Demonetization is nothing but the act of stripping a currency unit of its status as legal tender by the government. It is necessary whenever there is change of national currency. In this process the old unit currency must be retired and replace with a new currency unit.
On Tuesday, 8th November 2016 Prime Minister Narendra Modi announced a really bold move for the Indian economy that is “Demonetization” of Rs 500 and Rs 1000 currency note with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption.
Instead of RBI Governor Urjit Patel, surprisingly our Prime Minister announced the news of demonetization that banknotes took place.
During this whole process they also put some terms and conditions such as: the high values will not be legal for transaction and the old notes can be exchange till 31st December 2016.
Here are eight countries that tried demonetization before India did:
Nigeria, Ghana, Pakistan, Zimbabwe, North Korea, Soviet Union, Australia, Myanmar.
History of Demonetization in Indian economy:
Let’s focus on the Indian history of this great act of Demonetization. This is not the first time, when Indian Currency is demonetized in India. Earlier it was done in January 1946 with the complete ban of Rs. 1000 and Rs. 10,000 notes to deal with the unaccounted money i.e., Black money.
Again in 1954 the new notes of 500, 1000, and 10000 came in India. And in 1987 a new bank notes of 500 introduced by the Reserve Bank of India into our Indian economy to certain inflation.
Second times, it was done in 16th January 1978 by Government headed by Morarji Desai when Rs. 1000, Rs. 5000 and Rs. 10000 notes were demonetized.
Advantages of Demonetisation:
A major reason behind demonetisation was that a big part of black money was kept hidden by tax evaders and being used for funding illegal works, gambling, in inflating the price of major assets like real estate, gold and other social evils. Demonetisation is acting as an effective countermeasure against such activities. Now all such activities will get reduced for some time and it will take years for people to generate that amount of black money again and it helps in putting an end this circle of people doing illegal activities to earn black money.
Another benefit of this act is that due to this now people are disclosing their income by depositing money in their bank accounts, due to this government gets good amount of tax revenue which can be used by the government towards the betterment of society.
Disadvantages of Demonetization:
During the period of this huge and bold act hit the economy hard in the short term. It creates a lot of confusing among the common public. Due to this trading sectors faced massive predicaments by trying to adjust the new currency. And the biggest disadvantages were frenzy created among the common people, this situation was even worse in rural India where the people struggled to exchange their cash due to lack of banks in their villages.
Another problem was that this move took place to targeted Black money but many people who had not kept cash as their black money they simply rotated that money in other asset: gold, real estate and so on.