Fifth anniversary of Demonetisation- Economic impacts

India is observing the fifth anniversary of demonetisation on November 8, 2021. Demonetisation was announced by Prime Minister Narendra Modi in 2016.

Background

  • With this move, Rs 500 and Rs 1,000 currency notes were withdrawn as a legal tender across the country.
  • This move was aimed at eliminating black money.

What is Demonetisation?

Demonetisation is an act of withdrawing the status of currency as legal tender. It occurs whenever national currency of a country is changed. Under this act, current form or forms of money is pulled from circulation and are replaced with new notes or coins.

What are the Objectives of Demonetisation?

Demonetisation is done with the objective of:

  • Discouraging the use of high-denomination notes for illegal transactions. It curbs the use of black money.
  • Encouraging digitisation of commercial transactions and formalising the economy. Thus, it boosts government tax revenues.

What were the impacts of demonetisation?

  • On November 4, 2016, currency with public was around Rs. 17.97 lakh crore which declined to Rs 7.8 lakh crore in January 2017 following demonetisation.
  • Demonetisation led to liquidity shortage in economy. Post demonetisation, demands fell, businesses faced a crisis and gross domestic product (GDP) growth decreased to 1.5%.

What is Currency with Public?

According to Reserve Bank of India (RBI), currency with public is defined as “Total currency in circulation minus cash available with banks”.

What is Currency in Circulation?

It is defined as cash or currency available within a country for the purpose of conducting transactions between consumers and businesses.

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