Demonetisation of a currency is a
monetary step under which the status of an announced unit is declared invalid
under legal tender. This is generally
imposed when government issues new currency to replace the old units.
On 8th November 2016
government of India announced that notes of Rs500 and 1000 will not be under
legal use and they will be ceased under legal tender. That is notes will now be
only accepted on the places declared by the government. The notes can be changed in the banks as well
as post offices and can be used in petrol pumps, hospitals and other emergency
places. Date given to exchange old notes was till 30th Dec 2016.
This was not the first time when
demonetisation happened in India, it happened earlier in 1946 when government
banned Rs1000 and 10000 notes to deal with un accounted money or in easier
words black money and before 2016 it happened in 1978 when notes of Rs5000,
1000 and 10000 were demonetised by Moraji Desai.
Major aim of demonetisation in 2016
was to deal with unaccounted money in India as well as outside India as well as
making India a cashless economy.
India is the second largest country
in the world in which 98% of transaction by the consumers is done by cash.
The reason behind abolishing only
thousand and five hundred notes was because they had more share then other
notes. For example only Rs500 and 1000 notes were having 87% share of the cash
and these notes were more in circulation and were most unaccountable.
Few more reasons of demonetisation
notes in circulation
Abolishment of the notes of 500 and
1000 notes acted as a tight slap on the black money holders. Because people who
kept huge amount of unaccounted money in state of hard cash were in the state
of complete loss. The hard cash was no longer useful as it was earlier and was
turned immediately into pile of trash as he/she had to show the account
statement, identity and description of hard cash to get it useful. On that
note, if he/she fails to show the description or give the details, it will
result into 200% penalty or imprisonment on the situation.
People who were in the fake
currency rackets, demonetisation turned to be a death nail to them as most of
the fake currency was in the form of 500 and 1000 notes. All these unethical
rackets were busted at an extent. Hence, the message was clear to keep their
notes to themselves.
Huge sums of money especially in
hard cash in form of 500 and 1000 notes were used to fund terrorism like
Islamic terrorists and Naxalites. After the abolishment the organisations
suffered from lack of funds and resulted attacks in state of Mizoram. The funds were mostly used in trading of arms
and ammunitions, buying arms and other facilities was a very difficult and in
in sort of impossible task for them.
After demonetisation online
transactions and transparent transactions like using of cheques , demand drafts
etc were also increased. Therefore financial intelligence bureau was more
active. It resulted in more transparency in real estate sector of India which
is one of the biggest money yielding and lending sector of India.
Huge donations taken by education
as well as government sectors were also on a threat because these donations are
taken in cash but, now the question arises – What will be the solution of the
donations which are there in form of foreign money and crypto currency as well
as gold and diamond trading or in straight words laundering?
It is practically or even
theoretically (in my observation or perception) impossible to run a cashless
economy whereas Indian government is planning to 100% cashless economy. Our government thinks that it will result in
great transparency and our economy will be more digitised. Government also kept
a low withdrawal limit to encourage people for using more ebanks and cards.
Government also suggested to enhance the use of Paytm which was linked with Kyc
of Adhaar Card, but on that black money or unaccounted money in form of liquid
or ecash will increase because it is easier o carry one lakh in phone or then
to carry in form of cash and these banks are not trustworthy because their are
lot of cases registered in police stations against Paytm. Transferring money
from other person’s account made much easier then it was.
500 and 1000 notes were also used to
carry out illegal transactions across borders and money smuggling was also
increasing. Abolishment of these notes destroyed
the bricks of hawala transactions but the government was seeing one side of the
coin, they issued 2000 notes now and
They forgot account to account hawala transactions. Hence again it was a big
mistake made by them keeping this in mind. Terrorism funding was increased
after issuing these notes.
