Demonetisation is referred to as the process of stripping a currency unit of its status to be used as a legal tender. In simple words, demonetisation is the process by which the demonetised notes cease to be accepted as legal currency for any kind of transaction.
After demonetisation is done, the old currency is replaced by a new currency, which may be of the same denomination or may be of a higher denomination.
The impact of changing the legal tender status of a currency unit has a huge impact on the economic transactions that take place in an economy.
Demonetisation can cause unrest in an economy or it can help in stabilizing the economy from existing problems. Demonetisation is usually taken by a country for various reasons.
Demonetisation in India
Demonetisation in India has taken place three times till now, namely in the years of 1946, 1978 and 2016. Let us have a look at all the three events.
The first demonetisation event happened in 1946, at that time the denominations of Rs.1000 and Rs.10000 were removed from circulation.
There was a visibly low impact of the demonetisation as the higher denomination currencies were not available to the common people.
In 1954, these notes were again introduced with an additional denomination of 5000.
Demonetisation in 1978
The second demonetisation in India took place in 1978, at that time the Prime Minister was Morarji Desai. During the second demonetisation the denominations of 1000, 5000 and 10000 were taken out of circulation.
The whole purpose of demonetisation was to reduce the circulation of black money in the country. The announcement was made by Morarji Desai over the radio.
Demonetisation in 2016
The latest demonetisation was announced on 8th of November, 2016 by the Prime Minister Narendra Modi.
During this demonetisation the notes that were taken out of circulation were the denominations of 500 and 1000.
PM Modi also introduced new currency of denominations 500 and 2000 after demonetisation.
Objectives of Demonetisation
The objectives of demonetisation are as follows:
- To stop the circulation of black money in the market.
- To help in reducing the interest rates of the prevalent banking system
- To help in creation of cashless economy
- To formalise the informal Indian Economy.
- To remove counterfeit notes from the market.
- To help reduce anti-social activities and their finances.
This concludes the concept of demonetisation which helps in stabilising the economy and curb the spread of black money in the market. To read about more such interesting concepts on Economics for Commerce, stay tuned to BYJU’S.