Meaning/Definition: The Act of stripping a currency unit of its status as a legal tender. The old currency notes that are demonetised would be rendered without any value as such.
The act of Demonetisation is generally undertaken to change the national currency of any nation. The old currency notes will then be made convertible for a sufficient amount of time so as to ensure smooth transition from the old currency to the new currency regime. In some cases it is also done to curb the “Black” or the “Counterfeit” Money. Examples are:
1. European Monetary Union adopted the euro. The countries of the union then fixed the convertible rates to convert their currencies into Euro. Once the Euro was introduced other currencies were demonetised and were just made convertible into Euro, so as to ensure smooth currency transition.
2.Soviet Union under Mikhail Gorbachev demonetised the 50 and the 100 Ruble Bills in 1991 to curb the black economy. This however didn’t go as per the intentions of the Soviet Union.
3. North Korea: Kim Jong-Il in 2010 in an effort to tighten control of the economy and close black markets undertook the demonetisation exercise.
There are various other examples that would serve as cases to ponder for the people of India today due its recent Demonetisation exercise.
The Indian Case:
Demonetisation by Narendra Modi on Nov 8 ,2016 is not a new unleashing on the Indian economic front. Even in the past India has undertaken the demonetisation exercise. Be it in 1946, when the Rs.1000 and Rs.10,000 notes were demonetised or be it the demonetisation of Rs.1000, Rs.5,000 and Rs.10,000 by the Janata Coalition government in 1978, they were all undertaken with the intention of curbing the black money which is in the form of cash. However,it wasn’t that discussed during those times because the circulation of such high denomination notes was very less back then.
The recent demonetisation exercise of India is drawing widely varying opinions/reactions from all quarters. Looking purely from the efficacy angle of such measures in curbing the black money one would have to face various examples of failures from around the world. Also reports suggest that utmost 6 % of the total ill-gotten wealth is in the form of cash with people. Most of it is put in the form of jewellery ,bullion or Benami properties. So the question as to how effective or how far the demonetisation measure would be in curbing the black money menace is anybody’s guess and this is what is happening now in the country.
People seem to be divided on their opinions as to whether the measures would be helpful in the long run or not. More than that, the temporary hardships faced them like limitations on cash withdrawal, non-availability of cash in ATMs and long queues before them are being dealt with much criticism. There are sections who argue that such temporary hardships are not only temporary but also test the real levels of Nationalistic in the minds of the people. Other sections argue that the measure is regressive and is like “giving the medicine but killing the patient”.
However, it is too early to comment on the efficacy and the long term implications of such measures. This is because any economy is not a closed entity and the tilt of the world opinion especially the countries with which India has a stake(politically/economically) plays a major role in deciding what the long term implications of the measure would be.
The major pros and cons would be:
- Highly hit real estate sector because most of the transactions here are cash based. The prices would fall.
- Small time businesses would be badly hurt, especially the ones in the informal sector where majority of the transactions are in cash. This would consequently lead to reduction of investment, revenue and employment in the informal sector.
- Due to high vigil on spending and tax compliance, the investments coming to both the formal and the informal sectors would be reduced which would eventually lead to a reduced GDP. This however need not be a long term phenomenon .
- Basic sectors like agriculture, small and medium scale industries would be hurt because most of the purchases/activities/transactions related to them happen in cash. This may lead to unrest in sustained for too long. How the government deals with such a case is to be seen.
- Will curb the black money in the form of cash by rendering them useless.
- Will bring confidence in people’s minds that the country could do away with the age old tradition of looking at black money as something they need to live with accepting it as an inevitable part of their lives.
- May set examples for other countries facing similar black money problems.
- Funding to illegal and terrorist activities and other such deeds would be curbed.
What needs to be really done:
- The major source for the generation of black money is the presence of incentives to evade taxes and illicit activities. The tax regime of the nation should be such that people would want to comply rather than escape/evade it.
- The economy must move to a more Rule-Based System where in corrupt officials hitherto mending the rules to fit their needs cannot do so and people with such intentions are permanently discouraged. Rules must be stringent and prudent enough to ensure accountability and transparency in transactions and to see that all evil tendencies are nullified.
- Rule of Law: Indian Judicial system has many weaknesses and peoples’ trust in it is not that great. The reason for this has been the number of pending cases in the courts and also the fact that most of the people with black money find ways to escape the judicial claws using the various loopholes/interpretations available to the existing laws. The rule of law needs to be properly enforced by bringing uniformity in interpretation and imposing stringent punishments on the offenders.
CONCLUSION: Demonetisation is a good measure nevertheless but is like curing a patient after their contacting of the disease. The economy must be transparent and all the transactions must be put under strict vigil so that both economy and peoples’ confidence ( in the economy in particular and the on the governance in general) are improved.