Major Economic Changes After Demonetization in India
Demonetization is the act of removing currency as legal tender. The current form of money is stripped from circulation and dismissed in the case of Demonetization. New forms of notes and coins are replaced by the old ones. Nations often fully introduce a new currency by replacing the old currency. The most crucial thing about Demonetization is that notes and coins of a certain denomination are banned by the central government. There are certain merits and demerits of Demonetization. When a new policy is introduced by the government, it has to face several challenges and obstacles. Demonetization is not an exceptional one.
Advantages of Demonetization
Corruption is reduced drastically due to Demonetization. The dealing of black money stops abruptly because of Demonetization. Government pushes the future of the corrupt people in stringent darkness by implementing Demonetization across the nation.
Liability of the government is reduced by the introduction of Demonetization. The risk and liability of liquid currency is reduced too. It is quite convenient to handle soft money in place of hard currency. Demonetization also reduces the liability notes of the government.
One of the huge impacts of Demonetization is that in certain cases, it leads to tax avoidance. The deposited money will be tracked by the Income Tax authorities. Hence, people who are known for their tax avoidance will become hesitant to do so. This will lead to fulfilling the government exchequer in a proper way. The transaction of loan will also be under review. Flow of taxes will increase. This will lead to the implementation of different welfare measures taken by the government.
Challenges Faced by Demonetization
One of the major challenges faced by the introduction of Demonetization is the connectivity of the internet. Since digital transactions are promoted everywhere, maximum people will go cashless. But not in every part of the world there is adequate internet connectivity. In developing nations, certain policies should be implemented first with proper infrastructure.
Another result of Demonetization is cash shortage. Chaos cannot be avoided due to the dearth of cash. This was the exact scenario during the 2016 Indian banknote Demonetization. People faced numerous problems in exchanging and depositing the demonetized banknotes. Few unwanted casualties also occurred because of this ruling.
The major negative impact of Demonetization is felt in the rural areas. The agricultural sector entirely depends upon cash. Moreover, rural people do not possess adequate financial literacy to handle the situation. In India, almost 80% of the rural population is unaware of the term digital transaction. Plus, there is still a lack of knowledge of computers and a cashless economy. During the 2016 Demonetization, this chunk of the population was hit badly.
A Brief History of Demonetization
The overnight act of changing the currency of the nation is something that India has witnessed before. Mohammad Bin Tughlaq in the fourteenth century replaced the currency of his dynasty as an administrative measure. The intention behind his measures was never wrong, however, he became disliked by the majority due to the distress caused to the public. This move was inspired by the currency that was in circulation in Iran and China.
The socio-political structure of Indian society has changed a lot in the past seven centuries. Therefore it is not appropriate to compare and draw parallels between the history of Demonetization and the present scenario.
Geographically speaking, many countries spanning through different continents have tried Demonetization. In some countries, it proved to be a success while for the others it was a disaster.
Counterfeiting or the act of preparing fake currency was widespread in Australia. To stop this practice, the Australian Government changed the material of the currency from paper to plastic. There was no negative effect of such a measure on the economy of the country. The success of Demonetization in Australia can be attributed to the fact that it is a developed State, hence the economy can handle these changes without any side effects.
Nigeria, Ghana, and Zimbabwe were in a completely different position altogether. These were all debt-ridden countries that prohibited their old notes but the economy collapsed due to the inflation that followed.
The citizens of Myanmar and the Soviet Union reacted differently. There were mass protests in Myanmar and the Soviet Union broke up after a coup due to Demonetization. India is a very diverse country and Demonetization was levied to achieve specific targets. Hence, the effect of Demonetization on the economy and society of India was not the same as any of these countries.
The idea behind implementing the policy of Demonetization in India was to curb the problem of black money circulating in the country. Due to the change in currency, everyone had to account for the cash they had. Thus a lot of income became accountable. This led to a huge increase in tax. This benefit was however confined only to certain economic sectors.
India had a mixed response. There were many positive as well as negative impacts of Demonetization. Whenever a new policy is introduced in any country irrespective of the fact whether it is developed or not, it takes time to measure its impact. Therefore it becomes extremely important to take into account not only the immediate effect but the long-term impact of a decision taken by the government.
