Demonetisation and Black Money

Demonetisation and Black Money

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Demonetisation refers to the process of stripping a currency unit of its legal tender status. In recent years, India experienced a monumental event of demonetization when the government invalidated the high-denomination currency notes of INR 500 and INR 1,000 on November 8, 2016. This move was aimed at curbing corruption, counterfeit currency, and the circulation of black money in the Indian economy.

There were several causes of demonetisation in India. First and foremost, the proliferation of black money was a major concern. Black money, often obtained through illegal means and unreported transactions, had become a rampant issue, leading to an erosion of the country's economic stability. By invalidating high-denomination currency notes, the government aimed to disrupt the networks of corruption and illegal transactions that thrived on such unaccounted money. Moreover, demonetization led to a surge in digital transactions, as cash became scarce. The government promoted digital payment methods, which resulted in a significant increase in electronic transactions across the country. This shift to a digital economy helped in reducing the circulation of black money and increasing transparency in financial transactions.

Demonetisation and black money became synonymous with each other because demonetization played a significant role in tackling the issue of black money. It forced individuals holding large amounts of illicit cash to either disclose it or deposit it in banks, or face severe consequences. The government introduced the Income Declaration Scheme (IDS), providing an opportunity for individuals to declare their undisclosed income and pay taxes on it. This move encouraged individuals with black money to come forward and legitimize their wealth.

The effect of demonetisation on the Indian economy was both immediate and long-term. In the short term, the sudden withdrawal of high-denomination currency notes caused inconvenience to the public. People faced difficulties in accessing their own money, and sectors relying heavily on cash transactions, such as agriculture and small-scale industries, were hit hard. The informal sector, which largely operated in cash, experienced a temporary slowdown, impacting the livelihoods of many daily wage workers. However, in the long run, demonetization had several positive effects on the Indian economy. One of the key achievements was the expansion of the formal economy. As more transactions became digital and cashless, the government gained better visibility into economic activities. This resulted in higher tax revenues, which could be utilized for public welfare programs.