8th of November of 2016 witnessed a momentous event in the resurgent
Indian economy. Prime Minister Shree Narendra Modi announced in a press
conference at 8 o’clock in the evening that all Rs 500 and 1000 currency notes
would be considered demonetised post midnight of the same day. New Rs 500 and
2000 notes would be introduced in their place. Leading financial news platform
Investopedia defines Demonetisation as the act of stripping a currency unit of
its status as legal tender.
Demonetisation is generally done when there is a alteration in the National
currency. The current form or forms of money is pulled from circulation
and retired, often to be replaced with new notes or coins. This was a huge decision considering nearly 86% of all
the money in circulation in the form of currency notes consisted of Rs 500 and
politicians and people in general were shocked by the news. India had witnessed
Demonetisation in the past too ( as in 1946 in a hope to penalise Indian
businesses that were concealing the fortunes amassed supplying the Allies in
the WWII. The other time the nation witnessed such an event was in 1978 when
the Janata Party government demonetised notes of Rs 1000, 5000 and 10000 ) but the Modi
government decision was completely unprecedented given the known fact that it
would jeopardise the phenomenal rate with which Indian economy was growing.
justified the decision by saying that the move was aimed to curb the widespread
funding of terrorism by pushing all the counterfeit notes that were in
circulation, out of the economy. One more reason was to try and eradicate black
money. The government reported that the number of Rs 500 notes in circulation
had increased by 76% between 2011 and 2016 and Rs 1000 notes had jumped up by
109% all owing to forgery. The Economic Affairs secretary and the Governer of
the Reserve Bank later in the press conference explained in detail the various
aspects of the decision, adding that the decision to demonetise was made about
6 months prior to the announcement. The government also imposed a fine of Rs 10000
or five times the amount of money , whichever was more if anyone was found
transacting with the demonetised notes after November 8.
countries have tried Demonetisation in history with USA being the first one to
demonetise currency, deeming silver coins of two-cent piece, three-cent
piece, and half dime invalid
by The Coinage Act of 1873 but as it led to a five year long depression in the
country, The Allison Act remonetised silver coins in 1978.
The European Union also
demonetised the German Marc, the French Franc and the Italian Lira while
switching to a continent wide uniform currency, the Euro in 2002.
government in 2015 demonetised its dollar in an attempt to stabilize the
economy as the country was hit by severe hyperinflation. The inflation rate was
recorded to be 231000000% in the year. Zimbabwe endure the three month long
process in order to bring this into control.
In India, the move
received mixed reactions. Various leading economists and experts hailed the
move as an effective tool against terrorism and black money. People including
Arundhati Bhattacharya (Chairperson of State Bank of India ), Chanda Kochhar (
MD & CEO of ICICI bank ), Anand Mahindra, Sajjan Jindal and Kunal Bahl also
supported the move. Finance minister Arun Jaitley said that demonetisation
would completely clean the economic system and paired with the Goods &
Services Tax would change the lifestyle and spending habits of the masses of
the nation. Public figures including Nitish Kumar, Anna Hazare, former
President of India Pranab Mukherjee and S Y Quaraeshi praised the move. Prime
critics included the Indian National Congress, Nobel laureate economist Amartya
Sen and Cheif Economist of World Bank, Kaushik Basu.
up a nation wide debate whether the decision was good or bad with several
people in favour and against the argument.
The problems but, which have been discussed in detail
later, lay in execution of the decision. The nation was hit by severe cash
crisis in the days that followed with the state machinery failing to cope with
the pressure. Read on to find out more.