What exactly is demonetisation? It is a process where a currency unit loses its value as a legal tender, meaning it is no longer recognised as a medium of financial exchange. In layman's terms, the currency that is demonetised is no longer usable for any financial transactions.
After a currency is demonetised, it is usually replaced with a new currency. This new currency could be of the same denomination as the old one, or it could be of a higher denomination.
Changing the legal tender status of a currency unit can have a significant impact on the economic transactions that take place within an economy. This impact can be either positive or negative, depending on various factors.
Demonetisation can lead to instability in an economy, but it can also aid in stabilising the economy by addressing existing issues. The reasons for demonetisation can vary from one country to another.
History of Demonetisation in India
India has experienced demonetisation three times in its history. These instances took place in 1946, 1978 and most recently in 2016. Let's delve into the details of each of these instances.
Demonetisation in 1946
The first instance of demonetisation in India occurred in 1946. At this time, the Rs.1000 and Rs.10000 notes were withdrawn from circulation.
The impact of this demonetisation was minimal as the high denomination notes were not widely used by the general public. However, in 1954, these notes were reintroduced along with an additional Rs.5000 denomination.
Demonetisation in 1978
The second round of demonetisation in India occurred in 1978 under the leadership of then Prime Minister Morarji Desai. During this phase, the Rs.1000, Rs.5000 and Rs.10000 notes were withdrawn from circulation.
The main objective of this demonetisation was to curb the circulation of black money in the country. The announcement was made public by Prime Minister Desai via radio broadcast.
Demonetisation in 2016
The most recent demonetisation was announced on November 8, 2016 by Prime Minister Narendra Modi.
During this phase, the Rs.500 and Rs.1000 notes were withdrawn from circulation. Prime Minister Modi also introduced new Rs.500 and Rs.2000 notes after the demonetisation.