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The government under the prime ministership of Narendra Modi on November 8, 2016, had announced that the largest denominations of Rs 500 and Rs 1000 were demonetised with immediate effect ceasing to be a legal tender. Even though people suffered during demonetisation to get cash and exchange the bann.

The Legal Effects of Demonetisation | General Awareness & Knowledge - Bank Exams

What is Demonetisation?

Demonetisation means taking back of legal currency of the country. In India, demonetization take place three times. The recent demonetization took place on 8 November 2016. The main objective of demonetization is to reduce corruption, black money and fake currency. In 1946, as the world was just out of the jolt of the Second World War and India was at the peak of anti-colonial struggle, the British Raj conducted its version of demonetisation. This was the first instance of demonetisation in India.

  • November 8, 2016: A Distinctive Day for Indians
    • On this day, the world was grappling with Donald Trump's election as the 45th President of the United States, but in India, a different narrative unfolded.
    • Around 8:00 – 8:30 p.m. on November 7th, 2016, the government's sudden announcement of demonetization shook the nation.
    • The move targeted the elimination of high-denomination notes, specifically Rs. 500 and Rs. 1000.
  • Nationwide Impact
    • The announcement brought the entire nation to a standstill as local vendors and restaurants swiftly stopped accepting the invalidated notes within half an hour.
    • Social media platforms were flooded with posts and memes depicting the transformation of two powerful nations from "black to white" overnight.
  • Creative Responses and Satire
    • Internet users shared humorous content, suggesting alternative uses for the obsolete notes, such as using them for packing peanuts, as toilet paper, or even for making paper boats.
  • Positive Outlook on Demonetization
    • Despite initial disruptions, the move was seen as a positive step in combating widespread corruption.
    • The Rs. 500 and Rs. 1000 notes, constituting nearly 80% of black money, were a primary target, aiming to reduce the prevalence of tax evasion.
  • Eradication of Black Money
    • The elimination of these high-denomination notes was expected to reduce the hoarding of black money and consequently diminish the number of tax evaders in the country.

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The Legal Effects of Demonetisation | General Awareness & Knowledge - Bank Exams

Effect of Demonetisation 

  • Definition of Black Money in India:
    • Black money refers to unaccounted funds held by individuals in India to evade taxes. It is often kept hidden and not deposited in banks. It can also include money earned through illegal means such as bribes.
  • Impact of High Currency Notes Elimination:
    • The elimination of high currency notes renders black money held in cash worthless, prompting individuals to deposit it in banks to avoid losses.
    • This move aims to compel people to account for their black money, leading to increased tax payments and subsequently boosting the National Income of the country.
  • Rationale Behind Demonetization:
    • Eliminating high-value currency notes serves as a strategy to curb the illicit use of money, particularly in activities like terrorist funding and cross-border commerce.
  • Unexplored Negative Aspects of Demonetization:
    • While the positive impacts of demonetization are acknowledged, it is crucial to consider the negative consequences, both economically and legally.
  • Economic Consequences:
    • The elimination of high currency notes can have adverse economic effects, affecting individuals and businesses.

The Legal Effects of Demonetisation | General Awareness & Knowledge - Bank Exams

  • Legal Implications:
    • Demonetization may lead to legal challenges and complications that need to be addressed and considered alongside its positive outcomes.
  • Comprehensive Evaluation Required:
    • It is imperative to conduct a thorough assessment of both the positive and negative aspects of demonetization to understand its full impact on the economy and legal framework.

Question for The Legal Effects of Demonetisation
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What is the main objective of demonetization in India?
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How is demonetisation legally unsound?


