Demonetization
The term demonetisation refers to the act of stripping a currency unit of its status as legal
tender. In simple terms, you can say that when demonetisation of a currency occurs, the
currency loses its face value and is no longer of the status to be used as legal money for any
kind of transactions.
After demonetisation is done, the old currency is replaced by a new currency, which may be
of the same denomination or may be of a higher denomination.
The impact of changing the legal tender status of a currency unit has a huge impact on the
economic transactions that take place in an economy.
Demonetisation can cause unrest in an economy or it can help in stabilizing the economy
from existing problems. Demonetisation is usually taken by a country for various reasons.
Why is Demonetisation used by a country?
The act of demonetisation can be used by an economy for various reasons. It is
mostly used as a tool to make the country’s currency more stable which will give
more stability to the economy and possibly fight inflation. Some countries even use
demonetisation as a solution to facilitate trade and have better access to the
markets. Another reason why demonetisation is used is to provide more
transparency to informal activities and push them away from the black or grey
markets. One of the most important reasons as to why a cash-dependent
developing economy may use demonetisation is to combat corruption and crime that
often happen in the form of counterfeiting or tax evasion.
Demonetisation in India:
The first demonetisation event happened in 1946, at that time the denominations of Rs.1000
and Rs.10000 were removed from circulation.
There was a visibly low impact of the demonetisation as the higher denomination currencies
were not available to the common people.
In 1954, these notes were again introduced with an additional denomination of 5000.
Demonetisation in 1978
The second demonetisation in India took place in 1978, at that time the Prime Minister was
Morarji Desai. During the second demonetisation the denominations of 1000, 5000 and
10000 were taken out of circulation.
The whole purpose of demonetisation was to reduce the circulation of black money in the
country. The announcement was made by Morarji Desai over the radio.
Demonetisation in 2016
The latest demonetisation was announced on 8th of November, 2016 by the Prime Minister
Narendra Modi.
During this demonetisation the notes that were taken out of circulation were the
denominations of 500 and 1000.
PM Modi also introduced new currency of denominations 500 and 2000 after
demonetisation.
Objectives of Demonetisation
The objectives of demonetisation are as follows:
1. To stop the circulation of black money in the market.
2. To help in reducing the interest rates of the prevalent banking system
3. To help in creation of cashless economy
4. To formalise the informal Indian Economy.
5. To remove counterfeit notes from the market.
6. To help reduce anti-social activities and their finances.
This concludes the concept of demonetisation which helps in stabilising the economy and
curb the spread of black money in the market.
