Six years ago, Prime Minister Narendra Modi announced that the ₹1000 and ₹500 notes will be discontinued from the midnight of 8th November 2016, which became countrywide hot news for several years. This was known as the 2016 Indian banknote demonetisation. But, what were the reasons for demonetisation in India? Did it prove to be beneficial? Know it all and more, from the advantages and disadvantages of demonetisation in India, overall demonetisation impact in India, and why people consider it a failure or why demonetisation failed.
What Is Demonetisation?
The concept of demonetisation lies in the fact that when the central bank of a country withdraws the currencies, or other such financial valuables from the market permanently, they lose their monetary value and become useless.
Demonetisation in India meant that RBI, the main financial institution of the country, recalled notes of 2 denominations from their use as legal tender. Hence, 100 and 500 rupees notes were counterfeited.
2016 Indian Banknote Demonetisation
As of then, India had paper notes with currency denominations of rupees 5, 10, 20, 50, 100, 500 and 1000. However, the Government of India revised this and from the midnight of 8th November 2016, the old 500 and 1000 rupees currency notes were demonetised and banned for use. Instead, new 500 rupees and 2000 rupees notes were introduced in the country by the government.
Reasons For Demonetisation In India
The possible reasons for demonetisation in India as per the government are given below:
- Demonetisation in India was done to curb the ever-increasing black money usage and laundering.
- It also had the vision to cut off financial aids to the terrorist groups given by anti-nationals.
- The tax base was envisioned to be improved with demonetisation.
- To stop and track corruption by disrupting the regular cash flow between the defaulters.
- To promote the use of virtual/plastic money.
Advantages And Disadvantages Of Demonetisation In India
Upon the analysis of the 2016 Indian banknote demonetisation, here are some advantages and disadvantages of demonetisation in India.
Advantages
- Fiscal deficit of the government was brought down
- Had fair elections which were usually shadowed by black money funding
- Moderate the real estate property rates since they were one of the major sources of black money generation
- Mobilised the bank deposits in the market
- Stopped terror group funding.
Disadvantages
- Black market shifted from old to new currencies and is on a rise
- Small business owners faced a lot of trouble
- Sudden increase in demand for new currency
- Decrease in rural demand due to restricted cash usage
- Public panic situation around the country
- Banks and hospitals, etc. had to bear a lot of financial and social distress.
Also Read- Evolution Of Indian Money And The History Of Indian Currency Notes
Demonetisation Impact In India
Demonetisation wasn’t as smooth as expected in India. It had various consequences which the country is recovering till date. Here’s an account of the demonetisation impact in India.
1. Demonetisation Impact On Economy
Decreased liquidity in the market from demonetisation directly brought down inflation. It also caused the lowering of GDP growth momentum.
2. Demonetisation Impact On Banking
The short-term deposits in banks saw a sudden rise, however, the long-term investments in the form of bank deposits saw a steady decrease due to distrust, which was expected. For overcoming this, banks are seen to reduce interest rates in short-term deposits.
3. Demonetisation Impact On Retail Sector
Due to the liquidity crunch, sectors like jewellery and luxury items saw a significant rise. But the everyday commodity purchases were reduced for a temporary duration and the situation normalised after some time.
4. Demonetisation Impact On Businesses
Lack of financial resources led to an increase in demand for loans by businesses. And since the banks were also impacted, a lot of loan disapprovals were seen after demonetisation in India.
Why Demonetisation Failed?
The main aim to implement demonetisation in India was to curb black money. But after the statement from RBI that approximately 99.9% of the recalled banknotes were returned, the picture was fairly clear.
The black money usually isn’t stored by bearers as the notes itself. They tend to invest it in properties, bullion or keep it as dollars that are easily convertible at any given point in time.
Also Read- Why Indian Rupee Falling – The History Of Rupee Vs Dollar And Its Future
Conclusion
Demonetisation in India has had and will have a significant impact on the financial situation of the country for a long time. While this was only the 2nd demonetisation after India’s independence, it is very likely to see such changes in the future as well.
Also Read- Narendra Modi As PM Of India – Achievements And Failures
FAQs
1. Why Did Demonetisation Happen In India?
The government of India had the primary goal to make India a tax-compliant country. This would help in reducing corruption and getting rid of black money. Thus, the measure of demonetisation in India was taken.
2. Why Is Demonetisation Necessary?
Demonetisation is necessary to urge the citizens to shift on a virtual payment platform since that sector will not be affected by such happenings. Also, from time to time, to cut off black market transactions, demonetisation is implemented.
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