Demonetization is Announced: [November 8, 2016] This Day in History

On 8 November 2016, Prime Minister Narendra Modi announced the demonetization program on live TV. Read more about demonetization and how it affected India for the IAS exam.

Facts about Demonetization

• The Government of India demonetized the Rs.500 and Rs.1000 notes last year. These currency notes, which were the largest denominations of currency in India then, were rendered worthless when the Prime Minister announced the move on TV in an unscheduled airing at 8:15 PM. These notes had accounted for 86% of the circulating cash in the economy.
• Demonetization refers to the act of stripping the value of a currency unit as legal tender in a country.
• The government gave time till 30 December 2016 for citizens to deposit the old notes in bank accounts. NRIs and others got an extension of this date on a case-by-case basis. Petrol/CNG and gas stations, government hospitals, ration shops, state-government recognised diaries and railway and airline booking counters would continue to accept the old notes until December 2.
• The immediate effect of the move was people scrambling to banks for depositing the old notes and also to ATMs for withdrawing cash. As expected with demonetization, there was a shortage of liquid cash for many days after. Even ATMs were running dry. The government had devised the upper limit of cash withdrawal initially at Rs.4000 per day and Rs.20000 per week.
• The purpose of demonetization was:
  • To curb the thriving underground economy in India.
  • To eliminate counterfeit currency.
  • To eradicate black money.
  • To fight money-laundering and terror-funding.
  • To deal with tax evasion.
  • To promote a cashless/digital economy.

Impact of the 2016 Demonetization

• Individuals and organisations which huge deposits of unaccounted money were forced to either dispose it or deposit it bank accounts. If they could not provide proof of paying tax on the money, a penalty of 200% was imposed on them.
• Small businesses and daily wage labourers reported suffering as cash was not available readily. In some cases, private hospitals refused treatment due to lack of cash with the incoming patients.
• Many people rushed to buy gold in a bid to convert black money. The government mandated furnishing PAN details in such cases for accountability. Many jewellers who violated the norms came under fire.
• There was a huge surge in alternate payment modes. Mobile wallet companies gained significantly. They reported manifold increase in traffic and a considerable increase in money added to their digital accounts. Prepaid cash card companies and other payment systems of e-commerce companies also saw a surge in usage.
• The real estate sector was hit because it is a sector known for cash dealings and black money.
• The number of IT returns for 2016-17 increased by 25% post demonetization. Tax collection by local bodies also jumped over 260%.
• Many people booked long-distance first-class railway tickets to get rid of unaccounted money. The railway board then made restrictions on the cancelling of tickets by cash. It also said that any transaction above Rs.50000 warranted the submission of a copy of the person’s PAN card. This reduced bookings.
• The Chhattisgarh Police said that demonetization had affected adversely the Naxalites as well.
• The reaction of the people was mixed. While some lauded the move as bold and with good intentions, some blasted the government for the sudden inconveniences caused to them. Prime Minister Modi said, “Government will not harass the honest, but will not allow the dishonest to go scot free.”
• The Income Tax and the Enforcement Directorate departments were involved in raids and tracked forex traders, jewellers and hawala operators to enforce a crackdown on the movement of the demonetized notes.
• The government issued new 500- and 2000-rupee notes. Out of the Rs.15.4 trillion demonetized in the form of 500 and 1000 rupee notes, Rs.9.2 trillion have been recirculated in the form of the new notes as of January 2017.
• Four years after the demonetization, debate continues as to whether the move was a brilliant or a devastating one. It is believed that any slowdown in the economy due to demonetization would be short-lived.

Also on This Day 

1831: Birth of Lord Lytton, Viceroy of India from 1876 to 1880. 1927: Birth of former deputy Prime Minister L K Advani. 1947: Princely state Junagadh acceded to India. 1965: The UK abolished the death penalty. 1966: Death of prominent social worker and winner of Lenin Peace Prize Rameshwari Nehru. 2016: Donald Trump elected the 45th President of the USA.

See previous ‘This Day in History’ here.

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