Union, Australia. The intended benefit has been to either change a specific currency tenders or ban large notes. It must be noted that Venezuela tried the experience months after India only to roll the exercise back within weeks. The Indian experience was different as it came like lighting at the stroke of midnight. Also, the fact that Indian govt. and Indians managed to pull through this, answers a lot of cynical questions about the idea being a “good one but executed poorly”. Being a huge nation that we are, any move is likely to shake us up but Demonetization move has proved that with political will, things are achievable. Failure or success is for us to debate later.

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