On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes . The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.The sudden nature of the announcement—and the prolonged cash shortages in the weeks that followed—created significant disruption throughout the economy,
The bank notes in circulation have declined by little over 20 per cent from Rs 16.41 lakh crore a year ago to Rs 13.10 lakh crore. This may be seen as a huge benefit if it stays at that level in future. The benefits are in the form of lower cost of printing notes , distribution and logistics costs and the use of digital payments.
The bank notes in circulation were on the rise in the domestic economy. Take for example, the bank note in circles circulation increased by 15 per cent in 2015-16. Similarly. Bank notes increased by 11 per cent in 2014-15. It reached the level of over 16 lakh crore just before the demonetization of high value currency of Rs 1,000 and Rs 500 was announced on November 08,2016. Theses notes constituted almost 86 er cent of the total value of currency in circulation.
The Opposition has demanded that the government should tender apology for causing immense pain to people who lost their working hours affecting livelihood and comfort for exchanging the notes.
An estimated Rs 15.4 lakh crore worth old Rs 500 and Rs 1,000 notes had been demonetised on November 8. But, return of about 99 per cent demonetised currency to banks does not necessarily makes demonetisation a failure. Beyond the political statements, even those made by Prime Minister Narendra Modi and his ministers, there are several effects of demonetisation that may augur well for the economy in the long run.
Reduction in illegal activity Banning high-value currency will halt illegal activity as the cash provided for such activities has no value now. Black money is usually used to fund the illegal activity, terrorism, and money laundering. Fake currency circulation will come to a halt in a single shot. Corrupt officers, money launderers are under threat as Income tax department is taking all the measures to track such people.
For other countries, a better approach would be to phase out big bills over a period of years, making it easy to swap them at first, then progressively more difficult—say, by exchanging them at fewer locations. That would allow time to publicize the plan, fix inevitable flaws and help the public adjust. Meanwhile, electronic alternatives would have an incentive to evolve. In time, bills of all denominations would dwindle of their own accord.
Which suggests a second problem for India. After invalidating 86% of the currency in circulation, the government was left scrambling to encourage digital payments, using subsidies and other gimmicks. Only about half of Indian adults have bank accounts, and only about a quarter have internet access. Mobile payments remain relatively rare. Even if everyone had wanted to go digital, they couldn’t have.
The takeaway for other countries is to ensure reliable alternatives are available first, along with legal protections and privacy safeguards. One promising approach is digital legal tender, which might combine the advantages of electronic currencies with the stability of a central bank.
COURTESY https://en.wikipedia.org
www.thehindu.com/
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