Demonetization is when the government of any country puts a ban on the usage of large currency notes such that they cannot be used for any transaction. It hit the nation unexpectedly, when Prime Minister Narendra Modi declared the ban of 500 and 1000 rupee notes in an address to India at 8 pm on 8 November, 2016. The ban came into effect immediately.
During demonetization, the old currency notes are replaced by new notes. This is generally done to put a stop on black money and printing of fake notes.
Need for Demonetization
Now the question arises, why would any country need to put a ban on currency notes?
When the collection black money and printing of fake notes reaches a high point, that’s when demonetization comes into play. With such practices, people start hoarding cash instead of keeping it in banks, so that they don’t have to pay taxes. They prefer doing all transactions in cash, and mostly use big currency notes. Demonetization is used to control corruption, black money, fake notes, inflation and terrorist activities.
Economists believe that some changes should be brought in currency notes every five years in order to be safe. However, banning the notes is itself a huge transformation. Prior to the demonetization in 2016, the number of fake notes had increased so much that there was about banks and ATMs giving them out. On further investigation, it was found that those fake notes resembled the real ones almost completely.
According to clause 26 (2) of the Reserve Bank of India Act 1934, on recommended from the central board of RBI, the central government can cancel any currency note as a legal tender after notifying in the Gazette of India. The ban is then effective from the given date in the notification.
Past Demonetizations in India
India has gone through demonetization twice, before the one in 2016. In 1946, the British government brought demonetization in India for the first time. The next one was in 1978.
In the demonetization of 1946, the British government had decided to ban the use of 500, 1000 and 10 thousand rupee notes.
In the 1970s, the Wanchoo Committee, associated with the inspection of direct tax suggested demonetization. But the suggestion went public and demonetization couldn’t be implemented.
In January 1978, Morarji Desai’s Janata Party government passed a bill in which the 1000, 5000 and 10 thousand rupee notes were banned. However, RBI governor, I. G. Patel had immediately gone against this demonetization.
In 2005, Manmohan Singh’s government had demonetized the ₹500 notes that were launched before 2005.
As we all know, the latest demonetization was in 2016, when the Modi government banned the use of 500 and 1000 rupee notes. In the Indian economy, 86% of the transactions were done with these notes, so they were the most common in the market.
Let’s look at some of the differences between the demonetizations of 1946, 1978 and 2016:
- The demonetizations of 1946 and 1978 had banned the high value currency notes, that is, the 5000, 1000 and 10,000 ones, while in 2016 the 500 and 1000 rupee notes were cancelled.
- It wasn’t compulsory to give a notification before the announcement, but in 1978, a prior notification was compulsory.
- In 1978, the use of banned currency notes was restricted and illegal, whereas in 2016 the decision was instructional. But later, the possession of more than a certain decided number of banned notes was made punishable.