Demonetisation:

The Government of India, made an announcement on November 8, 2016, that

the two largest denomination notes, `500 `1,000, were ‘demonetised’ with
immediate effect, this led to 86%of the money in circulation invalid.
What does that mean:

It means that the RBI/Government’s decision to recall the status of a currency

note to be used as a legal tender. Usually, all the currencies issued by RBI can
be used as a legal tender as the value they carry is promised by RBI and once
the value has been demonetized/recalled/revoked, the currency note cannot be
used. Such currencies either turn into scrap or are deposited in the banks and
replaced by the new currencies. 
Why was demonetization done:

 To tackle the problem of black money, generated by income that has not
been declared to the tax authorities.
 The cash circulation in India is directly connected to corruption hence by
reducing the cash transactions , corruption can be controlled and the
country moves towards cash less economy or cash lite economy.
 To counter the menace of counterfeit /fake currency
 To prevent the cash being used for illegal activities

FEATURES
1. Demonetisation is viewed as a tax administration measure. Cash holdings
arising from declared income was readily deposited in banks and exchanged for
new notes. But those with 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 tax administration channelizing savings into the
formal financial system.
4. Demonetisation is to create a less-cash or cash-lite economy, i.e.,
channelising more savings through the formal financial system and thus
improving tax compliance.
BUSINESS DIMENSIONS
HIGHLIGHTED-
1. Political: Government has announced demonetisation of the ₹ 500 and ₹
1,000 currency notes with effect from the midnight of November 8, 2016. It is a
step by government in curbing the illegal use of money by some entities.
2. Legal: 500 and ₹ 1,000 currency notes stopped being the legal tender and
introduction of ₹ 500 and ₹ 2,000 became the new legal tender.
3. Technological: As demonetisation happened there was shortage of cash, it
encouraged the use of digital forms of payment in form of e-wallets like Paytm
and other modes of cashless transactions.
Advantages of Demonetization

o The menace of black money can be controlled to some extent

o The counterfeit currencies which have an impact on the real
economy, will be rooted out
o The mobilization of deposits in the banks will increase. Earlier
more people used to keep money at home rather than at bank, this
step resulted in savings in bank.
o It’s a major step by the government towards forming a cashless
economy
o It is expected that with this move the Fiscal Deficit of the
government may come down
o Helps people into the formal economy.
o It helped in reducing the interest rates in banks.
o To popularize the use of digital payments and reduce frauds.
Disadvantages of Demonetization

 The black money is not stored in the form of cash only and
secondly the measure takes care of result but not the cause-black
money is generated mainly because of corruption and tax evasion.
This measure controls the usage of black money but cannot control
the causes
 Sudden and huge demand for the new currencies
 Panic amongst the common man .
 The small trader/shopkeepers faced difficulties
  The establishments such as banks, hospitals etc were under lot of
stress
Challenges

 Digital transactions require use of cell phones for customers and Point-of-
Sale (PoS) machines for merchants, which will only work if there is
internet connectivity.
 The coverage of the banking sector in rural india is very less
 Cost of replacing all the Rs 500 and Rs 1000 notes was huge.
 The decision to issue Rs 2000 denomination currency and withdrawal of
Rs 500 and Rs 1000 currency lead to huge challenge as most of the day to
day transactions in India are centred around Rs 500 note
 The availability of Rs 500 and Rs 1000 notes was the biggest challenge as
both of them covered over 86% in terms of value of total currencies
issued
 The process led to huge rush and long queues of the people in front of
ATMs

Impact of Demonetisation on various

sectors:
1. Interest rates: As demonetisation happened the number of cash transactions
reduced; bank deposits increase in form of Jan Dhan Accounts. More financial
savings by the people of the nation.
2. Private Wealth: Private wealth saw decline as large volume transactions were
not possible with old notes.
3. Real Estate: Demonetisation led to the decline in price of property. Real
estate industry saw huge drop in business.
4.Digital transactions increased

5. Rise in income tax collection because of increased disclosure.&

6. No effect on Public wealth.

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