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Features of Demonetization

Last Updated : 15 Jan, 2024
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Demonetization is the act of removing a currency unit’s legal tender status. It happens whenever the national currency changes. The current form or forms of money are removed from circulation and retired, frequently to be replaced by new notes or coins. A country’s old currency is sometimes completely replaced by a new currency.

Features of Demonetization

  • Tax Administrative Measure: Demonetization is regarded as a tax administration measure. People who had cash on hand as a result of their declared income quickly deposited it in banks and exchanged it for new currency. Those who had unaccounted cash, on the other hand, had to come forward and declare it, as well as pay taxes and a penalty.
  • Tax Evasion Control Measure: Demonetization is also known as the government’s measure to curb tax evasion (avoiding tax illegally).
  • Channeling Savings into the Formal Financial System: Demonetization helps people channel their savings into the formal financial system. As a result, some of the new deposits can be used to launch new profitable schemes and offer lower-interest loans.
  • Creating a Less-Cash Economy: Demonetization aids in instilling in people a desire to channel more savings through the formal financial system, increasing the likelihood of a less-cash economy. As a result, despite the limitations (lack of cell phones, POS machines, Internet connectivity, etc.) of digitalizing transactions, it aids in the introduction of a formal economy.

Benefits of Demonetization

Fraudulent practices are being reduced

The greatest advantage of demonetization is the reduction of fraudulent acts in the country. People with black money would fear being prosecuted for these crimes while hoarding cash for exchange with banks because they would be unable to exchange black money with banks during the process. As a result, it is an excellent way to combat terrorism or other criminal offences involving counterfeit currency.

Advanced Investment System

With demonetization, the banking system will significantly improve. If the economy moves toward a cashless society, it will pave the way for better access to credit in the long run. The remaining white cash will be handled by the government. Banks and financial institutions can thus use the newly legalized money to make loans to deserving borrowers and help the banks generate interest.

Reduced Liability

Allowing demonetization can reduce the risks associated with dealing with liquid cash. All issued notes are a liability for the government, and those who choose to turn in their income will see their current notes lose value. As a result, Demonetization makes it much easier for the government to manage the country’s economy.

Tax Evasion has Decreased

If carried out successfully, the sudden severe movement can significantly reduce tax evasion. Tax evasion can provide a significant boost to the Indian economy. Increased taxation allows the government to implement public welfare measures.

GDP Growth

Higher tax collection allows for lower interest rates on bank loans; thus, reducing tax avoidance can bring clean money into the currency stream and increase the country’s disposable income.

Impact of Demonetization 

Money/Interest Rates The impact of demonetization on money and interest rates is such that it has reduced cash transactions in the country. For example, when demonetization occurred in India, Paytm and other online payment methods gained popularity. People began to use them in place of cash transactions. Because there was no money in the economy. Demonetization increased bank deposits in India because the government advised people to deposit their money in banks. It also resulted in more financial savings.
Private wealth Because the high denomination notes of Rs.500 and Rs.1000 were not returned, the impact of demonetization on people’s private wealth was negative. As a result, real estate prices have dropped dramatically.
Public sector wealth Demonetization had no effect on public sector wealth.
Digitization People’s use of digital transactions has increased. Due to a lack of currency in the economy, people began to use platforms such as RuPay, Paytm, and AEPS for transactions. People’s use of the internet and net banking increased as they used more of these platforms.
Real estate Prices fell as a result of a cash shortage in the market, which hampered property transactions.
Tax collection Following demonetization, income tax collection increased. People who had cash on them were required to deposit it with the bank. When this money was deposited in a bank, the government had the opportunity to tax it. As a result, tax collection increased.

FAQs on Demonetization

Question 1: Was demonetization useful?


Since demonetization, digital transactions have increased by 50-55%. Increased digital transactions require the RBI to print fewer notes, saving the government money on printing costs. In addition to demonetization, the introduction of the BHIM and UPI Apps has boosted digital transactions.

Question 2: What is the impact of demonetization in India?


Yes, demonetization not only reduced corruption, but it also altered the way we Indians lived before it. The only people who opposed demonetization were those who benefited from black money. Where the poor had faith in the BJP-led government, they knew their suffering and hard work would not be in vain.

Question 3: What are demonetization effects??


Because of demonetization, the market has less liquidity and cash flow, causing inflation to fall. As black money exits the system, the money supply will contract to some extent. In the absence of any open market interventions by the Reserve Bank of India, this will lower the inflation rate.

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