Features of Demonetisation

Table of Contents

Feature 1: Withdrawal of high-value currency notes

The demonetization process typically involves withdrawing high-value currency notes from circulation in a sudden manner, which renders them unusable. About 86% of Indian currency by value was invalidated in 2016 when the government demonetized the 500 and 1,000 rupee notes.

Key points:

Currency notes of high value are being withdrawn from circulation.
In India’s 2016 demonetization, 500 and 1,000 rupee notes were canceled.

Feature 2: Introduction of new currency notes

In India after demonetization, new 500 and 2,000 rupee notes were introduced to replace the old ones. The new notes typically have enhanced security features to discourage counterfeiting.

Key points:

Introduction of new currency notes to replace the old ones.
Enhanced security features on the new notes.
Example: In India, new 500 and 2,000 rupee notes were introduced after demonetization.

Feature 3: Reduction of black money circulation

As a result of demonetization, black money, which is undisclosed income and wealth that is not accounted for, is being curtailed. In order to promote transparency and accountability, the government invalidates high-value currency notes so that individuals holding black money deposit it in banks or face significant losses.

Key points:

Curbing the circulation of black money.
Encouraging individuals to deposit undisclosed income in banks.
Example: Demonetization aims to reduce the use of unaccounted wealth in the economy.

Feature 4: Promoting digital transactions

Demonetization often leads to an increase in the use of digital payment methods as people seek alternatives to cash. In India, for example, mobile wallets, internet banking, and payment apps experienced a significant surge during the demonetization process. This move towards digital transactions aims to create a more transparent and efficient economy.

Key points:

Encouraging the adoption of digital payment methods.
Creating a more efficient and transparent economy.
Example: Demonetization promotes the use of mobile wallets and payment apps.

Feature 5: Impact on informal sector and cash-based businesses

During demonetization, informal sectors and cash-dependent businesses, such as small vendors and daily wage laborers, often face significant disruptions. As cash liquidity becomes scarce, street vendors and small store owners may experience a temporary decline in business.

For instance, during India’s demonetization, street vendors and shop owners experienced difficulties because of the lack of valid currency.

Key points:

Disruptions in the informal sector and cash-based businesses.
Temporary decline in business for cash-dependent enterprises.
Example: Demonetization affected street vendors and small shop owners.

Feature 6: Short-term economic slowdown

As a result of reduced consumer spending and disruptions to business activities, demonetization can adversely affect the economy in the short run. India experienced a decline in GDP growth rate in 2016 after demonetization. A significant withdrawal of currency can lead to a decrease in demand and slow down economic growth temporarily.

Key points:

Short-term economic slowdown.
Reduced consumer spending and business disruptions.
Example: Demonetization led to a decline in India’s GDP growth rate.

Feature 7: Cashless infrastructure development

After demonetization, governments often develop robust cashless infrastructure in order to support the increased demand for digital transactions. This includes expanding the network of ATMs, promoting the use of digital payment systems, and enhancing financial inclusion. Following demonetization, India made significant efforts to improve its digital payment infrastructure.

Key points:

Development of robust cashless infrastructure.
Expansion of ATM network and digital payment systems.
Enhancing financial inclusion.
Example: Post-demonetization, India focused on improving digital payment infrastructure.

Feature 8: Increased tax compliance

Tax compliance and formalization are the objectives of demonetization. As a result of encouraging cash deposits and digital transactions, authorities can track and trace financial activities better, reducing tax evasion. Several countries have accompanied demonetization with stricter tax enforcement measures. This results in a broadening of the tax base.

Key points:

Promotion of tax compliance and formalization of the economy.
Easier tracking of financial activities.
Broadening of the tax base.
Example: Demonetization encourages individuals and businesses to comply with tax regulations.

Feature 9: Impact on Corruption and illicit activities

Through demonetization, illicit activities such as corruption, money laundering, and financing of illegal activities are disrupted and deterred. When high-value currency notes are invalidated, it becomes harder to carry out large-scale transactions involving illicit funds, which helps combat corruption and promote transparency.

For example, demonetization efforts have been driven by tackling corruption in various countries.

Key points:

Disruption of illicit activities.
Combating corruption and money laundering.
Deterrence of large-scale transactions involving illicit funds.
Example: Demonetization aims to address corruption and illicit financial activities.

Feature 10: Social and political implications

Among the general population, demonetization can cause a lot of inconvenience and disruption, which can affect their daily lives as well as their economic activities. Public opinion and political outcomes can be affected by the success or failure of demonetization measures, as in India, where demonetization caused both positive and negative reactions, leading to debates and discussions.

Key points:

Social and political implications.
Inconvenience and disruption for the general population.
Impact on public opinion and political outcomes.
Example: Demonetization in India generated debates and had mixed public responses.

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Smirti

(Founder of Management Notes)
MBA,BBA.

I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.

I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,

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Features of Demonetisation – 10 Major Features Explained in Detail | Financial Management