|Table of contents|
|The economic and social impact of demonetisation- positive and negative.|
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Demonetisation is the act of stripping a currency unit of its status as legal tender. On November 8, 2016 the government announced a historic measure to demonetize the two largest denomination notes Rs. 500 and Rs. 1000, which constitute 86% of the total cash in circulation. Four goals were pursued by the action: to reduce corruption, fraud, the use of large denomination notes for terrorist actions, and most importantly, the buildup of "black money," which is income that has not been reported to the tax authorities and is used for illegal activities.
To fulfill the vision, the government announced that notes of Rs. 500 and Rs. 1000 were to be deposited in the banks by December 30, 2016, while restrictions were placed on cash withdrawals. Some of the benefits of this reform are tax on black money, crowding out counterfeit notes, higher tax compliance due to formal economy etc. In addition to these immediate benefits, these are some long term benefits like making Indian economy a lesscash or cash-lite economy.
Notwithstanding its long term potential, Demonetisation had some short term costs too, for example aggregate demand shock aggregate supply shock liquidity shock etc.
Moving forward, the emphasis must be on maximizing Demonetisation benefits while minimizing its costs. First step to be taken immediately is to replenish the cash shortage. In the medium term, the impetus provided to digitization must continue. For higher tax compliance the taxation regime must be simple and predictable like GST. Hence, if we compare the merits with demerits, it will be safe to conclude that former outweighs the latter.