An Explanation on Complexities of Demonetisation

Demonetisation is a form of legal tender, which mainly refers to the act of liquidating the currency in circulation. In demonetisation, the current form of currency is removed or retired from circulation. Demonetisation is the economic process in relation to a country whose currency unit is not considered a legal tender. Also, during this process, the government has the authority to ban notes or coins of a particular denomination.

Demonetisation was announced in India on November 8, 2016. Prime Minister Narendra Modi made this announcement. In this announcement of demonetisation, Indian currency old notes of Rs. 500 and Rs. 1000 were withdrawn from circulation. This was a major event of 2016, also seen in life in common with the Indian economy.

Objectives

At present, demonetisation is being used to stabilise the currency and fight inflation. Further, by facilitating trade and access to markets, GST, with the help of which help the government and economy in keeping away from informal economic activities and black marketing. So that more transparency can be brought into the market.

Also, the main purpose of bringing demonetisation has been to find out the extent of demonetisation, to understand the meaning and reason, to study its positive and negative effects on the economy, and suggest, Which can have many far-reaching consequences.

Complexities of demonetisation

There are various effects of demonetisation on the Indian economy, which are positive as well as negative. According to the RBI report, there was a huge liquidity loss in the Indian economy due to the introduction of old Indian currency notes like 500 and 1000 rupees. 

Many countries have also adopted the demonetisation process to improve their economy, which helps in solving the problems of inflation as well as preventing criminal activities like counterfeiting, terrorism or tax evasion; here we will try to know its positive and negative impact through some points;

Positive Impact of demonetisation

Many better results also emerged during demonetisation, which are described below;

•  Helps eliminate counterfeit currency

The main benefit of demonetisation is removing fake currency from the economy, the benefits of which are seen in the economy and the whole society.

•  Improvement in cash deposits

Demonetisation saw a jump in cash deposits in Jan Dhan accounts. It also helped financial inclusion rev up its top gear. According to the estimates of RBI, about Rs 11.5 lakh crore was deposited in banks after demonetisation.

• The main attack on hawala/ hidden transactions

Hawala transactions are a kind of hidden transaction and transfer of money. Demonetisation caused serious damage to hawala transactions which helped to eliminate cash from the economy.

•  Helps in recovering overdue money

During demonetisation, people reached the government office for work related to bank loans, property tax, electricity bills etc. The government cleared the old dues by using the old demonetised currency.

•  Digitisation

Demonetisation helped digitise the market process, almost disappeared from the market, and people adopted digital as the medium of transaction, which was a better and bigger step toward a cashless economy and changing the people’s banking habits. People also got the opportunity to promote, which was a better work towards financial inclusion.

• Helped improve real estate

Demonetisation helped reform the real estate sector, with the government acting as the centre of the shadow economy. It was also a better effort in eradicating black money.

Negative Impacts of demonetisation

Some adverse effects are also seen during the process of demonetisation, which are as follows:

1. Damage to economic sentiment

86% of currency restrictions were imposed during demonetisation, which severely curtailed the country’s monetary base. Simultaneously, the monetary base declined from Rs 22.5 trillion to Rs 13.7 trillion. It also caused economic damage to the domestic economy. In addition, production, consumption, investment and exchange suffered heavy losses. Due to low exchange, there was an economic slowdown.

2. Lack of employment in the unorganised sector

In India, about 90 per cent of the workforce or the main means of earning a livelihood is the unorganised sector, which is mainly engaged in the informal sector. Due to a lack of cash, people faced many problems during this time. Due to the immediate reduction in production activities, there was also a reduction in employment.

3. GDP growth slowing

The effect of large-scale layoffs and the falling economic sentiment was also seen on GDP growth, which continued to work, due to which the country’s GDP growth also declined by about 2 per cent.

4. Effect on GST 

The abrupt withdrawal of currency notes from circulation and the hurried introduction of GST have harmed India’s economic growth. Demonetisation not only slows economic growth but also paralyses the economy’s informal and small-scale sectors.

Conclusion

Some economists were in favour of the demonetisation policy, and some did not. But the government brought a demonetisation policy to make a better economy. During this process, the entire society had to face paralysis but the policy of the government is very clear about it. It also explains its far-reaching effects, which will definitely be seen in the form of the eradication of black money and corruption. This measure is believed to bring about a positive change in the economy.