Many of us are still not clear about the concept of demonetization and keep criticizing its impact on the general public as well as the economic growth of the country.
In this post, we will try to understand what exactly demonetization is and how it impacts a country and its citizens positively.
In simple words, demonetization is when a certain currency retires; meaning it is withdrawn from circulation and such currency is no longer considered legal for money transactions and ceases to be recognized as a legal tender
Demonetization means stopping a currency from being used legally, buy things and for banking purposes. Even banks stop honoring such kind of currency.
Demonetization can be applied to any form of currency, whether coins or notes and stay no more valid after a certain cutoff date, decided by the government in association with the banking authorities.
Benefits and Merits associated with Demonetization
Stopping Fake Currency Circulation
One of the major objectives behind demonetization is to stop the usage and prevalence of fake currency and get it out of circulation.
Fake currency hampers the economic growth of a country immensely and currency out of circulation cannot be used for trading and banking purposes and this is where the importance of demonetization can be seen.
While the process of demonetization is in its final phase, people deposit all old notes with the banking institutions which facilitates them to the counterfeit of currency that is not genuine before accepting them.
Therefore, demonetization allows the government to weed out the fake currency circulating in the market.
A Tool to Control Inflation
Another merit of Demonetization is that it acts as an effective tool to control inflation. Taking certain currency notes out of circulation and the market can help the respective government to control public spending.
Enhanced Tax Collection
Money deposited in the bank during demonetization, which can be black or money on which earlier tax was avoided can be taxed with special rates. This is helpful especially to tackle people who were trying to evade taxation by keeping money in the form of hard cash. This helps a lot in economic development and does justice with the ones who ethically pay their taxes year on year.
With the change in a currency, people start disclosing their income by depositing money in their bank accounts and the government gets a superior amount of tax revenue which is then used for benefit of different socioeconomic classes, especially the ones who are unprivileged.
One more objective government of a country can achieve through Demonetization is to push the economy towards becoming cashless or cash deficient. The government achieves this by encouraging people to use digital means for making transactions.
Improves Deposits and Savings in Financial Institutions
With demonetization, people tend to deposit more money in banks and other financial institutions to minimize future risks and hence boost savings and deposits ethically benefitting the entire economy.
Combat Illegal Activities and Terrorism
Demonetization enables a country to keep a close and tight check on money used to fund illegal activities such as drug trafficking, money laundering and terrorism making all-cash inflow void.
A major achievement of demonetization is that it helps the government in tracking black money and put a control on it.
Due to low lending rates achieved with a higher rate of investments, revenue collection, deposits, and savings by and through the citizens of a country including its business have a positive impact on the GDP growth and its economic infrastructure.
With more money in collections and flow, the government receives more revenues and undertakes more socio-economic development projects.
Advancement in Quality of Currency
Demonetization gives a good opportunity to redesign and redevelop banknotes. This might involve making them more durable and difficult to be replicated in the form of fake currency.
A Measure of Good Governance
Demonetization policies improve the ease of doing business and also act as a measure of good governance to escalate the quality of business policies formed and executed by the government to benefit the business class and people associated with it.
Reduction in Bank Lending Interest Rates
The availability of better deposits in financial institutions leads to a win-win situation for investors, depositors, and people availing loans.
You can get a better rate of interest on your deposits and likewise get better deals on loans you take from banking institutions. In short, it means that people can borrow money at low-interest rates.
A few might criticize the term Demonetization and it’s after effects, but when its positive impact is seen on the economy at large, its importance cannot be denied.
The only thing that should be kept in mind while imposing such a massive decision by the government of any country is to evaluate its pros and cons thoroughly and take decisions accordingly keeping in mind its global impact and the benefit it imparts to its citizens.