Demonetisation: An Analysis of Intended Benefits and Unintended Consequences

Abstract: – Demonetisation is the mechanism by which the government states to withdraw the money which is current legal tender. The government being sovereign can take such decision. The effect of this announcement is that the currency notes in circulation will now cease to be valid tender and can only be exchanged at the banks. India’s Prime Minister Narendra Modi announced to the citizens on Nov 8, 2016 that 500 and 1000 rupee notes are worthless, effective immediately – and they had until the end of the year to deposit or exchange them for newly introduced 2000 rupee and 500 rupee bills. The move by the government is to tackle the menace of black money, corruption, terror funding and fake currency. The total value of old Rs.500 and Rs.1000 notes in the circulation is to the tune of Rs.14.2 trillion, which is about 85% of the total value of currency in circulation. This means that the total cash has to now pass though the formal banking channels to get legitimacy. There are higher chances of larger proportion of this unaccounted currency getting extinguished as the tax rate and subsequent legal issues could be prohibitively high for such money. The paper elucidates and analyses the various economic aspects of the recent demonetization move with an attempt to draw out critical derivatives of the decision on various economic variables.

Keywords: Demonetization, currency, Black money, corruption.

HISTORY AND BACKGROUND

Demonetization is a move not new to the Indian scenario. Infact the wider scope of demonetization can be understood when the respective countries of European union (EU), were replaced by the Euro, but in its present state of demonetization the Indian government still retains its legality of the old notes. On 12th January 1946 and 16th January 1978, a period of pre and post-independence era, the Indian currency was demonetised to serve similar requirements similar to the present move, which included objectives of checking black money circulations, tax evasions and further to add printing of counterfeit currency which are used to fund terrorism and anti-social activities. The rationale for the present move also includes, improving financial inclusion, preventing stashing of money, improving the gross domestic product (GDP), increase social welfare like Swachh Bharat (Clean India), Jan Dhan Yojana (Prime Minister Money Scheme), building a pathway towards a cashless society and improving India‘s position on transparency & corruption in the global stage.
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