Demonetisation is an economic term which is used to mean the 'scrapping' of old currency notes and stripping them off their status of legal tender, usually when a new currency note or currency is being introduced in the economy of the country. This is a standard practice followed by all major economies of the world for different reasons. For instance, when the 'Euro' was introduced as the common currency of the European Union, the participating countries had effectively followed a 'demonetization' drive of their respective currencies by fixing exchange rates for the old currency to the newly introduced Euro. Indian Rupee has been demonetized various times as well. The Rs. 10,000 notes were demonetized once in January 1946 and then again in January 1978. Recently, the Rs. 500 and Rs. 1000 notes were demonetized in a surprise move on November 8, 2016.
The recent scrapping of Indian 500 and 1000 rupee currency notes has sent the entire country in a whirlpool of confusion. The country may be happy about the initiative or upset with the move, but the word 'demonetisation' has recently become the trend. We bring to you the basic understanding of what the word means, when and how the demonetization of Indian Currency was brought into effect and why it is good or bad.
What is Demonetisation?
Demonetisation is an economic term which is used to mean the 'scrapping' of old currency notes and stripping off their status of legal tender. There are two basic elements to this definition. One is 'scrapping of old currency notes' and 'status of legal tender'. Before we explain the same, what you need to understand that a currency note or paper currency is essentially a promissory note or a legal document that simply suggests that the payee has 'promised' to pay that amount to the payer. The same is printed on every currency note as well. This is validated by the heads of the Central Banks of the nation and in case of India, by the Governor of Reserve Bank of India. This "status" of legal tender can be scrapped for a currency note, which means that the instrument seizes to be a "legal" mode of monetary transactions and in effect looses the value associated with that instrument. In other words, until and unless the old currency is legally exchanged at the designated centers, they are equivalent to nothing more than scraps of paper.
Demonetization of Indian Rs. 500 and Rs. 1000 Notes (When and How)
In a surprise move, the Indian Prime Minister, Shri Narendra Modi in his address to the nation on November 8, 2016 declared the demonetization of the Indian Rs. 500 and Rs. 1000 currency notes with effect midnight of November 8. This move sent the entire nation in a dizzy. The Hon'ble Prime Minister stated the decision as a step to counter terrorism which was being funded by counterfeit money as well as a decisive strike against the black money being hoarded by the citizens of the country. The decision scrapped the legal tender status of the high value currency notes of INR 500 and 1000 with immediate effect and introduced new Rs. 500 and Rs. 2000 notes. After the address, the Economic Affairs Secretary, Mr. Shaktikanta Das further explained the method and means by which the old currency notes would be exchanged for new notes. It was further assessed that people should not worry about their money as demonetisation does not mean that their money has no value. All it means is that it must be exchanged for the new notes.
As per the notification, barring some public utilities like petrol pumps, hospitals, railways and airports as well as cremation and burial grounds, the use of old 500 and 1000 rupee note was discontinued. All the banks were shut for one day to effectively carry out the exchange of old currency and the ATMs across the nation were closed for two days. The government also imposed a limit of withdrawals from ATMs to Rs. 2000 per card and from banks to Rs. 10,000 per account per day upto Rs. 20,000 withdrawals per week. The limits were later revised to Rs. 2500 ATM withdrawals per day and Rs. 24,000 bank withdrawals per account per week. The use of old currency notes were also extended for use at Delhi Metro recharge counters as well as payment of property taxes and electricity bills. The government intends to exchange the old currency notes by December 30, 2016. After the date, the exchange of the old currency notes would only be possible at designated counters of RBI after submitting a declaration form to the same effect.
The Aftermath of Demonetisation of Indian Currency
The move of the Modi Government received both praises and severe criticisms from every section of the society. The immediate effect of the announcement saw countrymen lining up at the ATMs to withdraw 100 rupee notes to tide over the impending cash crunch. As per figures provided by the RBI, the banned currency constituted 86 percent of the currency in circulation in the country at the time. The entire magnitude of replacing the money in itself is a mammoth task and the pinch was felt by everyone in the immediate aftermath. The banks and ATMs opened to long queues of citizens lined up to exchange, withdraw and deposit the old currency notes. Reports were received from various part of the country about chaos regarding decline in essential services. The government has released further measures and actions and continues to do so in order to make this as convenient to the common man as possible. The Income Tax Department and the Ministry of Finance has further clarified that since it had given affair chance to all to declare their income by September 30 under the voluntary disclosure schemes, no further concessions would be given to people depositing large amounts in their accounts and all such large transactions would attract Tax scrutiny and penalty as per the law. As the drive to exchange the old currency notes continue, measures are being put in place to make the transition as smooth as possible. However, it can be judged that the sheer quantum of the money that needs to be exchanged (given the population and the amonunt of notes already in circulation) makes this a logistical juggernaut and would continue to cause discomfort. The Government and RBI are constantly working towards making this as comfortable as possible. Some of the measures include increasing the limits of withdrawls and scrapping Toll on National Highways till November 18, midnight.