Demonetization: Impact and Pros and Cons

economics

International financial management
1
Demonetization
Demonetization is an act of shedding the currency in the name of legal tender. It is a situation
when a country replaces the old currency with the new currency.
The main aim of demonetization is to combat inflation, corruption, and crime. Moreover, it will
also encourage a web dependent economy and international trade (Prateek, Knopf, and
Peterson, 2017).
History of Demonetization in India
On 8 Nov, 2016, the Indian government announced ban the use of 500 and 1000 notes and
replace them by issuing new notes of 500 and 2000 notes. The RBI (reserve bank of India) have
come out with the annual report of the situation that demonetization enacted 21 months ago
couldn’t bring whole sum of money as 10720 crore did not reach to RBI. The Prime minister
“Narendra Modi” laid down three main objectives to combat black money, terror funding and
corruption. The country lost its GDP growth by 1.5 percent (India today, 2019).
Other countries who have been successful in demonetization
Four countries who were successful after executing demonetization are European Union in
2002, Pakistan in 2016, Zimbabwe in 2015, United Kingdom in 1971, and Australia in 1996 (India
today, 2019).
Reason for 2016 demonization in India

International financial management
2
Some of the main reasons behind demonization are-
Fake currency- Pakistan started printing fake currency to sponsor terror activities in India. Fake
currency attacked the Indian economy and increase the flow of currency in the economy
leading to inflationary pressures.
Cashless economy- Huge amount of cash in the economy leaves no scope of manipulating the
cash transactions. Therefore, demonetization encouraged people to move on to digital
methods of paying such as imps, mobile wallet, neft, net banking and debit card.
Black money- As demonetization enforced that only a particular amount of old notes can be
exchanged at a time. These decisions claim that people holding black money will find it difficult
to disclose their money and moreover, they will not even be rendered. It placed the people in a
dilemma with high income and non-tax payers where a piece of paper is useless and has left the
notes with no purchasing power (Jain, and Pandiya, 2016).
Impact of 2016 demonization on common people
Demonization has led to many problems to a common man such as-
Cash crunch- demonetization had direct impact on few sectors that deal with cash such as
Autorishaws, daily wage earners, small traders, taxi drivers and taxi drivers. The economy was
very much dependent on cash and suddenly the government announced the demonetization.
Even the sectors such as real estate, and illegal cash transactions started facing losses. People