A common man who had a lot of
worries in his life and had lot of work in home or office had to rush to the
bank or any other place just to change his notes. Imagine the situation of a
worker who just got his last month’s wage in a big note and his contract is
over. He had to rush to the bank to change
the note and don’t work so that he could afford his necessaries. People who nothing
to do with problems had to face the other problems. And their are people like Mr. Mukesh Ambani
who sponsored free internet for whole India to cover his black money. That’s great!
The currency was sucked out the
market along with Trumph’s victory the situation of the stock market turned completely
clumsy. General trade was affected because sensex lost 1600 points in one go.
There are ministers and administrators
in our country, but the ministers in our houses are much bigger and they are
the housewives. Indian housewives are in a habit to save money secretly so it
could be used later in an emergency or urgency. That money was of no use after
the abolishment and the ladies were given a higher limit to exchange the old
currency, so many people made their money in notice illegally using this note
as a shield.
Demonetisation provoked short term
inflation in the country as well. Due to the shortage of money in market it
lead to a short term cost push in the market.
The price of gold was hitting the roofs and the costs of basic
necessities were on a peak. December is
a marriage season in India and it was difficult for the families who had
weddings and people who had marriages in homes just had to submit a card in
banks and they could exchange whatever the amount they want, and this was again
a good decision made by the government so that the black money holders who gave
the party funds, etc could exchange their amount easily.
Expectations of issuing of new 2000
and 500 notes and banning the old notes of 500 and 1000 to remove the black
money as the owners will not be able to exchange the money. They forgot that
when it comes to innovation Indians are the top rankers! The government left a
lot of techniques and cons in their demonetisation project to completely flush
out the black money or unaccounted money; I think the reason behind this is the
people who are the part of the system and want to be safe out of this step by
When older notes were in
circulation the cash flow was going alright but, after the old notes being
scraped there was a difficulty and in easy words impossibility in the money
supply on a short run. To the extent that black money (which is a counterfeit)
does not re-enter the system, reserve money and hence money supply will
decrease permanently. However gradually as the new notes got circulated in the
system and the money will pick up. But the issuing of 2000 notes lead to new
problems, and talking about black money and unaccountable money it is increased
because carrying or hiding a 2000 note is easier than that of 1000 note (common
On an extent overall demand was
also affected. The demand in consumer goods, real estate or property, gold and
luxury goods and automobiles was impacted. All these sectors faced a moderation
in demand from consumer side; they owed a significant amount of cash
The price level was expected to go
low but they got risen up. Anyways suppose
if it went down then consumer goods would have been fallen only marginally due
to moderation in the demand as use of e-banks, cheques and cards would be
compensated for some purchases. Prices in real estate sector were fallen as
well as major transactions in this sector are done in cash.
GDP was impacted because of the
abolishment of the value there was a reduction in the consumption demand but,
the recent rise in the festive demand was expected lower ten it was.
Moreover, this expected impact was
only an expectation. It came out totally different and opposite. Cash
transactions were at minimal usage and the other alternative forms of payment
were on the surge in demand and also more transparency in the finance sector.
Demonetisation slowed down India’s growth rate
in short term and, people had less money in hands so it also slowed growth in
medium term. The growth rate was hampering as the demand was low but when soon
people got money in their hands markets were back on track.
It was said that it is beneficiary
as the government will have more revenue but I observed it turned out as an
electric shock for the economy of India as businesses and common people
suffered more and debts were increasing because of shortage of currency in the
economy, if this stage was continued for a longer time period economy might
have ended in a state of economic coma.
Demonetisation temporary decreased
liquidity in the economy of India because India is cash based economy. Decreased
demand was faced because of decreased liquidity and resulted in decreased
demand. Sudden demonetisation resulted in panicking the citizens and it also
resulted in people saving more money as cash.
The advantages were dominating and
it worked well in long term interest of our country. If government took all
necessary steps and precautions for the currency’s smooth flow in exchanging. It
made a massive change in our economy and to cover the loss from it the
government passed another project named GST.
I congratulate the government of
India and the master brains of administration and ministry who put this idea in