Questions on Demonetisation 2016

Demonetisation 2016 is the hottest topic in this academic year after Brexit. It is something that each commerce student must be aware of. No surprise if CBSE asks a question in upcoming board exams on demonetization and its consequences. Here is a brief introduction about the whole demonetization drive.

What is demonetisation of currency?

In simple words, means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as an official mode of payment. Demonetization 2016 is the act of Banning /taking back of a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.

What has the government done?

Prime Minster Narendra Modi’s decision to scrap high value notes of Rs 500 and Rs 1,000 has created a shortage of cash in the system, leading to a lot of discomfort for the general public and businesses. Also, since there is a shortage of newly printed Rs 500 and Rs 2,000 notes, the situation has worsened. The move has also led to a shortage of lower denomination notes such as Rs 100 and Rs 50 that are still legal tender, as people have taken to conserving whatever cash they have in hand.

 Reason for Demonetisation 2016

1. To tackle black money in the economy.
2. To lower the cash circulation in the country which “is directly related to corruption in our country,” according to PM Modi.
3. To eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India.
4. The move is estimated to scoop out more than more than Rs 5 lakh crore black money from the economy, according to Baba Ramdev, a staunch Modi supporter.

Who needs to worry?

Not the honest taxpayers. Even if you have Rs 10 lakhs as cash with you and you can prove its legitimacy, you don’t need to worry.

The surprise move by government is a disaster for people who have accumulated lakhs and crores of unaccounted cash under their pillows and mattresses. The winter is coming and these worthless pieces of paper can provide the corrupt some ephemeral warmth.

What experts think?

Almost all the stalwarts of the banking sector including Deepak Parekh, Chanda Kocchar think that the move will help curb black money in the economy.

According to MD & CEO, ICICI Bank BSE 2.35 % Chanda Kochhar who told ET Now, “this move will definitely bring about a whole amount of transition to no cash or low cash kind of transactions,”.

“A parallel black economy will collpase,” one of the leading lawyers in taxation laws, Harish Salve told ET Now.

Narayana Murthy, founder of the Infosys BSE 0.26 %, welcomed the government’s move in its fight against corruption. Murthy also added that “the dishonest will have to suffer, absolutely that is the right thing.”

HDFC Chairman Deepak Parekh anticipated that the Land will become cheaper and “one expects that real estate price will come down in medium term.”

But with all the positives, government has not been able to explain anything for the people who don’t have a bank account.

Impact on Economy

Since our economy is heavily dependent on cash, as only less than half the population uses banking system for monetary transactions, demonetisation 2016 has hit trade and consumption hard. With people scrambling for cash to pay for goods and services, the move is likely to take a big toll on the country’s growth and output during the current fiscal. Consumption makes up for around 56% of India’s GDP , hence, a drop in spending will pull down growth. The current step could also lead to behavioural changes in households’ savings and their consumption pattern, say economists.
Source: Quora, ET, ET

Article submitted by Dr. Vinod Kumar author of Ultimate Book of Accountancy.