The discontinuity of a particular currency from
circulation and a replacement of it with a new currency is called
Demonetization. The government has declared demonetization across the country
on 8th November 2016. It is one of the most trending topics which occupied the
columns of Indian newspapers in 2016. During November 2016 a bold step was
taken against the black money holders in India. Initially, implementation of
demonetization in a populous country like India was not a cakewalk for the
government. The sudden declaration of demonetization in the country has created lots of chaos and
confusion among the common people of the country, but gradually everything
becomes normal. It occurs when a particular form of money is pulled from
circulation and a new note or coin is introduced in the market as a replacement
of withdrawn form of money. The government has different objectives behind this
demonetization. But much before the announcement of demonetization, the
government has taken few steps in this direction. As the first and foremost
step government had requested the citizens to open free bank accounts under Jan
Dhan Yojna. Again the government has asked the people to deposit their
money in Jan Dhan account and do their transactions through sparing money
procedure or proper banking procedure.  Thereafter the step that the government
started was an obligation declaration of the compensation and had given October 30, 2016, due date
consequently. This can be considered a major step by the government in the
process of demonetization. Through this procedure, the government or
administration could tidy up a gigantic measure fund undeclared wage Regardless,
there were various who still aggregated the dim money, and remembering the
ultimate objective to deal with them.


                 Demonetization, Currency, Bank



Demonetization in general is the act of stripping a currency unit of
its status as legal tender. It occurs whenever there is a change of national
currency. The current form or forms of money is pulled from circulation and
retired, often to be replaced with new notes or coins. The first
and foremost objective is to attempt to make India a corruption free country.
On the other hand demonetization in India is also a very well planned step of
govt of India to earn proper tax from the citizen. Through demonetization the old currencies replaced by the new
currency or a currency circulation is blocked. There are multiple reasons why a
country demonetizes its currency; some reasons include checking the inflation
to curb the corruption and to promote the cashless transactions. Recently the
Indian government decided to demonetize the biggest demonetization notes (i.e.
500-1000 rupees note) is steps has been declared as a master stroke for the
Indian economy by the various experts . This is not the first time in that India
that demonetized its currency, earlier it was done 1946 with the complete ban
of Rs. 1,000 and Rs.10,000 notes to deal with the unaccounted money i.e. black
money. Second time it was done in 1978 by the government of India.


There are multiple reasons why nations demonetize their local units of

combat inflationTo
combat corruption and crime (counterfeiting, tax evasion)To
discourage a cash-dependent economyTo
facilitate trade

2016, the Indian government decided to demonetize the 500- and 1000- rupee
notes, the two biggest denominations in its currency system; these notes
accounted for 86% of the country’s circulating cash. With little warning, the
government announced to the citizenry on Nov. 8 that those notes were
worthless, effective immediately – and they had until the end of the year to
deposit or exchange them for newly introduced 2000 rupee and 500 rupee bills.




Increases Deposit Base & Savings:
Currency demonetization increases deposit base and savings as individuals will
deposit more and store less physical currency at home.

Improves Monetary Transmission & Reduces
Lending Rates: Currency demonetization, there will be a movement of currency
from individuals to banks and Financial Institutions. The rise in deposit rates
would put all of this money into circulation. The cost of funds will reduce for
Banks/ FIs, and the overall lending rates for various trade, business and
commerce activities would reduce.

Creates Room for Monetary Accommodation:
Improved monetary transmission will be space for a far more liberal monetary
policy, which would result in a further reduction of interest rates in the
future. Most analysts are already projecting a lower repo rate in the coming

Direct Boost to The Jan Dhan Yojana :
Jan Dhan Yojana accounts have a very high number of dormant or unused accounts.
These accounts have suddenly seen a spike in usage, and individuals who’ve had
these will finally start using them and it might help them in inculcating
banking habits.

Added Support for Government Finances:
The Government will significantly benefit from the additional cash that is
pushed into the economy. There will also be a much higher collection of income
and other taxes by the Government.

