Demonetization in India

Demonetization in India

What is Demonetization?

Demonetization is the act of pulling a currency unit out of circulation and replacing it with another currency. The government of India announced the demonetization of ₹500 and ₹1000 banknotes on 8 November 2016.

What is the purpose of Demonetization?

The stated purpose of Demonetization is to stop the circulation of black money in the economy, and to stop the use of counterfeit currency.

Black money is money that has been earned through illegal means, or money that has not been declared for tax purposes. Counterfeit currency is fake currency that is made in an attempt to pass it off as real.

Demonetization is the act of withdrawing a currency unit from circulation, making it no longer legal tender.

History of Demonetization in India

The first recorded demonetization in India was in 13th century AD under the rule of the Delhi Sultanate ruler Alauddin Khalji. In modern times, the first demonetization was carried out in 1978 by the Janata Party government under Morarji Desai.

Pre-Independence Era

In the pre-Independence era, there have been a few interesting episodes of demonetization in India. The first one dates back to 1833, when Lord William Bentinck, the then Governor-General of India, demonetized the silver rupee and replaced it with the gold mohur. The motive behind this was to curb counterfeiting activities being carried out by the Indian mints. In his report on Indian Currency, W.H. Playfair stated that out of every 10 rupees in circulation, only one was genuine!

The next episode took place during the rule of Lord Dalhousie, who served as the Governor-General of India from 1848 to 1856. In his period, around six or seven thousand pounds of counterfeit silver coins were discovered per month in Bombay alone! To tackle this problem, Dalhousie demonetized all silver coins which were weighed less than eleven grams and contained less than 50% pure silver. This decision led to a lot of protests from the public and was eventually rescinded within two years.

The last significant episode prior to Independence occurred during World War II, when paper currency notes were introduced for the first time in India. To finance the war effort and contain inflationary pressures, all metal coins were demonetized in September 1945. One rupee notes were issued in their place and remained legal tender until 1957!

Post-Independence Era

India’s first attempt at demonetization took place in 1978 under the Morarji Desai government. high-denomination notes of Rs. 1000, Rs. 5000 and Rs. 10,000 were withdrawn from circulation and replaced with lower denomination notes. The stated reason for this was to curb black money, counterfeiting and tax evasion.

This move was not very successful in achieving its objectives, as only about 6% of the total currency in circulation was demonetized. Counterfeiting and black money continued to be problems, and the overall impact on the economy was not very significant.

The second major demonetization effort in India came in 2016 under the Narendra Modi government. On November 8th, 2016, Rs. 500 and Rs. 1000 notes were withdrawn from circulation, with a goal of curbing black money, counterfeit currency and terror financing.

This move was much more successful than the first attempt, with over 86% of the total currency in circulation being demonetized. It caused a significant disruption to the economy, but is widely seen as having been successful in achieving its objectives.

Demonetization in India (2016)

On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series. The government claimed that the action would curtail the use of black money in the country.

What led to the 2016 Demonetization?

The 2016 demonetization in India was a policy implemented by the Indian government on 8 November 2016, whereby all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series were rendered invalid and old banknotes of ₹500 and ₹1000 were exchanged for new banknotes of ₹2000 and ₹500. The decision was taken by the Modi government as an anti-corruption measure.

There were a number of reasons that led to the 2016 Demonetization in India. Some of the main reasons were:

-To curb black money: A large amount of money is said to be held in black, i.e. unaccounted for, in India. This black money is used for a variety of illegal activities such as funding terrorism, smuggling, etc. Thedemonetization was aimed at curbing this black money.

-To tackle counterfeiting: There have been concerns about counterfeit currency being used in India. It is estimated that there are about 400 crore fake Rs 500 and Rs 1000 notes in circulation. The demonetization was aimed at tackling this problem.

-To move towards a cashless economy: There is a growing preference for cashless transactions in India. The government is promoting this move towards a cashless economy through various initiatives such as the Digital India Program. The demonetization was seen as a step in this direction.

What were the effects of Demonetization?

The effects of Demonetization in India were both short-term and long-term. In the short term, there was a decrease in the amount of cash available, which caused a decrease in spending and an increase in saving. This led to a decrease in GDP growth in the Quarter following Demonetization. In the long term, however, there was an increase in digital transactions, which led to an increase in tax revenue and a decrease in corruption.


Conclusively, it can be said that the decision of demonetization taken by the government was a good one but its implementation was not up to the mark. Many people had to face a lot of difficulties because of the lack of proper planning and execution by the government. The main aim of this policy was to curb black money, corruption and terrorist activities but it failed to some extent. However, it did have some positive effects as well which were mentioned earlier in this article.


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