In an attempt to rid India’s economy of black money, benami transactions and corruption, Prime Minister Narendra Modi on the evening of November 8, 2016, announced demonetisation – a move that banned high-value currency notes of Rs 500 and Rs 1,000.
Demonetisation meaning
Demonetisation is the act of making a currency invalid by stripping off its legal status. Typically, demonetisation takes place when a nation changes its currency. To effectuate demonetisation, the existing currency is replaced with new currency.
Currency notes are legal tenders issued by a government, promising the owner to give the value marked on the notes. Since it is a legal tender, the sovereignty of the currency is binding on the taker. However, when a government strips off the value of the said currency, it is called demonetization. Demonitisation is the end of the legal agreement, as well.
This step is used to replace old currency with new. In recent times, members of the European Union, for example, used demonetisation to adopt the Euro as a common currency.
See also: What is benami property
Demonetisation in India
The much-publicised move of demonetisation was announced by the prime minister in an unscheduled, national, live telecast at 8:15 PM on November 8, 2016, making high-value notes invalid, starting midnight. Modi’s demonetisation move resulted in 86% of the existing currency of the time becoming invalid overnight.
The public had the option to surrender the invalid notes within the next 50 days (till December 31, 2016) or visit any bank branch in the country and exchange the illegal tenders for valid currency notes of similar value. In a country with the world’s second largest population, the move resulted in extremely long queues, chaos, panic and several deaths.
Following demonetisation, 99% of the banned currency was returned to the Reserve Bank of India. While the total amount of the banned currency stood at Rs 15.41 trillion, Rs 15.31 trillion came back to the banking regulator.
On May 19, 2023, the RBI announced it would withdraw Rs 2,000 notes from circulation. These notes will continue as legal tender, it added.
Demonetisation: Impact
For a cash-dependent economy like India, the sudden move prompted economists across the world to take an adverse note of the move. Making matters worse, the RBI restricted the daily withdrawal limit.
Touted to help the government deal with benami transactions, underground transactions and money laundering, demonetisation unsettled the local economy and resulted in the Rupee crashing against the US dollar.
With 86% of the currency in circulation tendered illegal, a state of cash crunch emerged, severely hitting cash-reliant sectors such as real estate.
What economists said about demonetisation?
‘Demonetisation was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market. The demonetisation had very little to do with corruption. It is the poorer people and the informal sector, which has been hit very adversely. That was a non-starter frankly.’
– Kaushik Basu, former chief economic adviser to the government
‘The demonetisation of currency was a despotic act as the government broke the promise of compensation that comes with a promissory note. Demonetisation goes against trust. It undermines the trust of entire economy. Only an authoritarian government can calmly cause such misery to the people – with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back.
– Amartya Sen, economist and Nobel Laureate
‘It’s not something I think should be done for a country such as India and the level of development it has. Japan has the highest cash per capita, way more than India. The cash in circulation, relative to the gross domestic product for India was 10%, whereas in Japan it is 60%. That is not black money; that is not corruption.’
– Gita Gopinath, deputy managing director of IMF
‘A lot of money that operates in the shadow economy will now become a part of the banking structure itself. Banks will have a lot more money to support the economy. Private sector investment, which was so far lacking, will now get back into the economy. The banks, which were struggling because of the NPA problem will have a lot more money to lend for agriculture, infrastructure sector, social sector, trade and industry.’
– Arun Jaitley, former finance minister of India
‘This is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations. The manner in which it was implemented is not surprising – such actions are always secret till announced, so that insiders do not take advantage of the information at the cost of the outsiders.’
– Arvind Virmani, former chief economic advisor to the government
Latest update
SC upholds govt’s demonetise move
March 21, 2023: The Supreme Court refused to grant relief to petitioners with grievances about demonetisation. While giving its order on March 21, 2023, the apex court said, “If the petitioners so desired, they would be at liberty to make a representation to the Union of India to consider their individual grievances.” Recall here that the Supreme Court on January 2, 2023, upheld the Centre’s decision to demonetise currency notes of Rs 500 and Rs 1,000 denominations in 2016. Being the Executive’s economic policy, the note ban move cannot be reversed, the top court held.
Demonetisation led to increase in tax collection: Govt
Demonetisation led to the detection of black money, an increase in tax collection and the widening of tax base, Union minister of state for finance Pankaj Chaudhary told the Rajya Sabha in a written reply on March 21, 2023. Certain studies on related matter have been published by the RBI, the minister added. According to the statement, the income-tax department conducted search-and-seizure actions in 900 groups, leading to seizure of Rs 900 crore, including Rs 636 crore in cash and an admission of undisclosed income of about Rs 7,961 crore. There was transfer of funds into formal channels due to significant improvement in tax compliance, it added.
FAQs
When was demonetisation announced in India?
Demonetisation was announced on November 8, 2016, in India.
What does demonetisation mean?
Demonetisation is the act of stripping a currency of its legal status, consequently making it worthless.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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