DEMONETISATION

APRIL 24, 2020


Good morning boys! Now, we are starting a new topic today i.e demonetisation which you all are aware of. It happened on Nov 8, 2016 by the Government of India and it affects two environments mainly which are POLITICAL AND ECONOMIC ENVIRONMENT.

Learning outcome for today- At the end of the topic, students will be able to-
1) Explain the meaning of demonetisation.
2) Discuss the features and effects of demonetisation.

First of all, you must watch this video to understand the topic better:

Now, take down your notes:

Q.7 Explain the concept of demonetisation and its features. (5)
Ans- Demonetisation means cancelling the legal tender status of a currency unit in circulation. The Government of India announced demonetisation of the two largest denomination notes, Rupees 500 and Rupees 1000 on 8 November 2016. This led to 86% of the money in circulation invalid.
The features of demonetisation are as follows:
1) Demonetisation is viewed as a tax administrative measure-
a) Cash holdings arising from declared income was readily deposited in the banks and exchanged for new notes.
b)Those people with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.
2) Demonetisation is also interpreted as a measure to improve tax compliance-
a) It indicates that tax evasion will no longer be accepted or tolerated.
b) Tax collection increased because of increased disclosure and tax evasion decreased.
3) Demonetisation also lead to channelising savings into the formal financial system-
a) Bank deposits increased.
b)  Interest rates decreased.
4) Demonetisation is aimed to create a less cash or cashless economy-
a) Cash transactions declined.
b)  Digital transactions using Debit Cards , Aadhar Enabled Payment System (AEPS), etc increased.

Q.8 Explain the impact of demonetisation. (3)
Ans- 1. Money/ Interest rates-  Decline in the cash transactions, Bank deposits increased,  Increase in financial savings.
2. Private wealth- Declined since some high demonetised notes were not returned and real estate prices fell.
3. Public sector wealth- No effect.
4. Digitisation- Digital transactions amongst new users increased.
5. Real Estate- Prices declined .
6 . Tax collection - Rise in  income tax collection because of increased disclosure.

Q.9 What is the aim of demonetisation?(1)
Ans- The aim of demonetisation was to curb corruption,counterfeiting the use of high denomination notes for illegal activities  and especially the accumulation of black money generated by income that has not been declared to the tax authorities.