Components of New Economic Policy - Demonetisation

• When currency notes of some denominations stop being legal tender, it is called "demonetization."
• Old notes are withdrawn by the government/RBI and replaced by new currency.

• On 8 November 2016, ₹500 and ₹1,000 notes were demonetised and ceased to be legal tender (except for some specified payments like utility bills, petrol pumps, govt hospitals for a limited period).
• About 86% of cash in circulation became invalid and had to be deposited in banks, with limits on cash withdrawals.
• Public could deposit old notes till 31 Dec 2016 (without declaration) and till 31 March 2017 with RBI (with declaration).

• Elimination / removing black money (unaccounted money from tax evasion and illegal activities).
• To curb / stop corruption (bribery, smuggling, etc. done through high-value notes).
• To eliminate / curb counterfeit (fake) currency causing inflationary pressure.
• To check / stop terror funding done using high-denomination notes.

Tax administration measure:

• Deposits from declared income easily exchanged.
• Holders of black money had to declare and pay tax with penalty.

Shows tax evasion will no longer be tolerated.

Aims at a less-cash / cash-lite economy and more digital transactions.

Short term:

• Long queues at banks/ATMs, cash shortage, adverse impact on economic activity.

Later:

• Normalcy returned.
• Bank deposits and financial savings increased, digital transactions increased, real estate prices declined, and income tax collection rose.

• Demonetisation = withdrawal of legal tender status of certain currency notes.
• 8 Nov 2016: ₹500 and ₹1,000 notes demonetized; about 86% of cash invalid.
• Main aims: black money, corruption, fake notes, and terror funding.
• Seen as a tax administration step and move to a less-cash, digital economy.
• Effects: cash crunch at first, then higher deposits, more digital payments, higher tax collection, lower real estate prices.