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Demonetization Economics

Demonetization is the act of removing a currency's legal tender status and replacing it with new notes or coins. In 2016, India demonetized its 500- and 1000-rupee notes, which accounted for 86% of cash in circulation. Prime Minister Narendra Modi claimed this would curb black money, corruption, and terrorism by removing these high value notes from circulation. However, over 99% of the demonetized funds were eventually deposited in banks, suggesting the effort did little to remove unaccounted wealth from the economy as black money holders converted their cash into white. The move negatively impacted India's industrial production and GDP growth rate in the short term.

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37 views

Demonetization Economics

Demonetization is the act of removing a currency's legal tender status and replacing it with new notes or coins. In 2016, India demonetized its 500- and 1000-rupee notes, which accounted for 86% of cash in circulation. Prime Minister Narendra Modi claimed this would curb black money, corruption, and terrorism by removing these high value notes from circulation. However, over 99% of the demonetized funds were eventually deposited in banks, suggesting the effort did little to remove unaccounted wealth from the economy as black money holders converted their cash into white. The move negatively impacted India's industrial production and GDP growth rate in the short term.

Uploaded by

sneha garg
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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DEMONETIZATION

What is Demonetization?
Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs
whenever there is a change of national currency: The current form or forms of money is pulled
from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country
completely replaces the old currency with new currency.

The opposite of demonetization is remonetization, in which a form of payment is restored as


legal tender.

Lastly, demonetization has been tried as a tool to modernize a cash-dependent developing


economy and to combat corruption and crime (counterfeiting, tax evasion). In 2016, the Indian
government decided to demonetize the 500- and 1000- rupee notes, the two biggest
denominations in its currency system; these notes accounted for 86 percent of the country’s
circulating cash. With little warning, India's Prime Minister Narendra Modi announced to the
citizenry on Nov. 8, 2016 that those notes were worthless, effective immediately – and they had
until the end of the year to deposit or exchange them for newly introduced 2000 rupee and 500
rupee bills. The Prime minister of India Narendra Modi claimed that the action would curtail the
shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and
terrorism.
According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the
demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had
been demonetised, were deposited with the banking system. The banknotes that were not
deposited were only worth ₹10,720 crore (107.2 billion),[12] leading analysts to state that the
effort had failed to remove black money from the economy.[13][14] The BSE SENSEX and NIFTY
50 stock indices fell over 6 percent on the day after the announcement.[15] The move reduced the
country's industrial production and its GDP growth rate.

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