A Short Note on The forgotten 2016 Indian banknote demonetisation

The move was also criticised as poorly planned and unfair and was met with protests, litigation, and strikes against the government in several places across India. Debates also took place concerning the move in both houses of Parliament.

Nov 8, 2021 - 11:43
Nov 8, 2021 - 11:48
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A Short Note on The forgotten 2016 Indian banknote demonetisation
A Short Note on The forgotten 2016 Indian banknote demonetisation

On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised banknotes.

Prime Minister Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism. The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.

The Indian government had demonetised banknotes on two prior occasions—once in 1946 and once in 1978—and in both cases, the goal was to combat tax evasion via "black money" held outside the formal economic system.

In 1978, the Janata Party coalition government demonetised banknotes of ₹1,000, ₹5,000 and ₹10,000, again in the hopes of curbing counterfeit money and black money. In 2012, the Central Board of Direct Taxes recommended against demonetisation, saying in a report that "demonetisation may not be a solution for tackling black money or shadow economy, which is largely held in the form of Benami properties, bullion and jewellery."

According to data from income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a successful strategy.

People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash. According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had been demonetised, were deposited with the banking system, leading analysts to state that the effort had failed to remove black money from the economy.

The BSE SENSEX and NIFTY 50 stock indices fell over 6 per cent on the day after the announcement. The move reduced the country's industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost. Initially, the move received support from several bankers as well as from some international commentators.

The move was also criticised as poorly planned and unfair and was met with protests, litigation, and strikes against the government in several places across India. Debates also took place concerning the move in both houses of Parliament.

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