What is demonetization?
Demonetization is the withdrawal of a currency unit from circulation, typically due to its incompatibility with the new economic conditions or laws. In order for a demonetized currency to be replaced with a new one, the government usually encourages or requires citizens and businesses to exchange their old money for new at special rates or places. Bonds, lease contracts, promissory notes, certificates, mortgages, and treasury bills may also be demonetized if they are no longer backed by assets or authorized by the government.
What is the purpose of demonetization?
The purpose of demonetization is to reduce the amount of black money circulating in an economy and promote cashless transactions. It also encourages citizens to shift their savings from non-income generating money such as gold and hoarded cash into more productive investments such as banks, stocks, and real estate. In addition, demonetization helps generate economic growth by making it harder for criminal elements to hoard their wealth or transfer it out of the country. Despite these advantages, demonetization can be highly disruptive in an economy as it affects both individuals and businesses that rely on hard currency.
Impact of Demonetization
The objective of demonetization is to tackle the problem of black money in the economy. However, demonetization has a mixed impact on different sections of society. For instance, while it can help to curb corruption and tax evasion, it can also lead to a cash crunch, causing inconvenience to many people. Moreover, the long-term effects of demonetization are still uncertain.