Impact of Demonetization in India

Impact of Demonetization in India

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In November 2016, India witnessed demonetization: a historic event that sent shockwaves throughout the nation. The Indian government implemented the drastic measure by invalidating high-value currency notes, namely the INR 500 and INR 1,000 denominations. Demonetisation in India was aimed at achieving multiple objectives including curbing corruption, countering the circulation of counterfeit currency, promoting a cashless economy, and bringing unaccounted wealth into the formal banking system.

The objectives of demonetization were multi-fold. First and foremost, it aimed to tackle the issue of black money, which refers to funds obtained through illegal means or unreported transactions. By invalidating the high-value currency notes, the government intended to render large amounts of illicit cash worthless and force individuals holding such funds to either disclose them or deposit them in banks. The objective was to disrupt the parallel economy fuelled by unaccounted money and promote a more transparent financial system. Another goal of demonetization was to curb the circulation of counterfeit currency, which posed a significant threat to the Indian economy. By withdrawing the high-denomination notes, the government aimed to disrupt the networks involved in counterfeiting.

The cash circulation in India after demonetization underwent a significant transformation. In the immediate aftermath of the policy, there was a severe cash crunch as the old currency notes were withdrawn and new ones were being introduced. People faced difficulties in accessing cash for their daily needs, and sectors heavily dependent on cash, such as agriculture and small businesses, experienced a temporary slowdown.

However, the situation gradually improved as the circulation of new currency notes increased. The Reserve Bank of India (RBI) played a crucial role in replenishing the cash supply. The RBI report on demonetization, released in 2018, indicated that approximately 99% of the demonetized currency had been returned to the banks, suggesting that most of the black money held in cash was successfully deposited or exchanged. The RBI report also highlighted the positive impact of demonetization on various fronts. It indicated a significant increase in the number of taxpayers and a broadening of the tax base. However, the RBI report also acknowledged some challenges and drawbacks of demonetization. It highlighted that the economic growth rate had temporarily slowed down, particularly in the informal sector. Additionally, the cost of implementing demonetization, including printing new currency notes, recalibrating ATMs, and the impact on small businesses, was a concern.