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Demonetisation in business studies refers to the process of withdrawing certain currency units from use as legal tender. When a currency is demonetised, it loses its official status and can no longer be used for transactions, effectively rendering it worthless.
What is the impact of demonetisation on e-commerce?
Demonetisation has boosted digital payments, leading more people to shop online. This shift offers e-commerce businesses an opportunity to promote cashless transactions, adjust their business models, and attract customers who prefer or are encouraged to use digital payment methods.
What is the main aim of demonetisation?
The primary aim of demonetisation is to combat corruption, reduce counterfeiting, and curb the use of high-denomination notes in illegal activities. It also targets the reduction of black money, which consists of unreported income not subject to taxation.
Is demonetisation good or bad?
Demonetisation has both positive and negative aspects. It can help reduce black money and counterfeiting while promoting digital transactions. However, it can also cause economic disruption, job losses, and public inconvenience, making its overall impact mixed.
What are the advantages and disadvantages of demonetisation?
Demonetisation can reduce black money, combat counterfeit currency, and encourage digital payments. However, it may also disrupt businesses, cause cash shortages, lead to economic losses, and create public inconvenience, impacting daily transactions and jobs.
Demonetisation, Meaning, Objectives, Positive and Negative Impact
Demonetisation is the process of removing a currency's status as legal tender. It often aims to combat inflation, corruption, or counterfeiting. Learn more about demonetisation and its objectives here!
Mridula Sharma18 Feb, 2025
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Demonetisation: Demonetisation is the process of invalidating a currency's status as legal tender. Simply put, it means that certain banknotes or coins are no longer accepted for transactions. When a country undertakes demonetisation, it replaces the old currency with new notes or coins, which may either match the old denominations or introduce higher values.
This significant economic move involves withdrawing specific currency units from circulation. The government's decisions to demonetise can have varied effects on an economy. They might create economic disruption and public unrest or serve as a strategy to address deeper financial issues. In this article, we will explore the concept of demonetisation, its objectives, and its positive and negative economic impacts.
Objectives of Demonetisation
Demonetisation aims to achieve several key objectives. Here, we've mentioned details on some of the main objectives of Demonetisation:
Combat Black Money: One primary goal of demonetisation is to curtail the circulation of black money—illegally earned or unaccounted wealth. By invalidating certain currency notes, the government seeks to make it difficult for individuals to use or store this unreported income.
Lower Interest Rates: Another objective is to help reduce the interest rates in the banking system. By increasing the amount of money available in banks through the deposit of old currency, it is hoped that interest rates will decrease, thereby benefiting borrowers and stimulating economic activity.
Promote a Cashless Economy: Demonetisation aims to advance the transition to a cashless economy. By encouraging digital transactions, the government seeks to enhance transparency and reduce the reliance on physical cash.
Formalise the Informal Economy: This move also targets the informal sector of the economy, encouraging its integration into the formal financial system. By bringing more transactions under regulatory oversight, it aims to improve economic data and taxation.
Eliminate Counterfeit Currency: Another important objective is to remove counterfeit notes from circulation. Demonetisation helps to identify and withdraw fake currency, thereby protecting the integrity of the monetary system.
Reduce Anti-Social Activities: Lastly, demonetisation seeks to undermine the financial resources of anti-social elements. By making it harder to use illicitly obtained cash, the government aims to reduce illegal activities and associated finances.
Demonetisation in India occurred thrice in 1946, 1978, and 2016. Here’s an overview of each event:
Demonetisation of 1946
The first demonetisation took place in 1946 when the Indian government withdrew Rs. 1000 and Rs. 10000 notes from circulation. The impact was relatively minimal, as these high-denomination notes were not commonly used by the general public. In 1954, these denominations were reintroduced, along with a new Rs. 5000 note.
Demonetisation of 1978
The second demonetisation occurred in 1978 under Prime Minister Morarji Desai. During this event, notes of Rs. 1000, Rs. 5000, and Rs. 10000 were removed from circulation. The primary aim was to combat black money in the economy. Morarji Desai made the announcement via radio.
Demonetisation of 2016
The most recent demonetisation was announced on November 8, 2016, by Prime Minister Narendra Modi. This time, Rs. 500 and Rs. 1000 notes were demonetised. In place of these notes, new Rs. 500 and Rs. 2000 notes were introduced to replace the withdrawn currency.
Positive and Negative Impact of Demonetisation on Economy
Demonetisation, a significant economic policy, can profoundly affect a nation's financial markets. While it aims to address issues like black money and counterfeit currency, it also brings about both positive and negative impacts on the economy. Get here all the details on Positive and Negative Impact of Demonetisation on the Economy:
Positive Impacts of Demonetisation
Here, students can learn about the positive impacts of demonetisation on the economy in detail:
Reduction of Black Money: Demonetisation helps tackle black money by shutting down businesses that operate with unaccounted wealth and destroying hidden savings. This action brings more money into the formal economy, promoting fairness and transparency.
Decrease in Fake Currency: The removal of high-denomination notes helps eliminate counterfeit money circulating in the economy. This step helps stabilize the financial system and prevents fake currency from undermining the value of genuine money.
Increase in Bank Deposits: With the old currency notes being invalidated, people are encouraged to deposit their cash into banks. This results in a significant increase in bank deposits, which can then be used to boost financial stability and credit availability.
Impact on Real Estate: The real estate sector, often associated with black money transactions, sees a reduction in illicit financial flows due to demonetisation. This promotes a more transparent and regulated property market.
Boost to Digital Transactions: The cash shortage caused by demonetisation accelerates the adoption of digital payments. This shift not only facilitates easier transaction tracking but also helps in reducing tax evasion and promotes a cashless economy.
Negative Impacts of Demonetisation
Students can find here detailed information on the negative impacts of demonetisation on the economy:
Disruption of Small Businesses: Many small, cash-dependent businesses faced severe disruptions due to demonetisation. These businesses struggled with a lack of liquidity, leading to financial strain and, in some cases, closure.
Economic Losses in Manufacturing: Manufacturing industries experienced significant losses because of reduced cash flow and operational disruptions. This had a broader negative impact on the economy and affected the overall industrial output.
Job Losses: The economic downturn triggered by demonetisation led to factory and shop closures, resulting in job losses for many workers, particularly those in labour-intensive sectors.
Cash Shortages: The process of exchanging old currency notes led to cash shortages, affecting daily transactions and creating inconvenience for the public. Poor planning and management were criticized, leading to dissatisfaction and frustration.
Public Discontent and Legal Challenges: The sudden implementation of demonetisation led to widespread public discontent. Legal challenges, including a Public Interest Litigation (PIL) filed against the decision, highlighted the contentious nature of the policy, though the court chose not to intervene.
These effects illustrate the complex nature of demonetisation and its mixed impact on the economy, reflecting both short-term disruptions and long-term potential benefits.
Therefore, Demonetisation involves withdrawing specific currency notes to tackle issues like black money and counterfeit currency while promoting a cashless economy. Although it can enhance financial transparency and boost digital payments, it also brings challenges such as business disruptions and public dissatisfaction. The success of demonetisation depends on effective implementation and mitigating its short-term impacts. Furthermore, Physics Wallah (PW) excels in providing top-notch coaching for Commerce students, offering comprehensive and personalized instruction. With a focus on delivering quality education and addressing individual needs, PW is renowned for preparing students effectively for their exams and future careers.
