Demonetisation

Currency note or coin which is legally accepted as a medium of exchange is known as a legal tender money. If the Central bank of a country or Central government of a country withdraws this legal support or legitimacy associated with the particular denomination currency note or coin then it is termed as demonetization. It has been done thrice in India, recently it took place on 8th November, 2016. However,the nature and  purpose of demonetization done in 2016 was different from earlier ones. The officially declared objectives of demonetization was to curb the black money, to curb corruption, to eliminate fake currency notes and to prevent terrorism financing.

However, out of 15.44 lakh crore rupees 15.28 lakh crore rupees came back to the RBI this doesn't means that all the money deposited in bank accounts was white money. Demonetization also encouraged cashless transaction ensuring that the Indian economy gradually move towards a less cash economy. When transactions are conducted in a cashless form it becomes easier to track the movement of money from one hand to another. The money lying at home or being hoarded does not contribute in economic activities. However, after demonetization the liquidity in the banking system increased making availability of loan cheaper and in long run this will enhance consumption and investment.

However, demonetization also had its own negative consequences. In India 86% of the total employment is in unorganized sector, it is mainly a cash driven sector. Sudden outflow of cash from the economy adversely affected this sector. It had immediate impact over the GDP of the country. It resulted in sudden increase burden over the banking system. A large section of the society is still not connected with the banking system which made it difficult for them to deposit the old currency note. The RBI failed to ensure availability of sufficient cash in the rural and interior parts leading to extreme decline in liquidity. It means that implementation of demonetization could have been more smooth. However, all these problems are temporary.