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The Indian economic system is subjected to be dynamic as per the policies
and regulation implemented by the Government. Such a change occurred
recently in our economic system was the Demonetisation of currency by our
Prime Minister NARENDRA MODI.

“Demonetisation is the process in which a particular currency or valuable

mineral is degraded as a legal tender. This happens when certain currency is no
longer in regular use within the country of origin or when a newer currency
comes into circulation.” The demonetisation of Rs.500 and Rs.1000 banknotes
of the Mahatma Gandhi Series as a form of legal tender in India from 9
November 2016. The announcement was made by the PM of India in an
unscheduled live televised address to the nation at 20:15 Indian Standard Time
(IST) the same day. In the announcement, PM declared use of all Rs.500 and
Rs.1000 banknotes of MGS as invalid from midnight of the same day and
announced the issuance of new Rs.500 and Rs.2000 banknotes of Mahatma
Gandhi New Series in exchange for the old banknotes. The bank note
denominations of Rs.100, Rs.20, Rs.10, Rs.5 of the Mahatma Gandhi Series
continued to remain as legal tender and were unaffected by the policy.

The demonetisation was done in an effort to stop counterfeiting of the
current banknotes allegedly used for funding terrorism as well as a crack down
on black money in the country. The move is also aimed at reducing corruption,
drug menace and smuggling. The demonetisation effort being led by PM MODI
in India is that idea that Rs.500 and Rs.1000 notes should be declared no longer
legal tender to be replaced by other notes of different designs and in one case,
denominations. The aim is to wash the stock of “black money” out of the
economy and get it into the licit, banked and taxable part of the economy. The
microeconomic effects have seemed as told before to be beneficial. There is
quite obviously substantial tax revenue going uncollected and perhaps the
biggest effect is as told that large portions of the population feel that the basic
system is unfair. They are locked out of that easier world where matters are
settled in large amounts of cash, where tax is not paid and where favours are
The generation’s one of the economic events of the time memorable
experience will be demonetisation. Its impact is felt by every Indian citizen.
Demonetisation affects the economy through the liquidity side. Nearly 86%of
currency value in circulation was withdrawn without replacing bulk of it. As a
result of withdrawal of Rs.500 and Rs.1000 notes, there occurred huge gap in
the currency composition as after Rs.100, Rs.2000 is the only denominations.
Absence of intermediate denominations like Rs.500 and Rs.1000 will reduce the
utility of Rs.2000. Effectively this will make Rs.2000 less useful as a
transaction currency though it can be a store value denomination.

Technically demonetisation is a liquidity shock; a sudden stop in terms of

currency availability. It creates a situation where lack of currencies jams
consumption, investments, production, employment etc. In this context, the
exercise may produce following short term/long term/, consumption/investment,
welfare/growth impacts on Indian economy. The intensity of demonetisation
effects clearly depends upon the duration of the liquidity shocks. Following are
the main impacts;

1. Demonetisation will act as a liquidity shock that disturbs economic

2. Liquidity crunch (short term effect): liquidity shock means people are not
able to get sufficient volume of popular denomination especially Rs.500.
3. Welfare loss for the currency using population
4. Consumption will be hit: consumption – production – employment –
growth – tax revenue.
5. Loss of growth momentum: India risks its position of being the fastest
growing largest economy reduced to consumption, wage, investment
etc. may reduce India’s GDP growth.
6. Impact on bank deposits and interest rate
7. Impact on black money
8. Impact on counterfeit/fake currency

Prime Minister NARENDRA MODI and his government are constantly
reviewing the situation after getting feedbacks on inconveniencies being faced
by the people. While outright rejecting rolling demonetisation back, the
government has announced a number of measures, taking into consideration the
requirements of various sections of society, including farmers who are readying
for the Rabi season, small borrowers, people who have wedding in their
families, railway passengers and the likes.

