Demonetization: A Critical Evaluation

demonatisation analysis - Assam Exam

On November 8, 2016, Prime Minister Narendra Modi announced the 50-day long decision of demonetizing the Rs. 500 and Rs. 1000 notes in an attempt to curb black money, fake notes and to move toward cash-less or less-cash economy.

Demonetisation had a wide impact as it has affected the withdrawal of nearly 86% of the currency in circulation in India’s high currency using economy.  It has provided the invaluable service of giving mass awareness campaign against black money. Reduction of the informal economy was another achievement as cash transactions have to be made recorded.

It also helped to launch some related measures like Benami Transaction Prohibition Amendment Act, Aadhaar-PAN linkage, bank account opening, banning of high value physical transaction etc. Though a little bit of growth was sacrificed and a immediate damage to loss of the unorganized sector was occurred; it has helped to clean up the system.

The decision has become the talk of the nation in no time and the timing, motive and wisdom of the move became very much debatable. Irrespective of it’s success or failure, demonetisation have definitely leave a huge mark on the Indian economy and affects the Indian markets for in the recent times.


Intended Objectives

  • Curbing Black Money
  • Taking out fake currencies from circulation.
  • To get back the huge stock of currency in circulation
  • Promoting digital financial transactions
  • Reduce cash component in the economy
  • A check on funding to terrorist outfit, Naxalites and other disturbing elements of the society.
  • Few other ancillary and incidental objectives.

Actually achieved objectives

  • About 90% of old currency was deposited into the banks immediately after the demonatisation declaration. The government will directly earn a net profit of roughly 1.4 Lakh Crores.
  • The government now also has a track of money deposited by each individual into their respective bank accounts and thus, there can be substantial increase in the tax revenues earned by the government in the coming financial year as the people are expected to reveal an increased income to match their deposited amounts.
  • Huge amount of funds have been deposited into the bank. It means, these funds can be used at the discretion of banks to provide loans and credit facilities to business houses at cheaper rates.
  • The Income Tax Department is informed about suspicious deposition of huge amount money. It will be a huge source of revenue for the government and a huge blow to the black money hoarders.
  • Naxalites, terrorism activites slowed down. Hawala operations have taken a huge hit.
  • Demonetization has given a massive boost to the idea of cashless economy. More number of people have started making cashless transactions post demonetization.
  • Track of hitherto unaccounted cash
  • Stop illegal activities , at least for the time being
  • Increase Tax Revenue, lead to more govt expenditure cabapility


Negative effects of Demonetization

  • Most of the money has been deposited back into the banks which is a failure of the policy on it’ own.

  • Several cases of corruption from banking system came into light. It is believed that most of the big targets that were to be targeted might have exchanged the money by finding other means.
  • It is assumed that black money horded in cash is pretty low. Most of the black money has been converted into property, jewellery and other means. Therefore. Targeting only cash won’t suffice the main objective of fighting black money in any way.

  • The foreign as well as Indian Investors lacked faith in the Indian Market after demonetization. The Indian Stock markets saw a free fall, though temporary, after the event’s announcement.

  • Demonetization has largely affected the small scale industries and manual labour sector, which rely mostly on cash basis.
  • Due to huge cash crunch in the country due to limit on cash withdrawals, it has deeply impacted all the cash based businesses. The middle class businessmen are the most affected people.
  • Loss of man hours due to demonetization was immense since a lot of working days were skipped by many to deposit cash.

Demonetization was a good-willed move but collateral damages has been there and even now the GDP growth rate has plummeted to a record low. The good result of Demonetization will be felt gradually in near future.


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