Demonetisation and its Benefits

Demonetisation is an economic process during which a country’s currency value is reduced to zero. It means the currency unit is taken off the list of legal tender. 

A currency unit represents a piece of paper or metal with a specific monetary value. Nothing could be bought or sold with a country’s currency unit if the government demonetised it. 

Several factors can make money worthless, from changing the national currency to eradicating older forms of money. Over time, many countries have tried to demonetise their currencies, but not all have succeeded. 

Stripping a currency unit

After demonetisation, older currency units were replaced with newly minted legal tender, such as new notes or coins. Demonetisation in India is one of the most significant economic transformations. The move has had both positive and negative effects on the economy. Expert opinion around demonetisation states that the ₹500 and ₹1,000 note reforms have made life difficult for most people, but the condition will get better soon. 

On November 8, Prime Minister Narendra Modi announced the devaluing of ₹500 and ₹1,000 notes and the insertion of ₹2,000 notes into circulation. In the following days, people waited in huge lines outside ATMs for several days to withdraw their cash. 

Demonetisation or stripping of a currency unit was implemented to solve three main problems: counterfeit money, black money, and financing of terror operations.

Positive impact of demonetisation

Due to demonetisation, deposits in banks rose, indicating that interest rates may fall. This helped decrease black money in circulation, corruption, and terrorism, among other things. People started investing money into e-wallets and other e-banking technology, which helped boost the cashless economy. 

The government said that Jan Dhan (people’s money) was boosted after the demonetisation, which helped the impoverished masses. There was an increase in the number of new bank accounts and renewed activity in inactive ones. 

Politics and elections are considered cash-driven. The same can be said for industries like real estate. Due to demonetisation, people would most likely use virtual wallets such as Paytm, Ola Money, and others for transactions. 

Demonetisation has brought many people and businesses into the fold of the national economy, increasing liquidity and economic growth. Because now banks have more documentation about the payments being made through them, transactions through banking channels have contributed to the formalisation of informal commerce.

What is a legal tender?

Legal tender is a coin or banknote that can legally pay off a debt or obligation across a country.

Section 6 of The Coinage Act, 2011 declares that coins of any value not less than ₹1 will be legal tender for any amount that is not more than ₹1,000. In addition, an individual will be permitted to pay with 50 paise coins (half rupee coins) for any amount less than ₹10. No one can be forced to accept coins beyond the limits mentioned above. However, if they choose to carry coins for amounts above the limits, it is not against the law for them to do so.

The Reserve Bank of India (RBI) has made eight different banknotes legal tender across India. The country’s central government backs them up, but only till they are not withdrawn from circulation. Section 26 of the RBI Act, 1934 says that if a banknote is not removed from circulation, the central government will have to back it up even if it is way older. 

Since ₹500 and ₹1,000 banknotes created before November 8, 2016, have been demonetised, people will no longer be able to use them for making payments.

Government withdraws old currency notes

The RBI gave time for people to deposit their demonetised banknotes. After the announcement of demonisation, 50 days were given until December 30, 2016, for deposits to be made. Banned notes were traded for legal tender at all banks, as long as the cashiers were willing to do it. For foreign tourists and people abroad, international airports also offered to exchange banknotes.

However, there was no provision to exchange the banknotes until November 25, 2016, even though the government had said that the exchange volume would increase. But certain units – such as fuel pumps, government hospitals, train and plane booking counters, state-government-approved dairies and ration stores, and crematoriums – were able to accept the old banknotes till December 2, 2016. 

Conclusion

In this article, we studied what demonetisation, or stripping of a currency unit, is in detail. When it comes to demonetisation, being patient is the best way to deal with it. Time-consuming currency exchange and lower withdrawal limits at ATMs and banks will lead to a more stable economy in the long run. And this, in turn, will help individuals and the country have a better future. This move will make it easier for the government to find the stolen and black money.