Demonetisation in India

Demonetisation refers to the act of stripping a currency unit of its legal tender status. It usually occurs when the existing form of money is withdrawn from circulation and replaced by new notes or coins. In India, demonetisation was announced on 8 November 2016 by Prime Minister Narendra Modi, when all ₹500 and ₹1000 notes of the Mahatma Gandhi Series were declared invalid as legal tender. At the same time, new notes in denominations of ₹500 and ₹2000 were introduced. The public was allowed to deposit old notes in their bank accounts until 31 December 2016 without declaration, and further until 31 March 2017 with the RBI by making a declaration.

• To avoid a complete breakdown and cash crunch, the government permitted exchange of up to ₹4000 old currency per person per day with new notes. Until 12 December 2016, old notes were accepted as legal tender at petrol pumps, government hospitals and for payment of government dues like taxes and utility bills. The key objectives of this move were to tackle corruption, black money, terrorism financing and circulation of counterfeit notes, while also promoting the transition towards a cashless and digital economy.
• The decision received mixed reactions. On the one hand, it was appreciated as a bold measure against corruption and black money, while on the other, it was criticised for causing severe inconvenience to the public. Long queues formed outside banks and ATMs, and the shortage of currency in circulation created disruptions in daily trade, consumption and small businesses, adversely impacting the economy in the short run. However, as time passed, normalcy gradually returned.
• Demonetisation also had certain positive outcomes. It improved tax compliance by bringing a large number of people into the tax ambit. Savings of individuals were channelised into the formal banking system, enabling banks to access more resources and provide loans at lower interest rates. The move was seen as a demonstration of the State’s resolve to curb black money and ensure that tax evasion would no longer be tolerated. It also encouraged the growth of digital transactions, as households and firms began shifting from cash-based dealings to electronic payment systems.
• Despite these benefits, demonetisation faced criticism because over 99 percent of the demonetised currency eventually returned to the RBI, raising questions about its effectiveness in unearthing black money. Moreover, the cash shortage disproportionately affected the informal sector, rural economy and daily wage earners, while GDP growth slowed in the following quarters. Thus, demonetisation remains one of the most debated economic reforms in recent Indian history, with supporters viewing it as a strong step towards formalisation and critics pointing to its disruptive impact on the economy.