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On November 8, 2016, Prime Minister Narendra Modi announced ‘demonetization’ to weed out black money from the country. The move, which saw the currency notes of Rs 500 and Rs 1,000 denominations getting banned, wiped out 86% of India’s currency overnight.

Reserve Bank of India data show that the cash in circulation as of October 8 this year reached an all-time high of Rs 28.3 trillion, proving that cash is still the king. This figure is 57% higher than the level seen right before demonetization. The demand for cash also increased ahead of the festival season. The currency in circulation has been growing in line with nominal GDP growth.

The sudden demonetization was premised on the idea that "black money was just big cash". And, it is in high-denomination currency notes that black money would be held. So if the high-denomination notes were to be suddenly declared as illegal tender, then the black money of the rich would become null and void.

Initially, the move received support from several bankers as well as from some international commentators. The move was also criticized as poorly planned and unfair and was met with protests, litigation, and strikes against the government in several places across India. Debates also took place concerning the move in both houses of Parliament.

Demonetization has long-term effects on a nation’s economy. The people in the rural areas who did not have access to the internet and plastic money were majorly affected. For centuries, governments have been using it as a tool to reduce corruption and other illegal activities. Thus, demonetization boosts a nation’s economy by removing fake currencies and bringing black money into the mainstream.

Demonetization will lead to fewer instances of tax avoidance. This certainly is a massive advantage of demonetization. Money that is deposited will be taken track of by income tax authorities. Therefore, people will hesitate to use tax avoidance tactics. Furthermore, the loan transaction will also be under scrutiny. Consequently, there would be an increase in the flow of taxes. This would certainly result in the government undertaking more public welfare measures.


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