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Monday, November 14, 2016

What is demonetisation and its different ways

But what is demonetisation?
Demonetisation is a radical monetary step in which a currency unit’s status as a legal tender is declared invalid. This is usually done whenever there is a change of national currency, replacing the old unit with a new one. Such a step, for example, was taken when the European Monetary Union nations decided to adopt Euro as their currency.
However, the old currencies were allowed to convert into Euros for a period of time in order to ensure a smooth transition through demonetisation. Zimbabwe, Fiji, Singapore and Philippines were other countries to have opted for currency demonetisation.

In India’s case, the move has been taken to curb the menace of black money and fake notes by reducing the amount of cash available in the system. It is also interesting to note that this was not the first time the Government of India has gone for the demonetisation of high-value currency. It was first implemented in 1946 when the Reserve Bank of India demonetised the then circulated Rs 1,000 and Rs 10,000 notes. The government then introduced higher denomination banknotes in Rs 1000, Rs 5000 and Rs 10000 in a fresh avatar eight years later in 1954 before the Morarji Desai government demonetised these notes in 1978.

Demonetisation in India by PM Narendra Modi
On November 8 evening, Prime Minister Modi, in his televised address to the nation, made Rs 500 and Rs 1000 notes invalid, saying that it was aimed at curbing the “disease” of corruption and black money which have taken deep root. People holding notes of Rs 500 and Rs 1,000 can deposit the same in their bank and post office accounts from November 10 till December 30. All notes in lower denomination of Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2 and Re 1 and all coins continued to be valid, and new notes of Rs 2,000 and Rs 500 were introduced. There was no change in any other form of currency exchange be it cheque, DD, payment via credit or debit cards etc.

Following the announcement, there were huge crowds outside ATMs across the country as people lined up to withdraw currency of smaller denominations. Banks were advised Sunday to increase the Cash Withdrawal limit at ATMs from the existing Rs 2000 to Rs 2500 per day in the recalibrated ATMs. The weekly limit of Rs. 20,000 for withdrawal from Bank accounts has also been increased to Rs 24,000 and the limit of Rs 10,000 per day has been removed. The exchange limit over the counter has also been increased from the existing Rs 4000 to Rs 4500.

Amid relentless criticism from the opposition parties, PM Modi made an emotional appeal in Panaji on Sunday, asking people to give him 50 days to weed out black money and corruption. He also asserted that he was ready to face the consequences of his move, elaborating that he did not care about the risk on his life so long as he manages to rid the country of black money. The Prime Minister also tried to bolster the faith of people in the Indian currency system, stating the government would honour its pledge to give value for the old Rs 500 and Rs 1,000 notes, saying, “government will not harass the honest, but will not allow the dishonest to go scot free.”

Demonetisation of 1978
The government’s move to demonetise, even then, was to tackle the issue of black money economy, which was quite substantial at that point of time. In January 1978, the Indian government demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes which was quite substantial at that point of time. The move was enacted under the High Denomination Bank Note (Demonetisation) Act, 1978. Under the law all “high denomination bank notes” ceased to be legal tender after January 16, 1978. People who possessed these notes were given till January 24 the same year a week’s time to exchange any high denomination bank notes. The main difference between then and now is that currency of higher denomination was barely in circulation, unlike the Rs 500 and Rs 1000 note today.

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