Abstract
This chapter briefly discusses the impact and policy implications of demonetization across the world. The main focus of the chapter is on the demonetization that occurred in India on 8th November 2016. The event is important due to the surprise effect and also due to the huge scale of impact that it had on the economy. The authors make a case for the demonetization from the policymaker's point of view. This chapter will introduce how demonetization has impacted the business sector as well as the financial sector of the economy. The aim of the chapter is not to estimate the impact of demonetization on the economy as whole but rather to discuss the impact of the policy on the different sectors of the economy and different stakeholders of the economy. This chapter would also explore demonetization as a policy tool for tax evasion and corruption. Finally, this chapter will introduce the concept of cashless economies around the world and whether it will be possible for the Indian economy to become a cashless economy anytime in the near future.
TopIntroduction
Demonetization basically refers to discontinuation of old currency units of an economy which would render the old currency value less and replace the old currency units with new currency units having value. The Prime minister of India on behalf of the government of India, cited three primary reasons for implementing demonetization as a policy move. Firstly, one of the most vital reasons for implementing such a drastic move was to keep a check on the proliferating stash of black money, which would be mainly be kept in the higher denominations of currency like ₹500 and ₹1000. Secondly, as expressed by the Prime minister demonetization would help in dealing with rising menace of fake currency notes that would be circulating in the economy, according to the RBI’s annual report of 2015-16, 63% of the counterfeit notes are in the form of ₹500 and ₹1000. The third reason cited by the government for this drastic policy move was to curb the terror funding which is mostly carried out by a stash of black money and counterfeit notes.
The decision to implement such a huge and impactful policy step was kept completely confidential, and only two key government officials were aware of this policy move, the finance minister, and the RBI governor. The confidentiality of this decision was very necessary to ensure this decision is effective, as lack of confidentiality would have resulted in people making pre-emotive measures of making prior arrangements for handling their black money. Therefore, it was an imperative that this decision was carried out in full confidentiality and secrecy (Paliwal, 2017).
Key Terms in this Chapter
Digital Wallet: A digital wallet or e-wallet allows an individual to make online transactions like shopping, bill payments, or online booking.
Microfinance Institution: Microfinance institutions are finance institutions that provide financial services to lower income segments of the population.
Inflation: Inflation refers to sustained increase in the price level of goods and services in the economy over a period of time.
Hawala: Hawala is a method of transmitting money from different countries to India in Indian currency denominations.
Demonetization: Demonetization basically refers to discontinuation of old currency units of an economy which would render the old currency value less and replace the old currency units with new currency units having value.
Cashless Economy: Cashless economy refers to the economy where transactions are done using digital payment methods instead of using cash.