After-Effects of Demonetisation

Demonetisation is the central bank’s withdrawal of currency as legal tender. The governments of many countries worldwide have implemented demonetisation to combat black money and stop currency note counterfeiting. These currency notes are either scrapped or deposited in banks. Let’s look at the countries that experienced demonetisation and the after effects of demonetisation they faced.

United Kingdom

When the British changed their currency in 1971, it was the first big currency change in more than a thousand years. They divided the pound into 100 pence under this system. The decimalisation of Britain’s currency was successful because it was done after three years of education and awareness campaigns.

African countries

Nigeria introduced a new currency in 1984 under the leadership of Muhammadu Buhari. The after effects of demonetisation were that after inflation hit the country, being debt-ridden, it could not adopt this policy, and the economy collapsed.

Another African country that had its currency demonetised in 1982 was Ghana. Ghana decided to discontinue the 50 cedis note to reduce tax evasion and eliminate excess liquidity. The after effects of demonetisation were that the nationalists supported the black market and began investing in physical assets, thus weakening the economy.

The Zimbabwean government replaced the Zimbabwe dollar with the US dollar in 2015. Before this, the Zimbabwean dollar had a 100 trillion-dollar denomination. The Reserve Bank of Zimbabwe has eliminated numerous currency systems and replaced them with RTGS Dollars.

The after effects of demonetisation were that many people lost money due to the move since the government did it quickly. As a result, most people were angry. They said that the amount of money they paid for losing their Zimbabwean dollars was too low.

The decision to switch to the US dollar had an unforeseen consequence: it slowed economic development by making Zimbabwean exports less competitive.

Myanmar

Myanmar’s military government invalided 80% of its currency in 1987 to stop black marketeering and smuggling. The after effects of demonetisation were that the lack of any provision for exchanging the scrapped denominations caused great economic unease, and massive protests led to the brutal killing of over a thousand people.

Soviet Union

Mikhail Gorbachev withdrew the 50 and 100 ruble notes in 1991, also known as the Pavlov Reform, named after Finance Minister Valentin Pavlov. The after effects of demonetisation were that the confiscatory action withdrew 14 billion rubles from circulation, causing a loss of public trust in the government’s actions.

Australia

In 1992, the Australian government became the first in the world to introduce polymer-based plastic currency. After four years of using polymer-based notes, Australia implemented demonetisation in 1996, replacing all paper money with plastic currency, which had no impact on the economy. The move was successful. 

Pakistan

To combat black money, Pakistan’s central bank decided in 2016 to phase out outdated banknote designs, giving the people six years to exchange their currency. The government notified the people regarding the change, so there was no panic.The effect of the demonetisation was an increase in tax base and hence increased revenue collection.

Demonetisation in India

On November 8, 2016, PM Narendra Modi declared demonetisation to combat black money. The overnight ban on Rs 500 and Rs 1,000 currency notes wiped out about 86 percent of India’s cash.

The public currency, which was 17.97 trillion at the time, fell to 7.8 trillion in January 2017, shortly after demonetisation. A few months later, the RBI received Rs 15.31 trillion of Rs 15.41 trillion demonetised. As a consequence, almost all demonetised currency has returned to banks.

Objectives of demonetisation in India

• To combat black money/the shadow economy.
• To reduce cash transactions and control corruption by being cashless.
• To combat the threat of counterfeit currency.
• To prevent the funds from being used for terrorist activities.

Merits of demonetisation

• The biggest effect of demonetisation was the reduction of fraudulent acts.

• We got some control over the black money.
• It eliminated counterfeit currencies that harm the economy.
• Deposit mobilisation in banks has increased, leading to increased credit flow and reduced lending rates.
• Because black money added to the hidden demand, the government controlled inflation to some extent.
• The government intended to enhance revenue collection.
• Black money comes from real estate. As a result of this action, property market rates reached moderate to low levels.
• The government has taken a significant step toward establishing a cashless economy.
• The scheme targeted illicit money circulation in the elections.
• This move helped reduce the government’s fiscal deficit.

Demerits of demonetisation

• People store all black money in cash generated by corruption and tax evasion, which are the primary causes of black money generation. This strategy reduces the use of black money but not its causes.
• The rise in demand for new currencies.
• Common people hoard currencies due to the panic, further reducing market liquidity.
• Small-business owners face problems.
• The black market for the new currency notes increases.
• Hospitals, banks, and other establishments face a lot of stress.
• Experts expect an impact on the SME sector and agricultural production.

Conclusion

The shortage of legal cash undoubtedly causes difficulties for small businesses, people, and households. The government must resolve another rising issue, the demand for POS machines and debit cards, or the measures will become an obstacle rather than a solution. Because of these measures, we can expect higher taxes, more investments in the market, price corrections, a better ranking for India in international rankings, and the prevention of corruption.

However, after all this discussion, will this measure eliminate all black money? Cash was the least preferred means of storing unaccounted wealth, according to a 2012 National Institute of Financial Management report.