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India’s economic trajectory on the 6th anniversary of demonetisation

Published: 10th Nov, 2022


November 8 completes 6 years of demonetisation.

So let us assess the journey of Demonetisation over several years and its impacts on various sectors in the Economy.

Demonetisation and Purpose:

  • Demonetisation is referred to as the process of stripping a currency unit of its status to be used as a legal tender.
  • The key objectives of demonetisation were to wipe out black money, eradicate fake currency notes, and create a cashless economy by pushing digital transactions

Is it the first time in India to witness such an incident?

  • Demonetisation has been implemented twice -1946 and 1978 – in the past.
  • The first currency ban was occurred in 1946, the currency note of Rs.1, 000 and Rs.10, 000 were removed from circulation.

How currency rotates in the Market?

  • Currency with Public: As per the Reserve Bank of India (RBI) definition, currency with public is arrived at after deducting cash with banks from total currency in circulation.
  • Currency in Circulation: It refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.

Why there came a need to introduce such a stance by the Government?

  • Due to excessive currency circulation in the market: According to reknowned economist Anil Bokil, Rs.500 and Rs.1000 notes when discontinued, summed up to 86 percent of the total circulation and were on the rise.
    • If the demonetisation had not happened in 2016, then in the next two-four years, the circulation of old Rs.500 and Rs.1000 notes would have reached 90 to 95 percent which in turn would have frozen country's economy.
  • Hence, the old series notes were discontinued and the government introduced new Rs.2000 notes. 
  • Black money:  The biggest issue was curbing black money. Black money refers to cash that is not accounted for in the banking system or cash on which tax has not been paid to the state. Demonetisation will make black money circulation harder.  
  • To increase Digitisation: Following demonetisation, digital payments grew significantly, particularly as the government and banking regulator worked to turn India into a "less-cash economy." 

Impact on economy

  • Formalisation of the economy
  • Increase in GST collections
  • Facilitated Cashless Transactions during Lockdown
  • Helped in economic recovery after Pandemic
  • Strengthen Indian Rupee
  • Reduced Counterfeit Currency:In the year 2015-16, more than 4 lakh fake notes of Rs. 500 and Rs. 1,000 were captured. This number reduced to 45,400 fake notes of Rs. 500 and Rs. 2,000 in 2018-19. However, the number of fake notes among the new design notes of Rs. 500 more than doubled with an increase of 121% whereas those of Rs. 2000 increased by 21.9% over the previous year during 2018-19, according to the annual report of RBI.

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