Demonetisation – Essay 1.
Demonetisation means withdrawal of all or part of the currency that is in circulation in an economy.
Demonetisation is generally done for increasing the growth of the country and decrease black money and also for providing internal security to the country thus empowering the country and taking it forward.
On the evening of 8th Nov 2016, India announced the withdrawal of rupee notes of denomination 500 and 1000. It meant that those notes would not be considered legal tender from that point. There was a short period to deposit such notes to the bank or to exchange such notes in possession from the banks.
Reasons for the demonetisation
Demonetisation was announced to counter the black market and the parallel economy and at the same time to tackle the tax evaders who would hoard money in the form of cash. Most of the illegal money was expected to be held in these large denomination notes. Getting them out of circulation would leave the hoarders of these notes with just a useless stash of paper.
Reaction to the demonetisation
The immediate reaction was of course panic and people rushed to the banks to exchange their notes; Banks ran short of cash and panic spread further. At the same time, the Government was lauded for such a bold move. It was seen as an action towards a progressive economy. There were periods of severe cash shortage in the short run, but eventually, everything smoothed out.
General Objective of Demonetisation
There are following objective of demonetisation
- Curbing of Black Money.
- The decrease in the counterfeit banknotes.
- The increase in tax collections.
- The increase in digital payments.
- Increase internal Security.
There were the following problem faced by the people in the time of demonetisation:
- Due to demonetisation, cash shortage problem arises.
- The problem of transportation due to the scarcity of cash.
- Reduction in the output of industrial product
- Farmers faced a lot of problem in the purchase and sale of the product.
After a lot of problems faced by the Indian people, the aim of demonetisation is fulfilled by a rise in the economy of the country and importantly decrease in the black money. Demonetisation proved to be a successful move, although the repercussions to the economy are still being felt in small ways, some good, some not.
By Teamwork (2019)
Demonetisation – Essay 2.
Demonetisation refers to the act of withdrawal of currency by the Central Bank of a country. All or some of the currency notes or coins are no longer considered legal tender when a Central Bank decides to go for demonetisation.
Currency is the accepted medium of exchange and payment in any country. The most common forms of currency are the notes and coins. In the past gold and silver coins used to serve as currency.
Demonetisation can directly affect the lives of people as the currency goes out of circulation. Although it is not a common practice to demonetise currency, there are versions which are carried out by many countries for achieving different objectives.
Demonetisation can sometimes take the form of redenomination of the currency whereby the denominations in which the currency is printed, are cut down to a much lower value. In such case the notes have to be printed again and the coins have to be remoulded.
Over the years many countries like Australia, European Countries, have used Demonetisation for different Economic Objectives. One of the popular examples in Global Media today is the Demonetisation of the Rupees 500 and 100 notes by the currently ruling Indian Government, in the late 2016. The topic of Demonetisation came heavily into discussion and debate by many international organisations due to this move in India.
The Advantages and Disadvantages of Demonetisation were again heavily scrutinized by the World Leaders and the World Media. Some highlights of the Advantages and Disadvantages of various different Economic Objectives of Demonetisation are mentioned below.
Advantages of Demonetisation
Some common Advantages of Demonetisation are as follows:
Combating black money
High denomination currency is the commonly held form of black money. The governments crack down on hoarders of black money by getting these currencies out of circulation with little notice so as to render them useless, or giving it a chance to enter the market in a legitimate way. This is one of the biggest reasons why countries go for demonetisation.
The much talked about demonetisation, on 8th November 2016, in India was driven by this motive. Overnight the value of 500 rupees and 1000 rupee notes was zero. Although the public was given a period of fifty days to deposit their notes of this denomination with the banks, this was aimed at making it convenient for the general public. The anti-social organisations or elements were left with wads of black money which was rendered valueless
Better tax compliance
Tax evasion is a major problem in many countries. Transactions are carried out in cash to camouflage accounting inaccuracies. Demonetisation leaves the bulk of currency stashed away useless. After demonetisation tax compliance has gone up in India since many of the loopholes in the tax system have been plugged. Tax revenues have increased leading to better cash flow available for public goods.
Most of the anti-social and corrupt practices are financed by cash. An officer while taking bribe will do so in cash in as high a denomination as possible to keep out of notice. This cash cannot be deposited in a bank account for the illegitimacy of its source. Once the big denominations in the currency are made illegal, the value of these piles of hidden currencies is nothing. The motivation for accepting high denomination currency goes low and the cases of corruption go down.
Standing up to the parallel economy
The parallel economy which runs on the black money and where all the illegal activities are carried out is forced out of business or is severely affected by demonetisation as it runs on cash. If the medium of payment for these activities is to be cut short, the activities are also brought under control.
Fighting counterfeiting of currency
Demonetisation can immediately render the old currency and the counterfeit currency valueless. The newer currencies have security features that cannot be copied easily.
