Demonetization is referred to as the process of stripping a currency unit of its status to be used as a legal tender. In simple words, demonetization is the process by which the demonetized notes cease to be accepted as legal currency for any kind of transaction. After demonetization is done, the old currency is replaced by a new currency, which may be of the same denomination or may be of a higher denomination.
The impact of changing the legal tender status of a currency unit has a huge impact on the economic transactions that take place in an economy. Demonetization can cause unrest in an economy or it can help in stabilizing the economy from existing problems. Demonetization is usually taken by a country for various reasons.
Objectives of Demonetization
- To stop the circulation of black money in the market.
- To help in reducing the interest rates of the prevalent banking system
- To help in creation of cashless economy
- To formalize the informal Indian Economy.
- To remove counterfeit notes from the market.
- To help reduce anti-social activities and their finances.
Demonetization in India
- In the year 2016, demonetization occurred in India. This was tried and used as a tool to modernize the developing cash-dependent economy and to fight crimes like corruption that involve counterfeiting and tax evasion.
- The Indian Government demonetized the two most prominent denominations in its currency system— 500 rupees and 1000 rupees notes, which accounted for 86% of the country’s circulating cash.
- On November 8th, 2016, the Prime Minister of India announced that these notes will have no value. This was done with no prior warning, but the citizens were allowed to change these notes with the newly introduced currency of 2000 rupee notes and 500 rupee notes by the end of the year.
Positive Impact Of Demonetization On Indian Economy:
- Check on food inflation:
- Elimination of fake currency:
- Surge in Cash Deposits
- Attack on Hawala Transactions
- Realization of overdues
- Push Towards Digitization
- Tax Compliance
- Real Estate Cleansing
Negative Impacts of Demonization on Indian Economy
- Deep Hurt to Economic Sentiment
- Large scale lay off in Unorganized sector
- Dent in GDP Growth
- Slump in Real Estate