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Advantages and Disadvantages of Demonitization policy


The current demonetization policy of Government of India (GOI) is the buzzing topic in every nook and corner of India. Demonetization is done for the overall economic development for India. There are various advantages and disadvantages of the demonetization drive. Let's analyze them in detail

Demonetization Scenario

On October 8th, 2016, GOI declared that 500 rupee notes and 1000 rupee notes are invalid. New currencies in denomination of 2,000 and 500 are to replace the old currency. People can exchange the old currency in the banks to new currency up to 4,500 rupees initially till 24th November. People can deposit the old currency in their bank accounts. Deposits above 2, 50,000 rupees need documents and will be taxed according to the newly introduced tax bill in Loksabha on 29th November 2016 by finance minister, Mr. Arun Jaitley. GOI has extended old currency exchange in EB offices, tax offices, petrol bunks etc. till 15th December 2016. In the ATMs, initially 4,000 rupees was allowed to be withdrawn but now only 2,000 is the daily withdrawal limit. GOI aims to make a cashless economy through financial inclusion measures like payment banks, card based transactions, online transactions, internet banking, NEFT, RTGS etc. The mobile applications like Paytm, Mobikwik etc. are advised for online transactions in the current scenario.

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Advantages of Demonetization

The main objective of demonetization is to curb black money. Curbing Black Money Demonetization has made it mandatory for every person in India to deposit their old currency in the banks and exchange them for new currency. This will make the cash hoarders to deposit their money in the account and make it accountable. In this manner, black money will be retrieved to a certain extent.

Good Governance

Demonetization is done as a measure of good governance as suggested in the World Bank's Ease of Doing business report. This measure will increase the rankings of India in various indexes published by World Bank, World Economic Forum, United Nations and IMF etc. Demonetization will enhance the transparency levels in governance to a great extent by bringing all transactions in the formal banking sector.

Increased Tax revenue

There is an incredible surge in tax collections for the past month. Property tax, water tax and other corporation levies in all states have risen considerably. The income tax collections have also risen rapidly. The provision of Income Tax department monitoring the accounts with more than 250000 rupees deposit and collecting tax with penalties will increase the tax revenue for the government.

Disadvantages of Demonetization

Public inconvenience

Public inconvenience is the major disadvantage of the demonetization measure. People spend a full day in the banks to withdraw the money from the bank account. The queue in some banks is so large that people faint and some have even died standing for a long time. The move towards cashless transaction is good and only sections of the people are accustomed to this practice but majority of Indians have no knowledge about this cashless transaction.

Reduced Money Circulation

There is severe shortage of money circulation in the economy as a whole. Everyone has a single 2,000 rupee note and cannot transact with it in local shops, chicken shops and many other places where swipe machines are absent due to the problem of change. There is severe shortage of 100 rupee notes and with a single 2,000 rupee note, people find it very hard to find change. People have restricted their daily transactions to the maximum and this has affected the business in all spheres considerably.

ATM Calibration

Only 40 percent of the ATM machines have been calibrated to the new currency while the rest of the ATM machines are still put of order. This creates a queue in ATM machines and the cash gets exhausted within hours. Currently, the daily transaction limit in ATM is 2,000 and you get mostly a single 2,000 rupee note. ATM machines are not fully operational causing further inconvenience to the people. Most of the times, ATM machines are out of cash.

Corruption and Fraud

There are many instances of fraudulent activities like the banking personnel and the post office personnel illegally exchanging the old currency for new currency for a commission amount. The brokers are making hay of the current situation and earn whopping commission of 50 to 60 percent for exchanging the currency using the poor people. The misuse of Jan Dan accounts to exchange black money is also revealed and restrictions are implied on such accounts. Media has exposed such cases of corruption.


The demonetization measure is welcomed by majority of the people as 93 percent of the respondents in the Modi App voted in favor. Though, the real people suffering are standing in the queue and are mostly poor. The recent announcement of Mr. Arun Jaitley that the proceeds of tax collected during the demonetization drive will be used for the welfare of the poor is a welcome measure though. Earlier, LPG Direct Benefit Transfer was used to divert the subsidies of the rich to offer 2 crore free LPG connections to the poor. Overall, Demonetization is a bold step towards good governance and transparency.

- Chelladurai. P

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