The issue of demonetisation has been at the centre-stage in India for last few months and one must have the basic understanding of this issue as well as understanding of its pros and cons for the Indian economy. This article tries to give the information adequate for a candidate to form a balanced opinion on the issue of demonetisation required for any interview preparation or any Group Discussion exercise.

The literal meaning of ‘demonetisation’ is an act of stripping a currency unit of its status as a legal tender. The recent decision of Union Government of India stripping out Rupees 500 and 1000 currency notes is not in a stricter sense a ‘demonetisation move’, but can be labelled as a ‘remonetisation move’ as it has replaced the old notes with new currency notes of Rupees 500 and 2000, respectively. The past experiments of demonetisation of currency in India in the years 1946 and 1978 were different than the recent demonetisation move, in terms of its extent and impact on Indian economy.

Amidst the controversies and political mudslinging on demonetisation decision, one must try to understand and rationally analyse the demonetisation move in view of its pros and cons. The Government of India had four-fold objectives in mind before taking the decision of stripping out higher denomination currency notes of Rupees 500 and 1000. The four-fold objectives of demonetisation were – to tackle the black or parallel economy; to control corruption and move towards cashless society; to counter the menace of counterfeit currency and to prevent the terror funding. The another advantage expected out of this demonetisation move was the reduction in inflation rates as the inconspicuous demand created by black money in the economy was expected to be reduced to some extent by this move.

The benefit of this move would be especially in the real estate sector where the real estate sector prices are sky-rocketing due to presence of a lot of black money. The demonetisation move is expected to give a boost to Indian economy in long term, in view of the lower loan rates by the banks in the days to come as well as increase in direct as well as indirect tax collection by the Government of India. The available data indicates that the direct and indirect taxes collection has been increased by 18% in last year. The demonetisation move is also expected to hit the corrupt political funding practices and is also expected to prevent the use of black money in the elections. India has 10.86% of cash to GDP ratio and sudden stripping of 86.4% of this total cash available in higher denomination currency notes of Rupees 500 and 1000 could act as the foundation stone towards achieving the objective of cashless society (rather ‘less cash’ society) in India.

The critics of recent demonetisation move are ready with their own version and the supporting data. The critics reject the four-fold objectives of demonetisation move as impractical and baseless. The claim of reduction in black economy is not substantial as only 6% of total estimated black money in Indian economy is in higher denomination cash currency notes of Rupees 500 and 1000 combined. The majority of black money hoarding in India is in terms of gold, bullion, real estate and foreign accounts respectively. The second objective of demonetisation related to controlling corruption is also incomplete as the present demonetisation move doesn’t hit on the source of black money but targets the medium of black money i.e. the higher denomination currency notes only. The objective of controlling counterfeit or fake currency can’t be achieved fully with this move as only Rupees 400 crore are fake currency notes as per the Government of India records, out of total available almost 15000 lakh crores of higher denomination currencies in Indian economy.

. Secondly, the new currency notes of Rupees two thousand and five hundred are not hundred percent security proof and can also be easily counterfeited by the anti-national elements. Considering the international nature of terrorism networks and its modus operandi, complete crackdown on terror funding by demonetisation move is also doubted. Another drawback of demonetisation is its disastrous impact on poor farmers, agriculture sector and the MSME (Micro, Small and Medium Enterprises) sector of Indian economy. Apart from the immediate negative impact on GDP growth rate of Indian economy by the demonetisation move, the inadequately prepared RBI for remonetisation exercise had created a lot of inconvenience to the general public in getting money from banks as well as ATMs.

There is no doubt that the recent demonetisation is a bold move and will have a long-term impact on Indian economy, but negative impacts of this move can’t be negated as the fear raised by critics is also logical and supported by adequate data. So what’s the way ahead? The way ahead lies in proper implementation of the remonetisation exercise by RBI as well as Government of India and all out attack on black money generation through various measures including those on gold, real estate, benami transactions, foreign accounts and so on. The further road on curbing black money can be well summarised by Hon. Prime Minister’s recent statement that demonetisation move is not the end but it’s just the start of measures to fight against black money in the days to come. So RERA (Real Estate Regulatory Act), Electoral bonds for reducing political corruption and perhaps in days to come the attack on P-Notes (Participatory Notes) to reduce the black money in share market by overseas investors- could be the milestones in our journey to curb the menace of black money in Indian economy.

(The author of this article ,Lt Col (Dr) Satish Dhage, is an ex Army officer and has been qualified for IPS (Indian Police Services) through IPS LCE 2012. Presently, he is Director, MGM Institute of Competitive Exams Aurangabad. For any queries or feedback, he can be contacted on email id : drsatishdhage@gmail.com)