Critically Discuss about Demonetization | By UpscVidya

Demonetization is an act of stripping a currency unit of its status as legal tender. The present notes of Rs.500 and Rs.1000 denomination were recalled which need to be exchanged them with the new currency notes. The purpose of demonetization was to curb corruption and black money, leave terrorism paralyzed and promote digital economy in India.


Demonetization - What, Why, Pros & Cons, Effects

The article highlights what is demonetization, why demonetization was introduced in India, what were the pros and cons of demonetization, Initiatives taken by government to promote digital payment, etc.

Introduction :

On the midnight of Nov 8, 2016 Prime Minister Modi announced scrapping of high value notes in the denomination of Rs.500 and Rs.1000 which will not be used as a legal tender from henceforth, leaving these notes as mere worthless pieces of paper. This midnight ban on 86% of total value of currency in circulation left everyone stunned.

What is Demonetization?

Demonetisation is an act of stripping a currency unit of its status as legal tender. In Indian context, it meant that RBI has withdrawn Rs.500 and Rs.1000 notes as an official mode of payment and in turn has introduced new design notes in the denomination of Rs.2000 ans Rs.500 at present and later on will introduce Rs.1000 note too. This was an exercise of recalling present notes and exchanging them with the new currency notes introduced by the government.

Why Demonetization was introduced?

The foremost thought that comes in everyone's mind is why such a drastic and major step was taken by the Indian government. Was it really essential? Couldn't there have been other alternatives preferred over this measure? Was it a pre-thought and a well-played card from the government? 

The government's explanation to take such a move stands on following points :
  1. Tackle menace of corruption and black money,
  2. Promote digital transactions and move from a cash economy towards a non-cash/less cash economy,
  3. To eliminate fake currency in circulation that is mainly funding terrorism and corroding roots on Indian economy,
  4. To bring savings held by people in cash back into main circulation,
  5. To streamline the process of payment of wages,salaries and incentives paid by the employer to its employees.
Advantages of Demonetization:

1) Reduce corruption and eliminate black money altogether from Indian economy

a) Corruption:
- all government works to be done online like :
  • paying taxes like income tax, sales tax
  • registering/renewing licences
  • paying bills online like electricity bills
- reduces bribes, brings transparency in system

b) Black Money: Any money kept out of the purview of tax authorities is black money.

- could be earned by legitimized system but not paid taxes to save a little,
- stashed abroad in Swiss accounts [undisclosed income]
- used for illegal activities like drugs trafficking, human trafficking, funding terrorism, hawala money. 

2) Bring transparency in transactions and make tax evasion much more difficult - GST 

3) Move towards digital payment. 


Problems arising from Demonetization exercise:

1) Long queues outside banks -  many died, common man especially poor has to face a lot of inconvenience, 

2) ATM's go cashless,

3) New notes in new sizes needed recalibrations of 2.2 lakh ATM's across the country

4) Difficult to get change of Rs.2000 note due to lack of circulation of Rs.500 notes and scarcity of change of other smaller denominations.

5) Rules and notifications that change too often, leading to violation of the basic norms of trust between the government and citizens

6) Large-scale leakages in the printing-and-distribution chain with shady operators managing to get their hands on new currency notes worth crores while ordinary citizens line up, often fruitlessly, for the prescribed ration of a few notes of Rs 2000.

7) Common man's business affected especially small vendors across the streets like tea stalls, vegetable sellers, autorickshaw driver, street food stalls etc.

Government's initiative to boost Digital Payment post Demonetisation:

Following are the efforts taken by Government Of India to incentivise and boost digital payments in the country :-

1) Lucky Grahak Yojna [Consumers]

  • Daily reward of Rs 1000 to be given to 15,000 lucky Consumers for a period of 100 days;
  • Weekly prizes worth Rs 1 lakh, Rs 10,000 and Rs. 5000 for Consumers who use the alternate modes of digital Payments
    This will include all forms of transactions viz. UPI, USSD, AEPS and RuPay Cards but will for the time being exclude transactions through Private Credit Cards and Digital Wallets.


2) Digital Dhan Vyapar Yojna [Merchants]

  • Prizes for Merchants for all digital transactions conducted at Merchant establishments
  • Weekly prizes worth Rs. 50,000, Rs 5,000 and Rs. 2,500
Mega draw on : 14th April,2017 - Ambedkara Jayanti

To ensure that the focus of the scheme is on small transactions (entered into by common people), incentives shall be restricted to transactions within the range of Rs 50 and Rs 3000. 

The scheme specially focuses on bringing the poor, lower middle class and small businesses into the digital payment fold. The poorest of poor will be eligible for rewards by using USSD. People in village and rural areas can participate in this scheme through AEPS (Aadhar Enabled Payment System).

Implementing agency for this scheme : National Payment Corporation of India (NPCI)

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