BANKING SEMINAR

 
What Is Demonetization?
 
Demonetization is the act of stripping a currency unit of its status as legal tender. It
occurs whenever there is a change in national currency . The current form is pulled from
circulation and retired, often to be replaced with new notes or coins. Sometimes, a country
completely replaces the old currency with a new currency. In an attempt to rid India's
economy of black money and corruption, prime minister Narendra Modi announce
demonetization on 8th November 2016
 
Definition of demonetization?
 
Demonetization, in layman’s terms, is the eviction of a particular currency/tender
present in the economy from circulation and thus replacing the same with a new
currency which may aim for several outcomes like the corruption-free economy, black
money removal, controlling inflation, stopping funding of illegal activity, etc.
What is the background of demonetization in India ?
Demonetization is not a new concept and has been carried out several times in the past
by different countries. Most recently, Zimbabwe demonetized its currency in 2015. India
demonetized its currency twice before – first in 1946 and then in 1978.

The background of demonetization in India can be traced back to the announcement made
by the Prime Minister of India, Narendra Modi, on 8th November 2016. The announcement
was made with an intention to tackle the issues of black money, corruption and fake
currency notes in India

Initially, the government had proposed to scrap the old 500 and 1000 rupee notes and
replace them with new 500 and 2000 rupee notes. However, later on, the government
decided to scrap the old 500 and 1000 rupee notes completely and introduce new 500 and
2000 rupee notes. The decision was taken after careful consideration and consultations
with various experts.

The move was Criticized by many, who termed it as a “draconian” measure. They argued
that the move would not be able to achieve its desired objectives and would instead lead to
immense hardship for the common man. However, the government defended the move,
stating that it was necessary to tackle the menace of black money.
The move led to the withdrawal of around 86% of the total currency in circulation. This led
to a significant shortage of cash in the economy and immense hardship for the common
 
Demonetization in 1946
The first demonetization event happened in 1946, at that time the denominations of
Rs.1000 and Rs.10000 were removed from circulation.
There was a visibly low impact of the demonetization as the higher denomination
currencies were not available to the common people.
In 1954, these notes were again introduced with an additional denomination of 5000.

Demonetization in 1978
The second demonetization in India took place in 1978, at that time the Prime Minister
was Morarji Desai. During the second demonetization the denominations of 1000, 5000
and 10000 were taken out of circulation.
The whole purpose of demonetization was to reduce the circulation of black money in
the country. The announcement was made by Morarji Desai over the radio.