To end this The Government modified and relaxed 20 provisions regarding the

1. Transaction charges on debit cards: To facilitate the use of the debit card,
the public sector banks and some of the private sector banks have decided
to waive transaction charges (MDR) up to December 31.
2. E-WALLETS: RBI has decided to increase the monthly transaction limit
for individuals from Rs.10000 to Rs.20000.
3. RAILWAY PASSANGERS: Indian Railway has decided not to levy
service charges on purchase of reserved E-tickets up to December 31.
4. TELECOM: The Telecom Regulatory Authority of India (TRAI) has
decided to reduce the Unstructured Supplementary Service Data (USSD)
charges reduced to 0.50 per section for transactions relating to banking
and payments.
5. SMALL BORROWERS: Additional 60 day’s time for the repayment of
loan amount up to Rs. 1crore.
6. FARMERS: To allow farmers to purchase seeds with old Rs.500 notes.
Permitting them to draw up to Rs.25000 per week from their KYC
complaint accounts subject to the normal limits and conditioned apart
from the other facilities announced on November 17. NABARD has
made available Rs.21000 crore limit to the District Central Cooperative
Banks (DCCBs) through State Cooperative Banks for Rabi agricultural
7. PAN: The Income Tax Department has prescribed a list of transactions
for which quoting of Permanent Account Number (PAN) has been made
8. Rs.2000 FROM PETROL PUMBS: Select Public Sector Unit (PSU)
petrol pumps are dispensing Rs.2000 per person in cash against swiping
of debit cards.
9. EXCHANGE LIMITS: Initially, the exchange limit for Rs.500 and Rs.
1000 notes was capped at Rs.4000, and withdrawals were restricted to
Rs.2000 per card per day, and later to Rs.4000 per card per day. It was
further changed to Rs.2000 per person from November 18.
10. WEDDINGS: Families can withdraw Rs.2.5lakh for weddings from one
11. CENTRAL GOVERNMENT EMPLOYEES: Employees up to group C
will be allowed to draw salary advance up to Rs.10000 in cash. This will
be adjusted with their November salaries.
12. EXEMPTION DATES: Exemption date has been extended for the
acceptance and submission of annual life certificate for pensioners to
November 24 and January 15, 2017.
15. INDELIBLE INK: To prevent the conversion of black money the idea of
using indelible ink marks, like in elections, at the cash counters was
16. JAN DHAN ACCOUNT DEPOSIT LIMIT: The government set up a
limit up to Rs.50000 as deposit in to these accounts.
20. DEPOSITS ABOVE Rs.2.5lakh

Even though these implementation was meant as a help for the economic
activity by the government brought many Advantages and Disadvantages.


• All fake currency cleans at once

• Big attack on black money and corruption
• Promotion of using Plastic Money makes economy better
• Help to stop funding of terrorist
• Narrow the Gap of Rich and Poor with very little extend

• People are on roads for currency exchange

• Affect the tourist who have only old notes
• Common man will suffer to meet for his daily livelihood
• Problem of change with 2000 rupee note
• Banks are unable to handle the pressure of public and currency notes
are out of stock.

The Indian rupee (INR) is the official currency of the Republic of
India. The sudden move to demonetise Rs.500 and Rs.1000 currency
notes is not new. Rs. 1000 and higher denomination notes were first
demonetised in January 1946 and again in 1978. The highest
denomination note ever printed by the RBI was the Rs.10000 note in
1938 and again in 1954. But these notes were demonetised in January
1946 and again in January 1978, according to RBI data. Higher
denomination banknotes of Rs.1000, Rs.5000 and Rs.10000 were
reintroduced in 1954 and all of them were demonetised in January 1978.
However, this is the first time that Rs.2000 currency note is being

Demonetisation as a cleaning exercise may produce several good
things in the economy. At the same time, it creates unavoidable income
and welfare losses to the poor sections of the society who gets income
based on their daily work and those who doesn’t have the digital
transaction culture. Overall economic activities will be dampened in the
short term. But the un- measurable benefits of having more transparency
and reduced volume of black money activities can be pointed as long
term benefits.