6 years since demonetization, cash still reigns: acceptance of currency has risen by over 70% vs Nov 2016

The shocking announcement of the Indian government's demonetisation programme came from Prime Minister Narendra Modi on November 8, 2016 in India.

The demonetization of the Rs. 500 and Rs. 1,000 notes was announced by Prime Minister Narendra Modi. The government also permitted depositors two months to place demonetized notes in any bank.

As of October 21, 2022, the amount of currency in circulation had increased to a record high of Rs 30.88 lakh crore, demonstrating that cash usage The money held by the general population is now Rs 30.88 lakh crore, which is 71.84 percent more than the level for the fortnight ended November 4, 2016. With the ultimate goal of decreasing corruption and illicit money in the economy, Prime Minister Narendra Modi announced the plan to abolish Rs. 500 and Rs. 1,000 denomination notes on November 8, 2016.

The move was intended to make India a "less cash" economy, while many experts criticised it for having been poorly planned and carried out. According to the RBI's fortnightly report on money supply, which was announced on Friday, the amount of money in circulation reached Rs 30.88 lakh crore on October 21, 2022. On November 4, 2016, the money in circulation was valued at Rs 17.7 lakh crore, according to Reserve Money data from the central bank.

2016 is not the first instance of demonetization in India. In fact, demonetization happened in India even before 2016.

The Reserve Bank of India demonetized the circulation-level Rs. 1,000 and Rs. 10,000 notes in 1946.

New 1,000, 5,000, and 10,000 rupee notes of money were introduced by the government in 1954.

In order to stop unlawful transactions and anti-social behaviour, the Moraji Desai Government demonetized the Rs. 1,000, Rs. 5,000, and Rs. 10,000 notes in 1978.

Goals of Demonitization in 2016

On November 8, 2016, the Indian government decided to end the legal tender status of the Rs. 1000 and Rs. 500 denomination currency notes in order to achieve a number of goals, including (i) flushing out black money, (ii) eliminate Fake Indian Currency Notes (FICN), (iii) to strike at the root of financing of terrorism and left wing extremism, (iv) to convert non-formal economy into a formal economy to expand tax base and employment and (v) to give a big boost to digitalization of payments to make India a less cash economy.

Some potential advantages of demonetization:

The primary purpose of the cap was to ensure that owners of black money would be unable to exchange all of their unaccounted funds without first paying the required taxes (under PM Krishi Kalyan Yojana announced later). Even if we categorise 30% of currency in circulation as black money and even if 50% of it does not return to banks, the government anticipates receiving a fiscal boost of about 2 lakh crores that may be applied to a variety of social projects over time.

The benefits of switching to electronic payment methods are strong. Governments can easily tax people and businesses and trace unlawful transactions like money laundering, the financing of terrorism, crime, and drug smuggling with the help of electronic payments and transfers.

Despite the risk of cybercrime, using electronic means of payment increases transaction security. Carrying a lot of cash puts you at risk, encourages corruption, and makes the government less effective.

Evident Advantages of De-monitization

According to a Bloomberg report, India discovered more than a billion dollars' worth of illicit currency holdings after demonetizing more than 2,00,000 shell businesses.

The greatest way to address the NPA situation is to use the massive deposits that banks have received. Banks would be eager to lend this money out by providing cheap interest rates, which would eventually increase GDP and economic activity.

Obtaining funding from banks will allow for the completion of several infrastructure projects that have stalled owing to a lack of funding. The rise in tax revenue will be enormous (already evident). may raise India's position in numerous indices, including the "Ease of Doing Business Index"

 

Disadvantages of De-monitization

Demonetization will temporarily slow the economy. Even a 1% decline in GDP will be more than the benefits that the government receives from eliminating undeclared money from the economy. The rural poor have been severely impacted by the cash constraint, particularly when farmers were seeking to sell their goods.

Delaying the GST bill offers the government more time to draught the finest GST law, which is a blessing in disguise. However, a postponement could disappoint investors, which would further harm an already struggling economy.

 

Disadvantage due to poor implementation:

 

The failure to implement the decision is evidenced by recent IT raids and the large amounts of unaccounted money that were discovered there in new currencies. By not making the new currency available to the average person who is the engine of the economy, the majority of bank employees are entangled with high net worth persons in money exchange, making it challenging to achieve the goal and causing a cash constraint in the economy.

If not used properly, the fiscal pressure that the government is anticipated to get could result in financial indiscipline.

                                     

Summary

In spite of newer and better digital payment options growing more and more popular after demonetization and the COVID-19 pandemic, which prioritised contactless (digital) transactions, cash usage has been continuously increasing in the Indian economy.

Demonetization is undoubtedly a brave and positive move to combat black money. However, failing to do so could have a negative impact on the economy and undermine public confidence in the government and even the Reserve Bank. Government should therefore take all necessary and beneficial steps to ensure its success. Numerous people experienced immediate problems as a result of its implementation, but today faster, more inclusive, and long-lasting economic growth is on the horizon.