GDP Growth Potential: More than short
term benefits, there is an angle of long term GDP growth as well, which we
should be able to observe over the next few years. This move could positively
impact the GDP figures of our economy by around 2018.

Long Term Benefits: A few might
criticize this move at present, but it will bring multiple long-term benefits
for the nation’s economic health. This entire exercise might be slightly
discomforting, but demonetization will definitely have long-term benefits and





On the other hand, the critics of
demonetization have a completely different opinion about the effect of
demonetization on the Indian economy.

The biggest disadvantage of demonetization has been
the chaos and frenzy it created among common people initially. Everyone was
rushing to get rid of demonetized notes while the inadequate supply of new
notes affected the day to day budgets of citizens. Banks and ATM’s witnessed
long queues while small businesses suffered temporary financial losses. The
situation was even worse in rural India where people struggled to exchange and
withdraw cash due to lack of enough number of banks and ATM’s in their vicinity

Destruction of old currency units and printing of a
new currency units involves costs which has to be borne by the government and
if the costs are higher than their benefits then there is no use of

Another problem is that this moved the targeted the
black money, but many people who have not kept cash as their black money and
rotated or used that money in other asset classes like real estate , gold  and so on where not affected by the
demonetization. It turned out that more than 99% of demonetized currency come
back to the RBI and was accounted for. Therefore, the government’s claims about
black money fell on its face.

Many poor daily wage workers are left with no jobs
and their daily income has stopped because employers are unable to pay their
daily wage.


For banks:

Increase in
CASA deposits, CASA means large amount of deposits are in current and savings
account. This way the banks get funds at no or very low cost (interest). Banks
do not pay interest on the current account deposits and pays a very low % of
interest on savings account deposits. As the deposits with the banks will
increase so will increase the CASA, which will increase the Net Interest Income
and the Net earnings of the banks. However, this will not be abnormally high
since the RBI has increased the CRR in the short term to mop up some of this
liquidity. As the banks get a lot of liquidity in their hands, they are
expected to enhance the borrowing cycle by lending the money at a lower rate of
interest and hence the interest rate on borrowing will lower down.


One of
the biggest demonetization benefits of this move is that it is going to
drastically affect the corrupt practices. People who are holding black money in
cash will not be able to exchange much as they would be in a fear of getting
penalised and prosecuted by the authorities. Enemies of the countries which are
involved in counterfeit currency and terrorism will not be able to continue it
further for quite some time at least. The smuggling of arms and dealing with
the terrorist will not sustain further as all of the money will be on record


For Banks

will be an added replacement costs of currency. The increased cost of operating
ATMs need to be refilled more often and also it will be a large burden of
marks. Initially , it is very difficult to create a cashless society as more
than 50 percent of Indian population is not well versed with card transactions.
Also for these initial months, it will be very difficult to make cash
transactions of a higher amount. But the government is taking steps to improve
liquidity into the system and reduce inconvenience as much as possible.

For people:

liquidity squeeze caused by demonetization will be negative across sectors with
high level of cash transactions. Real estate, jewellery, retailing,
restaurants, logistics, consumer durables and luxury and luxury brands, cement
and some segments will be facing short term instability. Those companies with
high level of debt will face more pressure and can face loan defaults.


                        It could be clearly seen
that demonetization is the urgent needs of the hour in India. In order to
enhance the money value and regulation of black money circulation, the effort taken
toward demonetization is very essential in Indian context.  Accountable money transaction is most
important aspect of monetary reforms , due to lack of proper accountable system
; one can find accumulation of  income
and wealth in the hands of a few individuals . This situation result in income
inequality among different segments of population. Demonetization is welcomed
for efforts of the government on the part of the honest tax payers. In India, the
government employees are the honest tax payers as their tax is dedicated from
their salaries itself on the other hand a large number of industrialist and
business men are not the perfect tax payers and they evade tax by utilizing
various loop holes in the legal systems. The income generation from industrial
and business activities regulated.                                                                              




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