Understanding Demonetization with Naïve Realism

Authors: Amrita/Gurmeet

Whenever there is the need to stop the old currency and bring the new one in the country, the government has to follow the act of Demonetization. History witnesses that. Recently, demonetization took place in the European nations when the Monetary Union adopted the euro. With the introduction of the euro, the old national currencies got demonetized. Authorities followed some fixed exchange rates and the old national currencies remained convertible for a limited time period.

What is Demonetization?

Demonetization is required every time while there is a need for changing the national currency. The old currency unit needs to be suspended and replaced with the new unit of currency.

Recent episode of demonetization in India

Demonetization in India

Image Credits: OneIndia.com

The government of India made a sudden announcement on 8th November 2016 about taking an important step by ceasing all ₹500 and ₹1000 banknotes from usage. This legal tender came into action from 9th November 2016.


Image Credits:INC42.com

The announcement of demonetization was made by the Prime Minister of India, Mr Narendra Modi. At 08:15 PM, in an unscheduled live telecast, he declared that the circulation of all ₹500 and ₹1000 banknotes will be invalid from November 9. He also informed that ₹500 and ₹2000 banknotes will be issued in the exchange of them.

He mentioned that the banknotes of ₹5, ₹10, ₹20, ₹50 and ₹100 of the Mahatma Gandhi series will remain as legal tender and will not be affected by the new policy.

He justified this step as an effort to stop counterfeiting of the old legal banknotes and to crack down the black money in our country. He dedicated this move for reducing corruption and smuggling in the country.

Why is demonetization important? 

1. To reduce the usage of fake currency notes
2. To restrain the shadow economy in the country.
3. To reduce cash circulation
4. To unearth peoples real revenue

Negative Impact on the Economy

Yes, it is affecting various sectors of the economy and it is bound to produce lower growth. The GDP growth as estimated for Financial Year 17 may vary from 3.5% to 6.5%. The best guess of the analysts is that the Gross Domestic Product growth is likely to slow down to around 6 percent in 2016-17. 

How long before we get to normalcy?

Given the capacity constraints of printing the high-value notes, it is speculated that the replacement of all notes will be done by May 2017. The cash availability situations may not come to normal quickly but it will, as we all know, benefit the nation substantially.