What is Demonetization?
The simple definition of demonetization is the ban of currency from the economy.
Demonetization means that the legal status given to the holder of this particular note is going to be removed. The announcement that said that the old 500 Rs and 1000 Rs banknotes of the Mahatma Gandhi Series will not be valid after the 30th of December, 2016. Even before that they will be valid only in a particular way.
Demonetization is a counter attack to eradicate corruption, terrorism and black money in the country. The term demonetization is not a new thing to the Indian economy. According to the Reserve bank of India demonetization is introduced in the year 1946 and again in 1978.
We know that each economy has a lot of the currency in circulation in India it's estimated that these high denomination notes approximately total up to something like a little more than 14 lakh crores of rupees and people say in India there is black money. And part of this money is actually in the black form. So what exactly do we understand when we say black money, black money is money that you can't declare as income when you file an income tax. Black money gets generated either when people avoid tax basically leakage from the formal financial system.
Tax avoidance of corruption either induced or imposed. Some corruption is happening because what we are supposed to receive as a right, some services are either delayed or denied to us for which we have to surpass more than what we normally pay to the government. Where we are forced to indulge in a little bit of corruption that's what we induced or forced corruption. The bad effects are that this money can get invested into unproductive assets like gold cause we all know that gold is valuable, gold is liquid but gold does not produce cash flow. Black money may also go into real estate and various other places. The other types of corruption are when somebody wants to get an undue advantage or when somebody wants to give an undue advantage by accepting favors either in the form of money or anything else. When these things happen money leaks out of the system and changes hands.
So this money cannot find it's way back into the system so it stays off the system. So when the money stays in the system, the government gets lots of taxes, a lot of income but when the money goes out of the system. Where that money gets circulated in a parallel economy the government would not have income on that. Not only that it has a lot of bad effects.
Demonetisation Advantage in India:
- 100% Fake currency out of circulation in one stroke.
- Hawala sources dried up for funding of Terrorists, Maoists, Naxalites Jihadis.
- Cash to create chaos & terror lying with Terrorists, Maoists, Naxalites Jihadis went waste.
- Banks have started mobile banking for hospitals.
- Jan Dhan accounts are filled with money.
- 55 Lakh money disputes settled in one day in Lok Adalat.
- More than 3 lakh cr cash already deposited in bank accounts.
- All businessmen are depositing cash lying with then as current year income with Advance Tax.
- All Jewellers are being issued forms to declare their GOLD STOCK on day to day basis.
- Small vendors have started using Payment App and Card Machines.
- The businessman is not hiding their profit.
IMPACTS OF DEMONETIZATION IN INDIA:
- Since November 2016 there's an increase there's been a big increase in individual income tax filers of about 1.8 million new and additional over and above-trend growth the number of GST taxpayers has increased by about 50 % and there's also been some you know nice boost to individual income tax collections all over India.
- GDP is the gross domestic product which is the final value of goods and services in a particular period of time and for a particular reason. We can say that GDP is directly proportional to government expenditures, consumer spending, investment, and net export. After demonetization, the circulation of currency became less so the GDP also became less. Because spending, consuming and investment had decreased.
- The study noted that demonetization lowered the growth rate of economic activity by at least 2 percentage points.
- Initially, there was a decrease in the activities and attacks by Maoist and Naxalite radical groups which was attributed to lack of finance following demonetization. The surrender rate had reached its highest. The activities returned within a few months There was a decrease in the terror activities in Jammu and Kashmir.
- Due to the cash crisis farm input wasn't available in the agriculture sector. So daily wages Labor's and daily wages farmers had gone through a period of unemployment.
- One of the biggest benefits of demonetization is that it is going to drastically affect the corrupt practices and people who are holding black money will not be able to exchange as they would be in fear of penalties by the Indian government.
- The banking system will be getting a boost as entire black money would be flooding into the system and it will also result in the increasing use of the banking system. This will result in reducing the risk of cash handling as e-money is safer than hard money. The old currency will become worthless for those people who won’t disclose their actual income through the filing of income tax returns. Interest rates had decreased because all people had started depositing their money in the banking sectors. So the lending rates varied and became less eventually. The banks were not allowed to lend money below the lending rates.
KEY POINTS :
- Demonetization is a drastic intervention into the economy that involves removing the legal tender status of a currency.
- Demonetization can cause chaos or a serious downturn in an economy if it goes wrong.
- Demonetization has been used as a tool to stabilize the currency and fight inflation, to facilitate trade and access to markets, and to push informal economic activity into more transparency and away from black and gray markets.
New notes released by the Reserve Bank of India after the demonetization in India :
RS 500, RS 1000, RS 200 and Rs 50.