Imagine if the government suddenly said some of the money you have is no longer usable. That's what demonetisation is all about. It's when certain money notes are taken out of circulation to tackle issues like corruption and fake money.
While demonetisation can have benefits, like encouraging more digital payments, it can also create problems, like making it tough for people who rely on cash. So, while it might seem like a good idea, it's important to think about how it affects everyone.
In this article, we will look at what is meant by demonetisation, its benefits, and drawbacks.
Demonetisation is the act of removing a currency unit's status as legal tender. In layman's terms, when a currency is demonetised, it loses its face value and is no longer legal tender for any transaction.
This usually occurs when a country's currency is changed, which involves withdrawing the old form or types of money that are currently in circulation and replacing them with new notes or coins. Rarely does a country completely replace its old currency with a new one.
Demonetisation is frequently regarded as a radical intervention in a country's economy because it includes removing the currency's legal tender status, which can have an impact on day-to-day economic activity. If demonetisation goes poorly, an economy can be thrown into disarray or suffer a significant decline.
The odds of this happening increase when demonetisation is introduced abruptly and without warning. The procedure opposite to demonetisation is known as remonetisation, which refers to the act of restoring a payment form as legal tender.
Demonetisation aims to restore stability to a country's currency. It is used as a strategy to combat inflation, ease trade, and provide the economy with easier access to markets. This allows it to push illicit trade into becoming more open and steer the countries away from black and grey markets.
Demonetisation has been used to stabilize a currency's value and battle inflation. Some countries have demonetised their currencies to promote trade or build currency unions. Finally, demonetisation has been utilized to transform a cash-dependent developing economy while also combatting criminal activity and corruption (forgery, tax evasion).
Some adverse circumstances or acts, such as counterfeit currency, terrorism, and tax fraud, can be eliminated through demonetisation.
Demonetisation is also utilized to develop a new monetary system in some cases.
Now that you know ‘demonetisation meaning’, we will see the advantages and disadvantages of it.
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Pros |
Cons |
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Results in reduced tax evasion and higher tax income |
Imposes a hardship on citizens, especially those who have to convert one currency to another |
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Higher long-term GDP due to increased tax money reinvested in the nation |
It slows a country's GDP during the conversion process |
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Encourages innovation by transforming cash into digital currency and boosting digital transactions |
Incurs significant administrative costs, such as printing, changing ATMs, and promoting the changes |
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Reduces overall crime by increasing transparency and discouraging the use of black money |
The cash crunch also affects businesses, causing an economic downturn |
Demonetisation is the process of taking money from circulation or general use. The goal is to exchange the old currency for a new one. The new denomination of the bills may be equal to or more than the preceding one.
In India, demonetisation occurred thrice: in 1946, 1978, and 2016.
The demonetisation of 1946 followed the removal of Rs. 1000 and Rs. 10,000 notes from circulation as the general public didn’t have access to such denominations. The impact of this move was low.
The second event saw the demonetisation of Rs. 1000, Rs. 5000, and Rs. 10,000 to curb the black money circulation in the Indian economy.
In 2016, the government declared demonetisation to seize the black money or undeclared revenue, and to keep a check on the forged currency.
Furthermore, the government stated that demonetisation would drive India toward becoming a modern, digital economy that is less reliant on cash. More digital payments would help to organize a significant portion of India's informal and unorganized industries. Finally, it was a step that would eliminate unaccounted money from the economy while expanding the tax base.
Although the currency demonetised by the Indian government varied, the fundamental goals remained the same: reduce criminal activity, regulate inflation, minimize forged currency from the economy, and bring unaccounted money to the notice of banks and tax officials.
Demonetisation is when the government declares certain currency notes invalid as a measure to tackle issues like corruption and black money. It has its upsides, such as promoting digital payments and reducing illegal transactions.
However, it can also cause short-term problems like inconvenience for people who rely heavily on cash and disruptions in certain sectors of the economy. The success of demonetisation depends on how well it is executed and how it affects different parts of society.
Demonetisation is a government policy that involves invalidating certain currency notes, usually to tackle issues like corruption and black money.
Demonetisation can lead to increased transparency in transactions, a boost in digital payments, and a reduction in the informal economy.
Demonetisation can cause short-term economic disruptions, inconvenience for cash-dependent individuals, and disruptions in certain sectors of the economy.
Demonetisation can reduce the size of the informal economy as it encourages more transactions to be conducted through formal channels.
Demonetisation aims to reduce corruption by making it more difficult to hoard unaccounted-for cash.
Demonetisation can impact everyday people by causing temporary cash shortages, especially for those who rely heavily on cash transactions.
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