DEMONETIZATION

1. INTRODUCTION

Demonetization is an economic policy that involves the discontinuation of a specific currency as a legal tender. In simple terms, it makes circulating currency a worthless piece of paper. This step is taken by the central bank and the government to address various economic issues. The concept has been used in many countries with both desirable(United Kingdom in 1971) and undesirable consequences( Soviet Union Monetary Reform in 1991). India has recently experienced demonization in 2016, which largely proved to be a poor choice.

2. UNDERSTANDING THE CONCEPT OF DEMONETIZATION

Demonetization involves the declaration of certain currency notes to be invalid for transactions and is stripped of its legal tender status. There is a distinction between demonetization and the withdrawal of legal status for old currency notes. In demonetization, the holding of old currency is considered illegal while if a particular currency is simply stripped of its legal tender status, then it just loses its monetary value and can be still possessed by individuals without committing any wrong. There can be many reasons to demonetize currency:

A. Curbing black money: Money accumulated illegally and without paying taxes poses a serious risk to an economy. It creates a parallel economy and drives the prices of assets in a country. High prices of land in India are a reason for it. Demonetization is a way to reduce black money by rendering those currency notes useless, compelling holders of such wealth to disclose it or keep it as worthless paper.

B. Countering counterfeit currency: Invalidating specific denominations helps in curbing the circulation of counterfeit currency in the market. When a counterfeit currency is brought back into banks, it is identified and removed from circulation.[1] This leads to the removal of counterfeit currency from the system. Also, the new currency is made complex with advanced security checks to prevent duplication.

C. Promotes digital transactions: Demoralization makes people see digital transactions more reliably. It leads to a breach of trust in traditional paper currency. This makes them shift from traditional cash transactions to that of a formal banking system.

3. HARSH CONSEQUENCES

There are two sides to every coin and so demonetization too has its own set of demerits. Some of them are:

A. Inconvenience to the general public: When demonetization occurs, the general public waits in long lines to exchange their money. This causes them huge inconvenience. To exchange their currency before the deadline, they even have to take leave from their jobs to stand in long queues to exchange thier currency. One of the main reasons for demonetization given by the governments is that it will reduce black money. Even if accept this argument, then also punishing the whole population for the act of a few is unjustified. Also it has been seen worldwide that black money has never reduced due to demonetization as the culprits hold it in different mediums than in the traditional hard currencies. Assets such as gold or real estate are preferred by them. Also, they are seen to be more flexible and wise enough to disguise their wealth from the attack of demonetization. Looking into these it is not acceptable to justify the harsh effects of demonetization that the general public is experiencing.

B. Incurs huge cost for reprinting new currency: The expenses associated with minting coins, printing new banknotes, and ending the circulation of old money are some of the initial disadvantages.[2]

C. GDP of a country slows down: The immediate effect of demonetization is shutting down businesses that are cash-driven. Retail and small businesses like local markets, street vendors, and small-scale enterprises, primarily operate on cash transactions. Demonization immediately halts these business and also has the potential to bring it to closure. In simple words, demonetization has adverse effects on individuals and businesses heavily reliant on cash.

D. The number of new types of crimes committed online may rise. As more people begin using virtual payments, there may be a rise in scams and data theft incidents. Lack of digital literacy in country will aggreviate the situation.

E. Critics argue that the demonetization decision is also unconstitutional as it forces individuals to open bank accounts (which are essential for cash exchange). Freedom of choice is restricted and unconstitutional. The government justifies this claim by the exception provision present in Article 19( Freedom of choice).

4. 2016 INDIAN BANKNOTE DEMONETISATION

The Indian government declared on November 8, 2016, that all ₹500 and ₹1,000 Mahatma Gandhi Series banknotes would be demonetized. It aimed to fight corruption and black money while advancing the digital economy.

One of the striking features of Nov 8 demonetisation was it was declared overnight and the reason for the sudden announcement given by the Indian government was to collapse the underground economy.[3] The decision was notified by the government under the Reserve Bank of India Act, 1934's sub-section (2) of section 26, which granted the government the authority to issue the notification. In India, demonetization is permissible as long as the government can prove that it was carried out on the advice of the central board of directors of the RBI.[4]

2016 demonetisation has largely turned out to be bad for the Indian economy as it led to the GDP growth rate decreasing by 2.2% and employment falling by 3%.[5] Also, there has not been the eradication of black money in the country and the country is still amongst the highest cash to GDP country in the world. We continue to face the threat of inflation and terrorism. Small businesses that operated exclusively on cash have closed, worsening the nation's unemployment rate. Demonetisation with sufficient time given to the individuals and businesses to adjust to the new situation, would have been a better decision for the economy.

5. CONCLUSION

Demonetization is a significant economic policy that governments employ to address various socio-economic challenges present in a country. It is generally intended to have desirable consequences for the country but history teaches us that it can turn out to be a disaster for the country too. So a careful plan looking into each possibility before demonetization is essential to endure the economic disruption caused by it and achieve desirable outcomes. As countries continue to grapple with economic issues, demonetization remains a tool subject to scrutiny, debate, and strategic considerations in shaping economic policies.

6. CITATIONS