Question

The Indian government decided to demonetise the 1000 and 500 rupee notes on November 8, 2016. What do you understand by the policy of demonetisation?

Answer 1

• Demonetisation refers to the withdrawal of a currency unit’s legal tender status. In the Indian context, this occurred when the ₹500 and ₹1000 notes were taken out of circulation and replaced with new ₹2000 and ₹500 notes.
• The government’s main aim behind demonetisation was to combat the underground economy, eliminate counterfeit high-value currency, reduce tax evasion, eliminate black money and terrorist funding, and promote a cashless economy.
• However, the impact of demonetisation has been mixed. According to the Economic Survey of the Government of India, demonetisation led to several immediate negative effects, such as liquidity shortages, social disruptions, an atmosphere of uncertainty, job losses, a decline in farm income, adverse effects on cash-intensive sectors like real estate, and difficulties in the smooth functioning of banks.
• The informal sector was particularly affected. Demonetisation also caused a decline in the GDP growth rate due to disruptions in demand and supply. Despite these short-term challenges, it is expected that the long-term impact of demonetisation will be positive. The policy aims to curb black money and corruption, increase tax compliance, enhance liquidity in banks, reduce interest rates, promote a cashless economy, and strengthen the formal sector.