Class 12 Business Studies Demonetization : Concept and Benefits

Class 12 Business Studies Demonetization : Concept and Benefits

On November 8, 2016, the central Government made an announcement on demonetization or Note Ban of the currency notes of Rs. 500 and Rs. 1,000 with immediate effect. Further, the government gave people a period of 2 months to deposit all currency notes of the said denomination with any bank.  80% of the currency in circulation was found invalid. Demonetization was a major economic event of the year 2016.It led to a deep impact on all sections of the society including industrialists, traders and households. Now, the topic is also added to the curriculum of CBSE Class 12 BST. So keeping in mind its importance for students of BST Class 12, here in this article we will discuss –

1. What is Demonetization / Note Ban?
2. Why Demonetization?
3. Benefits and impact of Demonetization.
4. India’s Demonetization (Notebandi)

What is Demonetization?

Demonetisation or we can say Note ban or Notebandiis a withdrawal of the status of the legal tender to the currency. In simple words, when the Government demonetized the currency,  will no longer valid as legal currency, it become only a printed piece of paper. Thus, it no longer accepted as medium of exchange. Its purchasing power reduced to Zero. Eventually, a new currency replaces the old currency unit/s.

This is not the first instance of demonetization in India. In 1946, the RBI had demonetized Rs. 1,000 and Rs. 10,000 currency notes which were then under circulation. In 1954, the Central Government introduced new currency notes of Rs. 1,000, Rs. 5,000, and Rs. 10,000. Later, these notes were demonetized in 1978 when the Moraji Desai Government decided to restrict illegal transactions and anti-social activities.

November 8, 2016 was the dooms day for the holders of unaccounted cash. Demonetization of Rs 500 & Rs 1000 led to a massive loss of liquidity in the economy.

As per Reserve Bank of India report, demonetizaticed currency valued at Rs 15.4 trillion. It amounted to 86.9 % of the value of total currency in circulation.

Now, the question arises that –

Why Demonetization (Notbandi);

What is need of Note Ban, Why did the Central Government demonetize 500 and 1000 notes in 2016?

Following were the reasons or outcome ofIndia’s demonetization (Notebandi) for which Government demonetized 500 and 1000 notes:

1. Elimination of terror funding – it is largely in high value notes that the terrorists s receive funds from the hidden resources. It will plug financing to terrorists.
2. Elimination of Black money – It will help unearth black money. Black money is the household name in India. It refers to unaccounted money. Demonetization people were forced to declare their unaccounted cash balances.
3. The unearthed black money will also broaden the fiscal space of the government.
4. It will help reduce money laundering.Demonetization was expected to promote digital transactions or e-transactions in the economy. It will help formalize India’s informal economy, reduce the extent of cash transactions, and help in the creation of a less-cash economy. Even the government offered several incentives to induce people to use digital transactions too.
5. Developed economies are cashless economies, and almost free from corruption.
6. Rise in Government revenue by converting black money to white through paying taxes and penalties to the government.

Benefits of Demonetization (Notebandi)

• Full stop to the corrupt practices – one of the biggest benefit of demonetization is to stop mal practices done in the market through which black money circulated in the market.
• Increased Savings – People start saving in bank. When currency is demonetized, people likely to deposit their cash with a bank and store less money at home. This helps to improve their habit to save more.
• Lower lending rates – With effect of demonetization, money moves from people to banks and financial institutions. Resultant a better circulation of money. Moreover, banks and financial institutions have a lower cost of funds which translates into lower lending rates.
• Better economy – there is a higher circulation of money in the economy from the day demonetization induces.As people deposit their cash with the banks. The government receives more taxes and penalties and can undertake more development projects. Ultimately, this leads to a better-performing economy.
• Restrict anti-social activities – Eventually, anti-social elements like terrorists or smugglers use cash as a mode of transaction. When the government decided to demonetize 500 and 1000 rupees notes, they were the highest denomination notes in circulation. By demonetizing them, the government compelled these anti-social units to find ways to get rid of the old notes. This allowed the government an opportunity to get a better control over the unaccounted money in the economy and restrict anti-social activities. With this move, this will not happen at least for a decade or so.
• Decreasing counterfeit currency notes – During demonetization, people deposit all old notes with banks that check if the notes are genuine or counterfeit before accepting them. Therefore, this grants the government to weed out counterfeit notes circulating in the market.
• Increase GDP level–reduced tax avoidance can lead to a better flow of currency in the market. In the longer run, tax and interest rate expected to come down as higher income tax collection can offer a better scope to reduce rate of interest on loans. This, consecutively, will hike up the disposable income of the economy. When more or more people enjoy disposable income, the gross domestic product GDP levels of the economy can improve. Better purchasing power among people can leave a positive impact on the consumption demand, in the longer run.

This was the first surgical strike (psychological strike) done by Prime Minister Narendra Modi.There was a lot of propaganda on how this is a ‘surgical strike’ happen. Even political parties wanted to go for strike. People face few problems to deal with Demonetization/Note ban but later or sooner find this step is for their better future and better economy. So, in a nutshell we can say while the move maybe a bold move but it proves very beneficialfor citizens and the economy of the country as well.

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