Demonetization is one of the historical steps taken by the Government of India so far. It was no less than a financial revolution to curb corruption. However, it is a continuous process that will be reviewed by the government from time to time. Although there are certain challenges faced by the policy, the primary objectives of Demonetization have been achieved. The loopholes of the policy can be repaired but the national interest of Demonetization should be acclaimed.
FAQs on Demonetization Essay: Impact and Insights for Students
1. What is demonetization and what were the primary objectives of the 2016 demonetization in India?
Demonetization is the act of stripping a currency unit of its status as legal tender. Essentially, it declares that certain currency notes will no longer be valid for transactions. The 2016 demonetization in India, which invalidated the ₹500 and ₹1000 banknotes, had four main objectives as stated by the government: to curb black money, to combat the circulation of fake currency, to disrupt terror financing networks, and to encourage a shift towards a more formal, digital economy.
2. What were the main positive and negative impacts of demonetization on the Indian economy?
The impacts of demonetization were mixed, with notable positive and negative consequences for the economy. A clear breakdown includes:
- Positive Impacts: It led to a significant increase in the number of income tax filers, widening the tax base. There was a massive surge in digital transactions (like UPI and mobile wallets), accelerating the country's move towards a cashless economy. It also helped in the formalization of the economy.
- Negative Impacts: The sudden move caused a severe liquidity crunch, leading to long queues outside banks. It heavily disrupted the cash-reliant informal sector and small businesses, resulting in job losses and a temporary slowdown in GDP growth.
3. How did demonetization specifically affect India's informal economy and daily wage earners?
India's informal economy, which heavily relies on cash for daily transactions, was one of the most adversely affected sectors. The sudden withdrawal of 86% of the currency in circulation created a severe cash shortage. This directly impacted daily wage earners, small vendors, and farmers who conducted business purely in cash. Many small businesses faced a halt in operations, supply chains were disrupted, and labourers struggled to receive their wages, causing widespread economic hardship for this segment of the population.
4. From an economic viewpoint, how is the success of the 2016 demonetization policy evaluated?
Evaluating the success of demonetization is complex and debated among economists. The evaluation is based on comparing its stated objectives against the actual outcomes. While almost all the demonetized currency returned to the banking system, suggesting it was not very successful in eliminating black money, it did achieve other goals. Its success is often acknowledged in terms of pushing India towards a digital economy and increasing the number of taxpayers. However, these benefits are weighed against the significant short-term costs, such as the drop in GDP and the disruption caused to the informal sector.
5. What is the fundamental difference between demonetization and devaluation?
Demonetization and devaluation are two distinct economic concepts. Demonetization is a domestic policy where the government withdraws the legal tender status of certain currency notes, making them invalid for exchange within the country. Its primary goal is often to tackle issues like black money or corruption. In contrast, devaluation is a monetary policy related to a country's foreign exchange rate. It involves officially lowering the value of a country's currency in relation to other foreign currencies, primarily to boost exports by making them cheaper for other countries to buy.
6. In what ways did demonetization serve as a catalyst for the growth of digital payment systems in India?
Demonetization acted as a major catalyst for digital payments by creating a situation where cash was not readily available. The severe cash crunch forced both consumers and merchants to actively seek and adopt non-cash payment methods. This led to a dramatic increase in the usage of platforms like Paytm, Google Pay (then Tez), PhonePe, and the government's own Unified Payments Interface (UPI). This forced adoption helped overcome initial inertia and significantly accelerated the behavioural shift towards a digital-first transaction ecosystem in India.
7. What are some of the potential long-term consequences of demonetization for India's economic structure?
The potential long-term consequences of demonetization point towards a structural shift in the Indian economy. The primary long-term effects include a greater degree of economic formalization, where more transactions are recorded and taxed. It has also established a wider and more robust infrastructure for digital payments, which continues to grow. Furthermore, the expansion of the tax base could lead to improved government revenues over time. However, a lingering debate among economists is whether these structural benefits ultimately outweigh the significant, albeit temporary, shock and disruption the policy caused to economic growth and the informal workforce.
