❖ Meaning – stripping a currency unit off its legal status.
❖ Demonetizations in India
1. 1946
a. Notes of Rs 500, Rs 1000, Rs 10,000 demonetized
b. Aim: to curb black marketing
c. The old notes were being sold at 60 and 70 per cent of their price. The move was called a ‘death blow’ to black marketeers.
2. 1978
a. High Denomination Bank Notes (Demonetization) Act, 1978
b. Ceased usage of high denomination bank notes: ₹1000, ₹5000, and ₹10000
c. The act was introduced as an ordinance.
d. Was challenged in the Supreme Court. Constitutional validity of the act was upheld.
e. The chief economic advisor of the State Bank of India affirmed that 25% of the proscribed currency notes did not return to the banking system during the 1978 demonetization episode.
f. Post 1978, the highest denomination was ₹100 for almost a decade.
g. The aim of the move was to tackle black money
h. A week’s time was given to exchange the notes
3. 2016
a. The demonetization announcement on November 8, 2016, involved the withdrawal of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series.
b. Main objective: The government aimed to curb black money, including untaxed income, corruption, illegal activities, and counterfeit currency.
c. Other objectives: Expand the tax base, increase the number of taxpayers, reduce cash transactions, cut finances available to terrorists and radical groups, and integrate formal and informal economies.
d. Shifting goalposts: The goals of demonetization were expanded over time to include making India a cashless economy and neutralizing money held by Maoists, terrorists, and human traffickers.
e. A major portion of demonetized banknotes, approximately 99.3%, was deposited in banks, leading to the belief that the effort failed to remove black money from the economy.
f. The move led to a decline in the stock market indices, industrial production, GDP growth rate, and resulted in estimated job losses of 1.5 million.
g. Digital and cashless transactions saw a significant increase after demonetization.
h. The number of income tax returns filed increased, but the majority were from salaried and non-business class.
i. There was a sharp jump in digital payments immediately after demonetization due to cash shortages. Debit card transactions increased significantly, mobile wallet transactions surged, and digital payments doubled by April 2018.
j. Before demonetization, banknotes worth ₹17.97 trillion were in circulation.
The demonetized banknotes constituted 86.4% of it. By March 2018, banknotes in circulation reached the pre-demonetization level. Five years after demonetization, the currency in circulation was at a record high of ₹29.17 trillion. (But size of economy has also increased)
k. Initially, activities and attacks by Maoist Naxalite groups decreased due to lack of finance post-demonetization, but they resumed after a few months. There was a temporary decrease in terror activities in Jammu and Kashmir.
l. The move received support from some central bankers and international commentators but faced criticism for poor planning and unfairness.
Follow Us
Instagram: @prepstreak
Telegram: https://t.me/forumrbi
Comments