Move towards transparency and cashless economy
Demonetisation can also be effective in bringing more transparency in the economy. In the Indian case as the demonetisation of the 500 and 1000 rupee notes created a cash crunch, more and more people moved towards cashless transactions. These are taken care of by internet banking or by online payment gateways. This leaves little ambiguity and brings in transparency as to the circulation of money. Even when the cash supply was restored, the ease and preference for online payment remained high.
Image building for the economy
A decision of this dimension to fight the corruption and parallel force in an economy at the short-term expense of general public is a very courageous move for any politician. It gives the right message to the world about the intentions of the administration for the countries future. The 2016 demonetisation in India has restored credibility about Indian economy in the world market.
After the demonetisation, for some time all the relevant key indicators dropped down but by mid-2018 India regained its position as the fastest growing economy and even replaced France as the fifth biggest economy
Advantage to big businesses
In the Indian instance of demonetisation, in the short run, the big supermarkets did good business because the cash shortage could be countered by card payments or other forms of payment gateways as were available for even small groceries in the big supermarkets.
Increase in banking business
The Demonetisation in India has increased the banking activities, especially by the poor and the rural residents as against the earlier reluctance. The initial phase of depositing the demonetised currency in the bank accounts as the only way to exchange it led to opening of innumerable bank accounts and using them too.
Increase in media business
When sensational news arise media make good business. In India the 2016 demonetisation led to a huge demand for different news media so in the short run, the media was able to do good business based on the news and impact of demonetisation.
Improved financial infrastructure to all sectors of the economy
The 2016 demonetisation in India led to an improved financial infrastructure as the online payment facilities were made available across all sectors, including rural areas. Most people now have bank accounts and access to banking facilities. With the mobile phone apps, transactions are easy and traceable to most people.
Disadvantages of Demonetisation
Some common Disadvantages of Demonetisation are as follows:
Short term confusion and uncertainty
As soon as currency is demonetised there is a lot of confusion and uncertainty about the entire situation. This can cause immense inconvenience to the public. There needs to be substantial education about the change.
In India, since this was a planned move, there was no space for spreading information and awareness of this change in advance. Hence following demonetisation, chaos ensued. There were discussions and debates on TV and other media, most of them speculative in nature.
Adverse effect on poverty in the short run
The effect of demonetisation can be very harmful in the short run. The ceasing of some currency to be unacceptable leaves the poor with fewer resources. Also as in the case of India, the cash crunch that followed the announcement made it even harsher on the poor people and daily wage earners as there wasn’t much cash to dispense.
Inconvenience to the public
One of the disadvantages of demonetisation is the immediate inconvenience to the public. There is usually a time frame within which the people can convert their old currency for the new one. This can many times be inconvenient.
In case of India, it was inconvenient for people to have to wait in long queues for long hours to be able to deposit this currency, or for withdrawal of alternative denominations.
Short term cash crunch
One very important part of a successful demonetisation is planning. The time lag between the withdrawal of old currency and the introduction of the new one cannot be too long or else the strain falls on the existing currency by its shortage.
The Indian experience was the shortage of money to such an extent that a fixed quota of withdrawal per week was allowed per person. This usually compromised the daily lives.
Unemployment in the short run
When the demonetised money is not immediately replaced with new currency and there is shortage of cash, the direct impact on employment is strongly felt. People postpone employing daily wage earners and also the purchasing decisions are affected.
In the Indian demonetisation, even the industrial production felt a setback and the employment felt the impact.
High cost of changes
The cost of replacing currency can be very high. To recall all the old currency from circulation, then minting new notes and coins and finally introducing them can be a very heavy cost for the economy.
Disruption in the banking activity
The banks come under a huge strain to recall the old currency and replace the new one. In the mean time they have to abide by the rules put forward for the amount of cash to be dispensed and rationing out the available cash. Sometimes they have to suffer from the ire of the public.
Cost of educating
Depending on the type of demonetisation, there can be a big change in the way the currency is used. It is also important to educate the people about how the change will affect them and how to deal with the change.
Risk of Recession or short term inflation
Withdrawal of money from circulation causes an immediate contraction of the economy. Depending on the magnitude of demonetisation and the time lag before restoration of the supply of money, the contraction can be either insignificant or enormous. The shortage of money causes immediate increase in prices and thereby inflation.
It is commendable of the Political Leaders, Country Governance and Economic Experts, when they choose to implement such crucial decisions in order to combat the evils of the Economy. But over several instances of Demonetisation in different countries it has been understood, that the Power of Demonetisation lies in the understanding that Demonetisation is not a Single Isolated Step, rather it is one Step in a long Sequence of Events, preceding and succeeding the actual Step of Demonetisation. For Demonetisation to be effective all these Scenarios need to be taken into account; and an adequate Scenario Analysis has to be done prior to the act of Demonetisation. Proper Planning and Implementation of the entire Scenario Management, by the Authorities paves the way for the Demonetisation Decision to have the Desired Outcome, by avoiding the adverse consequences.
By Janhavi (2019), Edited
Last updated: July 5, 2019.