What is Demonetisation?

Demonetisation, a term reverberating through economic discussions and policy circles, is a formidable tool nations wield to reshape their financial landscapes. At its core, Demonetisation entails the deliberate cancellation of the legal tender status of a currency unit in circulation, ushering in a transformative wave across economies. While seemingly straightforward, this act carries profound implications, often serving as a strategic response to prevailing economic conditions. By initiating a recalibration of monetary systems, Demonetisation aims to instigate positive shifts in liquidity structures, combat illicit financial activities, and foster economic stability.

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Why does a country use Demonetisation?

Demonetisation in India

Advantages of Demonetisation

• Curbing Corruption and Black Money : Demonetisation helps reduce corruption by making it difficult to hoard unaccounted wealth or black money, thereby promoting financial transparency and accountability.
• Combating Counterfeiting : Invalidating old currency notes discourages counterfeiting activities, as the new currency often incorporates advanced security features that are harder to replicate.
• Encouraging Digital Transactions : Demonetisation encourages the shift towards digital payments and banking, promoting financial inclusion and reducing reliance on cash transactions, which can be more easily tracked and monitored.
• Boosting Tax Compliance : By compelling individuals to deposit old currency notes into their bank accounts, demonetisation increases the visibility of financial transactions, facilitating tax enforcement and reducing tax evasion.
• Economic Modernization : Demonetisation can lead to a more formal economy by discouraging cash transactions in informal sectors and encouraging businesses to adopt transparent and legitimate practices.
• Strengthening Financial Institutions : Increased bank deposits resulting from demonetisation can strengthen the banking system, providing more liquidity for lending and investment thereby fostering economic growth.
• Reducing Inflationary Pressure : Demonetisation can help stabilise prices and reduce inflationary pressures by curbing black money and promoting financial transparency.

Disadvantage of Demonetisation

• Inconvenience to Citizens : Demonetisation can cause significant inconvenience to the general public, disrupting daily transactions and financial activities, especially for those reliant on cash-based transactions.
• Confusion and Uncertainty : When only specific denominations are phased out gradually, it can lead to confusion among citizens and businesses, creating uncertainty about the value of their currency holdings and transactions.
• Short-term Economic Disruption : The demonetisation process may result in a short-term slowdown or stalled economic growth as businesses and consumers adjust to the new currency regime, leading to decreased spending and investment.
• Logistical Challenges : Implementing demonetisation requires costly logistical measures, including reprogramming ATMs, recalibrating vending machines, and reframing consumer prices to accommodate the new currency denominations.
• Impact on Daily Wage Earners : Daily wage earners, often the most vulnerable segments of society with minimal savings, may face hardships as they may continue to be paid in invalidated currency. This may require them to spend time and effort exchanging their earnings at banks, leading to loss of income and productivity.