Advantages and disadvantages of demonetization policy
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Advantages of demonetization
Demonetization was introduced as a policy because it was thought to have numerous advantages. Below are some of the key advantages that are often associated with demonetization.
Getting fake currency out of circulation: Demonetization can also be used to get fake currency out of circulation in a country’s economy since such currencies cannot be deposited in banks and other financial institutions.
Controlling inflation: Demonetization is usually cited as having one key advantage: this is that it can control inflation. Taking certain notes out of circulation can help the government to control public spending.
Tax Collection: Money deposited in the bank during demonetization can be taxed especially if the affected parties were trying to evade taxation by keeping hard cash.
The move to digital currency: Some commentators argue that in the future, we will all be using digital currency, such as bitcoins. If this is true, then one advantage of demonetization is that it will help to propel us into the future.
Improved deposits and savings in financial institutions: Parallel economies make it difficult for banks and other financial institutions to raise deposits. Demonetization reduces the size of the parallel economy and boosts savings and deposits.
Disadvantages of demonetization
Demonetization is not all beneficial and even proponents of demonetization acknowledge that it does have its disadvantages. A few of them are outlined below.
Little cash in circulation: Cash crunch is a major disadvantage of demonetization due to the unavailability of small currency denominations, an issue which makes it difficult to make small purchases.
Inconvenience and annoyance to the public: Sometimes, demonetization can be very inconvenient. For example, sometimes the government will remove certain denominations of bank notes from circulation but keep others. It can be annoying when smaller coins are removed from circulation and you do not have enough change. Further, queuing up in banks to deposit money or exchange currency can be inconveniencing.
Slowdown in Economic Growth: Economic growth will experience a period of lull due to business disruptions, at least in the short term.
Panic: Not everyone understands the essence of demonetization and, therefore, such an exercise is likely to result in panic among a section of the population.
An avenue for fraud and corruption: Some people are likely to take advantage of lapses in the financial system to engage in fraud and corruption when exchanging currencies.
Demonetization was introduced as a policy because it was thought to have numerous advantages. Below are some of the key advantages that are often associated with demonetization.
Getting fake currency out of circulation: Demonetization can also be used to get fake currency out of circulation in a country’s economy since such currencies cannot be deposited in banks and other financial institutions.
Controlling inflation: Demonetization is usually cited as having one key advantage: this is that it can control inflation. Taking certain notes out of circulation can help the government to control public spending.
Tax Collection: Money deposited in the bank during demonetization can be taxed especially if the affected parties were trying to evade taxation by keeping hard cash.
The move to digital currency: Some commentators argue that in the future, we will all be using digital currency, such as bitcoins. If this is true, then one advantage of demonetization is that it will help to propel us into the future.
Improved deposits and savings in financial institutions: Parallel economies make it difficult for banks and other financial institutions to raise deposits. Demonetization reduces the size of the parallel economy and boosts savings and deposits.
Disadvantages of demonetization
Demonetization is not all beneficial and even proponents of demonetization acknowledge that it does have its disadvantages. A few of them are outlined below.
Little cash in circulation: Cash crunch is a major disadvantage of demonetization due to the unavailability of small currency denominations, an issue which makes it difficult to make small purchases.
Inconvenience and annoyance to the public: Sometimes, demonetization can be very inconvenient. For example, sometimes the government will remove certain denominations of bank notes from circulation but keep others. It can be annoying when smaller coins are removed from circulation and you do not have enough change. Further, queuing up in banks to deposit money or exchange currency can be inconveniencing.
Slowdown in Economic Growth: Economic growth will experience a period of lull due to business disruptions, at least in the short term.
Panic: Not everyone understands the essence of demonetization and, therefore, such an exercise is likely to result in panic among a section of the population.
An avenue for fraud and corruption: Some people are likely to take advantage of lapses in the financial system to engage in fraud and corruption when exchanging currencies.
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Demonetisation can result in a decrease in tax evasion by individuals and ensure the implementation of practical public measures. Every ATM in the country needs to be remodified to allow the exchange of currency. The Gross Domestic Product would increase with a decrease in tax evasion.
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