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Importance of 500 1000 currency demonetization india

More than an entire year has passed since the Indian government demonetized the five hundred and thousand rupees currency notes. It was one such significant decision that left a large dent in the economy of India and a massive impact on her society. Now everyone is keen to know and understand whether it was a masterstroke played by the government presently in power or an epic setback to the Indian economy. Demonetization offered a new way of doing the monetary transaction to the sons and daughters of India and tried to do away with the evils of a parallel economy.

The high-pitched, fierce discussions over the much-touted accomplishments of demonetization are yet to be settled; and reputed economists and even noble-laureates are still divided on this sensitive issue. Today’s discussion is going to primarily revolve around the key objectives that demonetization was said to achieve.

Anticipated advantages

Putting a period to corrupt practices

It was fundamentally believed that demonetization would put an end to all the malpractices of the black marketers. Also, its proponents were to quickly assume that people will be pretty scared to hoard their unaccounted cash post-demonetization because of the inherent and constant fear of being arrested by the income tax authorities, nor will they be able to gather enough courage to deposit their black money to the banks.  Furthermore, many of the theorists and strategists were under the impression that this move will prove to be a fatal blow to global terrorism, as its sponsors were often found to be deeply involved in hot currency dealings including counterfeit notes for procuring arms and ammunition. As all the accounted money will continue to remain in a systematic and proper record post-demonetization, it was posited that this very move would make dealing with terrorists and smuggling of arms practically unsustainable, at least in principle.

Helping the Indian banking system to attain maturity

It is anticipated that demonetization will be the precursor to a pro-digital economy and will lay the foundation for a less-cash economy in the long run. Moving in the direction of an increasingly digital economy also implies completely upgrading or total revamping of all the financial processes and operations and also better access to a line of credit. As an increasing number of people will gradually start to shop online, the present white money will continue to remain in the Exchequer. And this newly legalized currency can thus be appropriately used by the financial institutions and banks to disburse loans to genuinely needy borrowers and also to earn interest in the process.

Reducing the liabilities for the Indian government

Demonetization can partly mitigate the burden and perils associated with managing the liquid currency. Many experts argue that soft money aka digital money is always safer to handle in comparison with hard cash. It may also be noted that every note is considered a financial liability for the elected government in the scope of the law, and demonetization was said to reduce that very liability considerably.

Reducing the number of cases of tax avoidance

It happens to be one of the apparent, and critical advantages of demonetization and this drastic initiative can significantly reduce the sheer number of instances of tax avoidance. Whenever and whatever amount of money is exchanged or deposited will be electronically registered and stored for future retrieval of such financial information. Hence, people will think twice before evading tax. Also, all kinds of business transactions including the ones related to real estate and retail jewelry will be subjected to constant digital surveillance and remote scrutiny. Eventually, this increased tax flow will aid the government to undertake and sustain various social welfare schemes and measures.

Increasing the GDP

A significant reduction in tax avoidance can potentially result in an unrestricted movement and free flow of accounted money aka white money. Furthermore, repo rate (repurchase rate) for lending and various tax rates are primarily expected to likely come down because of the increased collection in the income tax segment, which will also reduce the base rate for all kinds of retail loans including the ones people typically take for purchasing freehold properties. As a result; it is hoped by many that this will crank up the disposable income of an individual, and the day an increasing number of people will have more and more money to part with, the nation’s GDP (Gross Domestic Product) will spontaneously receive a phenomenal boost due to better purchasing power in the hands of all the members of the society.

Changes to the Banking Sector

Ever since the RBI or the Reserve Bank of India has revealed in its annual report; nearly 99% of demonetized currency has found to be returned to all the banks, the initial enthusiasm has gradually begun to fade out; and people have started to question once again the motives of a grand, once-in-a-lifetime exercise called demonetization. There is no escaping from the fact; the government had hoped a dividend of about four to five Lac Crore rupees, but only a little more than sixteen thousand Crores has returned as per the RBI statistics, and so was it really a logical and smart decision to give 1% of the GDP to gain just sixteen thousand Crores?! Just the way a coin is manufactured with a flip side, demonetization had its fair share of disadvantages too.

Critics of Demonetization

Perhaps, the most significant disadvantage and the most criticized aspect of demonetization is, it created utter chaos and unprecedented frenzy among the common mass. Everyone rushed to dump the old notes in banks and post offices; while the stifled supply of freshly minted currency continued to plague the daily routines of the poor and the middle-income-group Indians, the ones who have no or limited access to the Indian banking system, let alone plastic money. ATMs and banks witnessed serpentine queues, small traders grappled with substantial financial losses, and many precious lives were lost while waiting to exchange the demonetized notes under the scorching sun. The situation happened to be disturbingly worse in the tea-estates and rural parts of India, where the salaries of the workers are credited in cash and the concentration of ATMs as well as the presence of bank branches per capita (now that is quite indeed a fancy way to say, for every thousand people) are abysmally low.

Another significant repercussion is; as the cost of minting new notes and destructing the demonetized ones was borne by the present government, which is seemingly higher than the expected benefits, the procedure apparently offsets the advantages promised by the outcome.

Yet another collateral damage done by demonetization is that it drastically brought down the interest rate for savings, causing many woes to the retired employees from the private sector, who are not entitled to the post-retirement privilege of enjoying a secure and constant cash inflow in the form of monthly pension, and even the pension-receiving now-retired government workers bore the brunt too. As the savings interest rate was promptly subjected to a downward revision, it did a great job adding insult to injury and inflicting much pain to the senior citizens of India in the gloomy days of rising inflation.

Finally, the entire move was advertised to spot and severe all the possible sources of black money. However; a vast majority of people did not keep their unaccounted monetary funds in the form of liquid cash, but instead invested in other types of asset classes like gold and real estate, and were not at all affected in the process for obvious reasons. Hence; the chest-thumping, larger-than-life claims about the successful eradication of black money made by those special people; who were elected by the ordinary people of India; miserably fell on its face; eventually turning out to be superficial, void, and insincere.


Whether demonetization was a cleverly crafted scam by the ruling government to bail out the defaulting corporates and to grease the greedy hands of the crony capitalists, or a life-saving surgery performed by the Indian prime minister NaMo to bring back the Indian economy from the coma and to suffocate the actors of the parallel economy to a pretty painful death, only the coming decade will be able to provide brutally honest answers to such pertinent questions. Till then; let the civil society and the intelligentsia spend their leisure time in engaging, healthy debates; and let the truth prevail.