  • Lack of Consideration for Diverse Issues:
    • The decision to ban high currency notes lacked thorough consideration of its impact.
    • Overlooked the consequences for the general public while targeting black money and terrorism support.
  • Urban vs. Remote Disparities:
    • City dwellers with electronic payment options can manage daily needs, but rural areas lack proper banking facilities.
    • Neglects citizens without bank accounts and local vendors, potentially leading to exploitation.
  • Implications on Justice System:
    • Difficulty hiring lawyers due to cash dependency, particularly affecting the economically disadvantaged.
    • Challenges in paying court fees, hindering litigation processes and leading to case delays.
  • Unfnded Withdrawal Restrictions:
    • Imposed restrictions on cash withdrawals without legal basis.
    • Banning 84% of the cash without adequate compensation measures, causing money scarcity.
    • Lack of government arrangements exacerbates the situation.
  • Infringement of Fundamental Rights:
    • Many occupations in India rely heavily on cash transactions, violating Article 19 (1) (g) and Article 21 of the Constitution.
    • Restrictions on cash usage impact livelihoods, especially for those dependent on non-banking systems.
  • Violation of Right to Property:
    • Demonetization infringes on the right to property by not providing alternatives for non-banking individuals.
    • Unreasonable restrictions on exchanging cash, particularly affecting the middle class and rural residents.
  • Reversal of Intended Benefits:
    • Supposedly aimed at benefiting the public, demonetization has caused significant suffering.
    • The cash crunch among the common population raises questions about the duration of the suffering.

Question for The Legal Effects of Demonetisation
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What is one of the reasons why demonetisation is legally unsound?
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FAQs on The Legal Effects of Demonetisation - General Awareness & Knowledge - Bank Exams

1. What is demonetisation?
Ans. Demonetisation is the act of stripping a currency unit of its status as legal tender, typically by a government. It involves replacing the existing currency notes with new ones, rendering the old notes worthless and no longer acceptable for transactions.
2. What are the effects of demonetisation?
Ans. The effects of demonetisation can vary depending on the specific circumstances and implementation. However, some common effects include a temporary disruption in the economy, a decrease in cash circulation, a push towards digital transactions, an opportunity to tackle black money and corruption, and potential hardships for individuals who heavily rely on cash transactions.
3. How is demonetisation legally unsound?
Ans. Demonetisation can be legally unsound if there are flaws in the process or if it violates constitutional rights. Some reasons why demonetisation may be considered legally unsound include inadequate notice period for the public, lack of proper legislative framework, violation of property rights, and disproportionate impact on vulnerable sections of society. These legal concerns can arise if the demonetisation process is not executed in a fair and reasonable manner.
4. What are the legal effects of demonetisation?
Ans. The legal effects of demonetisation can include the invalidation of the old currency notes as legal tender, the introduction of new currency notes, changes in monetary policies, the implementation of new regulations and procedures for cash transactions, and potential legal consequences for those found engaging in illegal activities such as money laundering or tax evasion.
5. What are some frequently asked questions (FAQs) about demonetisation?
Ans. Here are some frequently asked questions about demonetisation: 1. How long does demonetisation usually last? - The duration of demonetisation can vary depending on the specific circumstances and objectives. It can be a short-term measure or may last for several months. 2. Will I lose all my money during demonetisation? - No, during demonetisation, individuals are usually given a designated period to exchange their old currency notes for new ones. However, there may be limits and restrictions on the amount that can be exchanged. 3. Can I still use the old currency notes after demonetisation? - No, after demonetisation, the old currency notes are no longer considered legal tender and cannot be used for transactions. They can only be exchanged at designated banks or other authorized outlets. 4. How does demonetisation help in tackling black money? - Demonetisation aims to curb black money by invalidating the existing high-value currency notes. This forces those holding unaccounted cash to either disclose it or face the risk of losing its value. It also promotes the use of digital transactions, which leaves a clear trail and reduces the scope for unaccounted money. 5. What are the potential challenges faced by individuals and businesses during demonetisation? - Some potential challenges faced during demonetisation include limited availability of cash, long queues at banks and ATMs, difficulties in conducting cash-dependent transactions, and potential disruptions in the economy.
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