Impact of Demonetisation on the Indian economy

Q.7 Define Demonetisation. What is its impact on the Indian Economy?

Meaning / Definition of Demonetisation

Demonetisation means withdrawal of the status of legal tender from a currency note or coin by the government.
In simple words, when the government decides that certain currency notes will no longer be acceptable as money, it is called demonetisation. Impact of Demonetisation on the Indian economy

Demonetisation refers to the process by which the government withdraws the legal tender status of a currency note or coin, meaning that particular currency will no longer be accepted as valid money for transactions.

In India, demonetisation generally refers to the Government of India’s decision on 8th November 2016 to demonetise ₹500 and ₹1,000 currency notes, which ceased to be legal tender from midnight of that day.

2. Objectives of Demonetisation in India

1. To curb black money –
   To force people holding unaccounted money in cash to either disclose it or lose it, as old notes had to be deposited in banks. Impact of Demonetisation on the Indian economy
   
2. To control corruption –
   Large cash transactions in bribes and illegal activities were expected to reduce.
   
3. To check fake currency (counterfeit notes) –
   Fake high-value notes were believed to be used for illegal activities and terrorism. Demonetisation aimed to eliminate these notes. Impact of Demonetisation on the Indian economy
   
4. To hit terror funding and illegal activities –
   Terrorist organisations and illegal traders largely used high-denomination cash. Cancelling these notes was expected to disrupt their finances.
   
5. To promote digital payments and less-cash economy –
   By forcing people to use banking channels, cards, wallets, UPI etc., the government wanted to move towards a more transparent, digital economy.

3. Impact of Demonetisation on Indian Economy

(A) Short-term Impact

1. Liquidity crunch (shortage of cash) –
   People had to stand in long queues outside banks and ATMs to exchange or withdraw cash. Daily transactions, especially in cash-based sectors, were badly disturbed. Impact of Demonetisation on the Indian economy
   
2. Fall in consumption and demand –
   As people had less cash in hand, they postponed purchases. Retail trade, small shops, street vendors, kiryana stores, etc., faced a fall in sales.
   
3. Adverse effect on informal and unorganised sector –
   Small businesses, daily wage earners, rickshaw pullers, domestic workers and small farmers depend mainly on cash. Many of them temporarily lost jobs or income. Impact of Demonetisation on the Indian economy
   
4. Slowdown in GDP growth –
   Due to lower demand and production, the growth rate of GDP showed a decline in the immediate quarters following demonetisation.
   
5. Temporary problems in agriculture –
   Farmers faced difficulty in buying seeds, fertilisers and selling their produce because most transactions in rural areas were in cash. Impact of Demonetisation on the Indian economy
   

(B) Long-term Impact

1. Increase in bank deposits and financialisation –
   Old notes had to be deposited in bank accounts. This led to a sharp rise in deposits in banks, improving their liquidity position and giving more funds for lending. Impact of Demonetisation on the Indian economy
   
2. Growth of digital payments –
   Use of UPI, debit/credit cards, net banking and mobile wallets increased sharply. This pushed the economy towards a less-cash / digital mode, although cash usage later rose again.
   
3. Widening of tax base and more formalisation –
   With more transactions routed through banks and digital modes, many people and small businesses came under the tax net. This helped in widening the base of income tax and GST payers.
   
4. Impact on black money –
   Some unaccounted cash could not be exchanged and thus was extinguished. Also, the fear of future action and data gathered from deposits helped tax authorities to detect undisclosed incomes. Impact of Demonetisation on the Indian economy
   
5. Effect on inflation –
   In the short run, lower demand led to softening of prices for some goods. But this effect was not permanent.
   
6. Improvement in transparency and accountability –
   By promoting electronic payments and record-keeping, demonetisation aimed to make economic activities more transparent and reduce the scope for illegal cash deals.
   

4. Conclusion

Demonetisation is a powerful monetary measure in which the government cancels the legal tender of currency notes.
In India, the 2016 demonetisation had mixed effects:

• It caused serious short-term hardships such as cash shortage, fall in demand and difficulties for small businesses and workers.
• At the same time, it encouraged digital payments, increased bank deposits, widened the tax base and attempted to curb black money and corruption.

Thus, demonetisation was an important but controversial step, with both positive and negative impacts on the Indian economy. Impact of Demonetisation on the Indian economy

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Note:- 👉 Important questions of Business Environment

1. Previous Years questions Papers of Business Environment Under Gndu.
2. Significance of business environment
3. Privatisation solution for currently economic Problem
4. Functions of NITI aayog
5. Disinvestment of shares in public sector enterprise

Impact of Demonetisation on the Indian economy