Demonetisation is one of the most talked topics of the past few years. The meaning of demonetisation is to replace the existing currency with a new one and to ban the older currency in any type of financial circulation. This is what the Indian government did on November 8, 2016, when demonetisation of the currency of 500 and 1000 was announced.
In order to reform India’s economy and to wipe out the black money from India, the government of India took the decision of demonetizing the currency of Rs 500 and 1000. This order of government had affected all Indian citizen more or less.
The common misconception about demonetisation is that it’s not a planned decision but the government had started its preparation long before its announcement. The opening of zero balance bank accounts under Jan Dhan Scheme and tax declaration of the income till 30th October 2016 were among the precautionary step that the government has taken before the announcement of demonetisation.
But still it was a big decision and every Indian gets some positive and negative effects of this decision. A decision like demonetisation has some merits and demerits and we will get to know about them but first, we will focus on the purpose of demonetisation in India.
Purpose of Demonetisation
It was not the first time for India when the government has taken the decision of demonetisation in 2016. Earlier in 1946 and in the 1970’s the country faced the demonetisation. In January 1946, Rs 1,000, Rs 5,000, and Rs 10,000 notes were taken out of circulation although they were reintroduced in 1954.
On January 16, 1978, the currency of Rs 1,000, Rs 5,000 and Rs 10,000 became illegal for the second time after the government’s order and Wanchoo committee’s suggestion. Propose of demonetisation at both of the times were to clamp down the black money.
In November 2016, when the Modi Government took the decision of demonetizing the currency of Rs 500 and 1000 its purpose was also same to clamp down the black money and to point out the tax thieves.
But this time a few more reasons were accompanying the main reason of demonetisation; like to promote the cashless transaction and to move India from a tax non-compliant society to a compliant society. The income tax department has used the post demonetisation money deposit in bank data to point out the new income taxpayers.
Overall we can say that the idea of demonetisation in 2016 was not limited only to wipe out the black money form the economy but few more visions were included in it.
Merits of Demonetisation
The government’s vision behind the demonization in 2016 was to make the Indian economy a corruption-free economy. Demonetisation stroked at the unaccounted cash of corrupt people who stored it by accepting a bribe or by saving taxes. Demonetisation helped the government officials to track the source of unaccounted cash.
Individuals with a huge amount of cash have to show their source of income and who used to not file the ITR and declare their actual income now have to start doing all the procedure to save their collar from the grip of Income Tax Officers.
The other immediate benefit of demonetizing the higher currency note was visible in unlawful activities. Funding of Terrorist groups was stopped for a few months and duplicate currencies were become out of circulation. Although both of these effects of demonetisation lasts only for a few months.
But this move of government affected the unlawful activities badly at that time. Money laundering is another area which got affected by the demonetisation. Demonetisation made it easy for the income tax department to track the cash hence the illegal money laundering become more difficult.
The effect of demonetisation on the black money cannot be ignored as the money corrupted people lost at that time, they could not earn the same amount soon in near future. This black money used to have a strong impact on all the economy. Gold and real states are the two places where most of the black money is invested hence after the demonetisation we have seen a slope in the price of real state.
Another major effect of demonetisation we have observed that now people are more concerned about their income tax returns. Demonetisation forced people to use their Pan Card of a small transaction of 20K so now people know that the income tax department already has their details and hiding anything from IT Department can create a problem for them.
After demonetisation, the trend of the cashless transaction has increased. The cashless transaction is a transparent way of money transaction and in this method of money transaction, the buyer and supplier both cannot hide any detail from the income tax department.
Demerits of Demonetisation
As every coin has two sides so the demonetisation also has some merits and some demerits. This was a huge step of the government of India but it came so immediately that Indians got panicked when they come to know about the ban on 500 and 1000 rupees’ Indian currency.
In order to get rid of the demonetized currency of 500 and 1000, people became restless. Chaos and frenzy situation was very much visible in the banks and ATM’s. The newly launched currency had a different size so it could not fit in ATM Machines; it created more issues for the public.
The other disadvantage of demonetisation was the increased pressure of expenses on the government. Due to the printing of new currency and the destruction of the old currency government expense has increased. Demonetising the big currency and non-availability of new currency created a situation of a cash crunch in the country. This situation affected the small business so badly that a few of them could not handle the pressure and broke down.
Daily wage workers were among the most affected citizen of the country at the time of demonetisation. Due to a cash crunch, their employer could not pay them for their daily wages so either they have to stop working for a few days or they chose to work and receive the payment when the things will become fine. In all this chaos they could not fulfil the daily requirement of their family.
Demonetisation has its merits and demerits both and a few of them we have mentioned here. Many financial experts find it as a revolutionary step against black money and many others consider it as a failed experiment. Demonetisation caused a slowdown in the Indian economy for a few time but now the Indian economy not only doing well but became the fastest growing economy of the world.
Black money was the main target of demonetisation but according to the banks approx 99% of old currency has been deposited in banks so this step could target only a few amounts of black money. But its positive and long term effects can be seen as a more cashless transaction. Since the demonetisation, a rise can be seen in direct tax payments and e-returns of individual taxpayers.
So to conclude the effects of demonetisation on Indian economy we have to agree that it totally depends on you how you look at this step as a revolutionary and bold step or a failed experiment.