Demonetization Meaning Examples Effects Of Demonetization

Demonetization Meaning

Examples of Demonetization

Example #1

The U.S. demonetized all notes above $100 on July 14, 1969, which positively affected the economy. It was primarily aimed at eradicating the black money present in the system, and all highly acclaimed the move. However, this decision can sometimes be also linked to the evolution of the U.S. Banking system.

Example #2

Considering the recent demonetization in India, the country’s central bank or reserve bank of India stated that though it was announced where tenders of 500 and 1000 were declared as banned and were asked to get it exchanged by new tenders, it was not as beneficial as almost all the old tenders were deposited or either exchanged with the new tenders. Therefore, the estimated figure is 99%, or around $238.7 billion.

It meant that corrupt individuals and people in business who held the illicit wealth managed to safeguard it. The only positive impact of the decision was the investigation of close to 1.8 million bank accounts involving a sudden huge volume of transactions and numerous individuals who were questioned to identify and tax the black money.

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Effects of Demonetization

This policy aims to make the country corruption-free. The individuals who are used to taking bribes to limit their activity as they are scared to justify the unaccounted cash and can easily come under the limelight of taxation authorities.It helps the country’s government track the source of black money. In addition, it will help them to tax the person for unaccounted income. In India, for example, PAN (Permanent Account Number) is mandatory for any high-value deposits made. Thus, this income tax authority can easily get hold of a person exchanging or depositing a lot of cash during demonetization.This policy also stops funding illegal activities like terrorism, human trafficking, money launderingMoney LaunderingMoney laundering is a criminal act of legitimizing the money acquired through illegal or unethical means by disguising the origin of the crime.read more, etc. These illegal activities survive on unaccounted money, and bringing about such radical monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more will halt them.The maximum positive effect of demonetization can be seen in the stoppage of the circulation of fake currencies. Most of the fake currencies usually exist in the form of high-value tenders, and this takes the biggest hit.It also brings about a habit of going cashless and adopting digital forms of payment which are very demanding these days.Banks offer lower lending rates because the money flows from public hands to banks. As a result, they are better positioned to manage the liquidity, which means lower cost of funds and thus lower lending rates.It also brings about savings as people tend to deposit the money in their bank account rather than keeping it in physical form.

Disadvantages

Abolishing old currency notes and replacing them with newer ones increased printing costs. It is generally borne by the government of a particular country or economy.Demonetization is more directed to the removal of black money in circulation. Thus, people holding the same in other forms of assets like gold, real estate, land, etc., are generally not victims of this policy and get away with it.The initial chaos that it creates is massive. The entire nation has to reach the bank, which is limited in number to handle the population, thus resulting in long queues, wastage of productive hours, and temporary losses to small businesses.Many people have to suffer from issues like non-payment of wages or timely payment because even companies struggle to manage their daily required cash for operations.At times, the overall economy may face cash crunch or liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more problems because people speculate that there may be no cash in the market and thus start holding it back with themselves.Spending power comes down during such phases, and people tend to spend less, and businesses suffer losses.The cashless facility may not always work since not all vendors are equipped with the right technology and infrastructure, thus creating many problems even in buying simple consumables.It slows down the economy as black money plays a big role in inflating GDP.

Important Points

The main result is measured by how the common person or the general people look at it and adapt to it. It is generally seen that governments or leaders from all over the world who have tried demonetization failed to see their big dream concretely. In a process to punish the part of the society involved in illegal activities, the government ended up causing trouble or inconveniences to people who were compliant thoroughly.Saying so also doesn’t mean there were no positive impacts. A similar scenario was observed with the recent demonetization India faced. The basic purpose was never fulfilled since 99% of the banned tenders were again flushed into the system, and only the common people had to suffer.Terrorist activities have come down drastically. The country has taxed several unaccounted cash holders and audited numerous bank accounts, which ultimately ended up for the boon of the country. It is up to the people to understand this trade-off positively or vice versa.When people consider the short-term benefit of such policies, they are really in scarcity, but on the contrary, when one analyzes the long-term impact, they are in plenty. Generally, industrial sectors like FMCGFMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more, real estate, constructions, etc., which are greatly dependent on cash, initially take the hit. Still, parallelly, increased government spending and enhanced financial inclusion will boost the economy over a prolonged time.

Conclusion

Demonetization is a very radical and positive step that a government takes to better the economy/country. However, it should also be implemented properly and planned to avoid hassles to the common public and serious harm to the economy.