DEMONETISATION
- ECONOMY
News:
Majority verdict finds no
flaw in 2016 demonetisation process
What's
in the news?
●
A majority of four judges on a
Constitution Bench of the Supreme Court on January 2 found no flaw in the
government’s process to demonetise ₹500 and ₹1000 banknotes through a gazette
notification issued on November 8, 2016.
●
The sole woman judge, Justice B.V.
Nagarathna, on the five-member Bench however disagreed with the majority,
saying the government’s notification issued under Section 26(2) of the Reserve
Bank of India (RBI) Act was unlawful.
Key
takeaways:
Majority
judgement:
●
Justice B.R. Gavai, delivering the
judgment for the majority which included Justices S. Abdul Nazeer, AS Bopanna,
V. Ramasubramanian, said the statutory
procedure under Section 26(2) was not violated merely because the Centre
had taken the initiative to “advise” the Central Board to consider recommending
demonetisation. The government was empowered under the provision to demonetise
“all series” of banknotes.
Dissenting
judgement:
●
Justice Nagarathna said the government
could have issued a notification under Section
26(2) only if the Central Board of the RBI had initiated the proposal to
demonetise a specified series of banknotes by way of a recommendation.
Here, in 2016, the government had initiated the demonetisation, not the Central
Board.
What
is Demonetisation?
●
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 or forms of money 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.
Demonetisation
in India - Backdrop:
●
India opted for demonetization two times before the 2016 monetisation.
●
The first instance of demonetisation by
the government was implemented in 1946
when the RBI demonetised Rs.1,000 and Rs.10,000 notes.
●
Later, higher denomination bank notes
(Rs.1000, Rs.5000 and Rs.10000) were re-introduced in 1954.
●
However, the Morarji Desai government
demonetised these notes in 1978.
●
According to data provided by RBI,
Rs.10,000 note was printed in 1938 and 1954 and was subsequently demonetised in
1946 and 1978 respectively.
●
In
2016, the Government through notification under RBI Act 1934 demonetised the
₹.500 and ₹.1000 notes.
●
The RBI’s annual report, submitted that
₹.15.44 lakh crore worth of currency was demonetised. The withdrawn money
amounted to 86.4% of the currency in circulation at the time. Only ₹.16,000
crore out of the ₹.15.44 lakh crore was not returned. He said only 0.0027% fake
currency was “captured” following demonetisation.
Positive
effects of Demonetisations in the economy:
1.
Impact on Black Money and Corruption:
●
It is argued that steps taken by the
government of demonetization can help curbing black money in the country.
●
Corruption will also be automatically
reduced by removing black money from the economy.
2.
Impact on Counterfeit Currency:
●
The biggest positive impact of the
demonetization will be on the counterfeit/fake currency as it is currently
thrown out of the system fully.
3.
Lower Inflation:
●
Inflation arises due to higher liquidity in the market. Because
of demonetization there is less liquidity and less cash flow in the market
that's why inflation becomes down.
●
As the black money goes out of the system the money supply will shrink to
some degree. This will reduce inflation rate in the longer absence of any open
market interventions by the Reserve Bank of India.
4.
Impact on Banks and Financial Institutions:
●
As per directions of the government,
people have to deposit their money with the banks which will increase the liquidity of the banks for the
short term. This liquidity can be used by banks for lending purposes for
the long run.
●
As the liquidity of banks increases, they
are expected to enhance the borrowing
cycle by lending money at a lower rate of interest.
5.
Online Transactions and other modes of payment:
●
The government wants to go cashless;
demonetization has a positive impact on digital transactions and other modes of
payment.
●
The value of transactions through the
Unified Payments Interface (UPI)
crossed $100 billion in October 2022. UPIs were only introduced in the post
demonetisation period in the country and their rapid growth is truly stellar.
This is an innovation of global scale and quality.
6.
Check on hawala transactions:
●
As per Central intelligence reports the
call traffic by hawala agents dropped by 50% in India.
7.
Formalisation of the economy:
●
Increase in online transactions, and GST have led to formalization of the
economy.
Negative
effects:
1.
Slowdown in economy:
●
GDP
decreases because circulation of currency is less because of
the cash crunch in the country. The GDP formation could be impacted by this
measure, with reduction in the
consumption demand.
●
An IMF report states that the disruption
caused by cash shortages dampened consumer and business sentiments, leading to
a decline in high-frequency consumption
and production indicators, such as sales of two-wheelers and cement output,
respectively.
2.
Impact on Purchasing Power:
●
The move of demonetization has affected
the purchasing power. This mainly affects those assets that are used as long-term
investments like real estate, vehicles and core sectors of cement and steel.
3.
Impact on Real Estate Sector:
●
Demonetization smashed the real estate
market and it will result in more than 50% drop down.
4.
Impact on Tourism:
●
Cash
crunch badly hits the tourism sector. It is very difficult
for people to get money from the banks and ATMs. The travel and hospitality
industries are facing a tough time.
5.
Not much achievement of declared objectives:
●
The government claims to have achieved the
objectives but return of about 99.3% of canceled notes to banks is proof that elimination of black money, corruption and
increased IN tax compliance did not happen at ground level.
●
Since a huge number was returned back, if
black money existed in cash all of it was efficiently laundered.
Does
demonetization serve its purpose?
1.
Counterfeit currency:
●
Demonetising 85% of the currency in
circulation removed the legal tender status of the old Rs 500 and Rs 1000
notes.
●
The measure removed all currency notes in
circulation of those two denominations, genuine and fake.
2.
Tackling Black Money:
●
Transactions of more than 3 lakh
registered firms are under the radar of
suspicion while one lakh companies were struck off the list.
●
The government has identified more than
37000 shell companies which were
engaged in hiding black money and hawala transactions.
●
About 163 companies which were listed on
the exchange platforms were suspended from trading due to the pending
submission of proof documents.
3.
Impacts on terrorism, Naxalism, and trafficking:
●
Due to demonetisation, terrorist and
Naxalite financing has stopped almost entirely. The surrender rate has reached its highest since the demonetisation was
announced.
●
According to the Nobel laureate Kailash
Satyarthi and several others working to fight
human trafficking, the note ban had led to a huge fall in sex trafficking.
●
Since demonetisation, no high-quality fake currency notes were found/seized by
intelligence operations, including at the Indo-Bangladesh border.
●
Furthermore, it also affected the hawala operators and dabba trading venues.