Advantages and Disadvantages of Stopping the Old Currency

Introduction

The decision to demonetize old currency notes, also known as 'currency demonetization,' has been a subject of debate and discussion worldwide. In this article, we delve into the advantages and disadvantages of such measures as seen in practice, with a focus on the period post demonetization. Key topics include fake currency reduction, impact on black money, economic growth, and social challenges.

Advantages of Stopping Old Currency

1. Reduction in Fake Currency

{Advantage 1: Fake Currency Cleansed Once and For All}

One of the main advantages of demonetization is the swift and massive elimination of counterfeit currency. The removal of high-value notes led to a significant reduction in fake currency production, as these notes are no longer in circulation. This action contributes to maintaining the integrity of the financial system and ensures that the public is not subject to financial losses due to counterfeiting.

2. Combat Against Black Money and Corruption

{Advantage 2: Big Blow Against Black Money and Corruption}

Demonetization aims to tackle the issue of black money or cash generated from illegal or unreported transactions. By invalidating high-value notes, the government sought to curb the use of cash in illegal activities such as tax evasion, bribe transactions, and money laundering. This measure ensures that a significant portion of undeclared wealth is re-integrated into the regulated banking system, which can be taxed and subject to auditing.

3. Promotion of Cashless Economy

{Advantage 3: Increased Promotion of the Cashless Economy}

Demonetization serves as a catalyst for transitioning to a cashless society. By encouraging the use of digital transactions, online payments, and mobile wallets, the SWIFT (State Wayne for Internet Finance) helps reduce the demand for physical cash. This shift not only enhances financial inclusion but also cuts down on transaction costs and counterfeiting risks. Moreover, it promotes financial literacy and digital skills among the population.

4. Increase in Bank Deposits and Rational Loan Interest Rates

{Advantage 4: Increase in Bank Deposits and Cheaper Loan Interest Rates}

In the aftermath of demonetization, individuals were encouraged to deposit their newly acquired small denominations in banks. This influx of cash into the banking system not only helps manage subsidy leaks in the public distribution system but also helps in stabilizing the financial markets. Additionally, the increase in bank deposits leads to reduced pressure on interest rates, making borrowing more affordable for businesses and individuals.

5. Fear for Future Tax Theft and Compliance

{Advantage 5: Fear in People for Future Tax Theft and Increased Compliance}

While demonetization may not eradicate all forms of black money, it certainly instills a sense of fear among individuals who seek to evade taxes. As a result, people are more likely to report their unreported income, leading to increased tax compliance. This behavioral change can contribute significantly to bringing the informal economy into the formal sector, thus promoting transparency and reducing fiscal deficits.

Disadvantages of Stopping Old Currency

1. Immediate Human Costs and Casualties

{Disadvantage 1: Over 50 People Died}

The sudden discontinuation of high-value currency notes led to significant inconvenience and hardship for the public. A notable number of people died while trying to exchange their old notes for new ones, underscoring the human cost of this decision. The measures were implemented without sufficient planning and communication, leading to chaos in cash exchanges.

2. Negative Impact on Business and Tax Collection

{Disadvantage 2: Black Money Resurfaced and Reduced Indirect Tax Collection}

While demonetization aimed to reduce black money, some argue that it only created a temporary setback. Black money and corruption quickly returned to the informal economy, and many old notes circulated again. Furthermore, the move reduced indirect tax collection, as businesses and consumers were forced to adjust to a new cash flow reality. This loss in tax revenue can increase fiscal deficits and reduce the government's ability to invest in public services.

3. Human Resource Loss and Impact on GDP

{Disadvantage 3: Loss of Human Resource/Time and Impact on GDP}

The demonetization policy required a significant amount of time and effort from the public, leading to decreased productivity and efficiency. Queues at banks, post offices, and ATMs caused widespread delays and disrupted daily routines. The economic impact of shutting down businesses and the inability to work can be seen in lower GDP growth and potential rating downgrades. While digital transactions were promoted, the initial transition period was challenging for both individuals and businesses.

4. Increased Use of Other Forms of Hoarding and Inflation

{Disadvantage 4: Loss of Other Ways to Avoid Taxes and Inflation}

Even though demonetization aimed to reduce black money, many individuals found alternatives such as gold and real estate as forms of hoarding. The demonetization effectively delayed but did not eliminate the problem of black money. The sudden increase in demand for gold led to price hikes, contributing to inflation. In some regions, the absence of cash led to difficulties in purchasing essential goods, further exacerbating the economic and social challenges.

5. Political Ramifications and Market Instability

{Disadvantage 5: Political Insurgency and Market Instability}

The decision to demonetize caused significant political turmoil, with increased polarization and more political posturing. The immediate impact on the stock market and investments was negative. Temporary pullout of foreign investment and delays in export activities further slowed down the recovery process. Political and market instability continue to be a concern in the long term, posing risks to economic growth and investor sentiment.

Conclusion

In conclusion, the decision to stop old currency has led to both positive and negative outcomes. On one hand, it has reduced fake currency and curbed black money, promoting a more transparent financial system. On the other hand, the measures have resulted in significant human costs and economic disruptions. The overall impact of demonetization depends on how effectively these challenges are managed in the long term, particularly in terms of fostering a cashless economy and maintaining economic stability.