JAM Topic – DEMONETIZATION

DEMONETIZATION

• Demonetization is the act of stripping (clearing) a currency unit of its status as legal tender. It occurs whenever there is a change of national currency (The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins).
• On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹2000 notes of the Mahatma Gandhi Series. And announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.

• The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. This was the 3^rd time of demonetization earlier it had done in 1946 and then in 1978 by Indian government to eradicate illegal activities in the country

• The biggest advantage of demonetization is that it helps the government to track people who are having large sums of unaccounted cash or cash on which no income tax has been paid because many people who earn black money keep that money as cash in their houses or in some secret place which is very difficult to find and when demonetization happens all that cash is of no value and such people have two options one is to deposit the money in bank accounts and pay taxes on such amount and second option is to let the value of that cash reduced to zero.

• Since black money is used for illegal activities like terrorism funding, gambling, money laundering and also inflating the price of major assets classes like real estate, gold and due to demonetization all such activities will get reduced for some time.

• Another benefit is that due to people disclosing their income by depositing money in their bank accounts government gets a good amount of tax revenue which can be used by the government.