DEMONETISATION

DEMONETIZATION

 On the 8th of November, 2016, the Government of India made an announcement with profound implications for the Indian economy. It was decided to demonetize high-value currency notes of denominations of 3 500 and 1,000 with immediate effect, ceasing to be legal tender, except for a few specified purposes.

Definition: Demonetisation is the act of removing a currency unit of its status as a Legal Tender.

The aim of demonetization was to curb corruption, counterfeiting the use of high denomination notes for illegal activities and especially the accumulation of black money generated by income that has not been declared to the tax authorities.

Features of Demonetisation

1. Demonetisation is viewed as a “Tax Administration Measure'. Cash holdings arising from declared income were readily deposited in banks and exchanged for new notes. However, people holding black money had to declare their unaccounted wealth and pay taxes at a penalty rate.

2. Demonetisation is also interpreted as a shift on the part of the government indicating that Tax Evasion will no longer be tolerated or accepted.

3. Demonetisation also led to channelizing savings into the formal financial system. However, much of the cash deposited in the banking system is bound to be withdrawn. However, some of the new deposits schemes offered by the banks will continue to provide base loans, at lower interest rates.

4. Demonetisation also aims to create a less-cash or cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance.

• However, digital transactions require internet connectivity, as they need a cell phone, customers and Point-of-Sale (PoS) machines for merchants.
• On the contrary, these disadvantages are counterbalanced by an understanding that helps people into the formal economy, thereby increasing financial savings and reducing tax evasion.

Impact of Demonetisation

1. Money/Interest rates

• Decline in cash transactions.
• Bank deposits increased.
• Increase in financial savings.

2. Private wealth

• Declined since some high-demonetized notes were not returned and real estate prices fell.

3. Public sector wealth

• No effect.

 4. Digitisation

• Digital transactions amongst new users and the use of RuPay Cards and Aadhar Enabled Payment System (AEPS) increased.

 5. Real estate

• Prices declined.

 6. Tax collection

• Rise in income tax collection because of increased disclosure.