CH -3 Business Environment

DEMONETISATION: A process of withdrawal of currency notes from circulation not to become a legal
tender and to introduce new currency notes in place of old one is known as ‘Demonetisation’.

• On 8th November 2016, then NDA govt announced Rs. 500 and Rs. 1000 will not be a legal
tender from mid-night.
• About 86 % currency in circulation become invalid or cease to be legal tender.
• People of India had to deposit old currency notes in the bank and exchange with new
currency notes.
• Restriction were placed on convertibility of domestic money and bank deposits.

AIM OF DEMONETISATION
• To Curb Corruption- High denomination currency notes were used to give bribe
• To recover Black money- Money generated by individuals by not paying taxes to the govt.
• To check on use of counterfeit money( fake money in circulation)- High currency notes
were used in operation of illegal activities; terrorism, human trafficking, drug-trafficking etc.

Features of Demonetisation:
1. Tax administrative measure: Persons holding black money had to declare their
unaccounted wealth & pay taxes at penalty rates. Cash holdings from declared
income had to deposit into the bank and exchange for new notes.
2. No tax evasion: The government indicated that tax evasion will no longer tolerated
or accepted.
3. Channelizing savings into the formal financial system: The new deposits schemes
offered by the banks will provide a productive loans, at lower interest rates to business
enterprises and others.
4. To create a less cash or cash lite economy: Through promotion of digital transactions
under ‘Digital India’ initiative, the government reduces the use of currency notes for
payments of purchase of goods and services.
IMPACTS OF DEMONETISATION

1. Money/ Interest rates (i) Decline in cash transactions

(ii) Bank deposits increased
(iii) Increase in financial savings
2. Private wealth Declined as many did not exchanged high
demonetised notes and real estate prices
fell down
3. Public wealth No effect
4. digitisation Increased with the use of digital methods
such as Rupay, AEPS etc.
5. Real estate Prices declined
6. Tax collection Increased because of increased disclosure