Advantages and disadvantages of demonitization
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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.
Stopping fraudsters: When a new currency is introduced, this can also be a great opportunity to halt the activities of fraudsters who had been making money illegally by counterfeiting coins and notes.
Reducing illegal activities: Money used to fund illegal activities such as terrorism and drug trafficking will be rendered useless. Hence, the government can use demonetization policy to trace money that has been made from illegal activities such as drug trafficking and theft since such individuals are faced with only two options: either deposit the money with the bank or be left with currency that has no value.
Growth in a country’s GDP: Due to low lending rates, improved revenue collection, and growth in savings and deposits, a country that has demonetized is likely to see an improvement in the growth of its GDP.
Introducing new bank note designs:Demonetization is also a good opportunity to redesign bank notes. This might involve making them more durable, for example.
A measure of good governance practices: Some experts claim that demonetization policies improve the ease of doing business and is also a measure of good governance.
Good income management habits:People will opt to invest their money in properties such as real estate or deposit cash in banks to safeguard against some negative effects of demonetization.
Reduction of lending rates: Availability of cheap deposits in financial institutions means that people can borrow money at low interest rates.
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.
Disruption of Trade: The normal trading activities may be disrupted by this process since it takes time for consumers and suppliers to adjust to the new monetary policy.
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.
Stopping fraudsters: When a new currency is introduced, this can also be a great opportunity to halt the activities of fraudsters who had been making money illegally by counterfeiting coins and notes.
Reducing illegal activities: Money used to fund illegal activities such as terrorism and drug trafficking will be rendered useless. Hence, the government can use demonetization policy to trace money that has been made from illegal activities such as drug trafficking and theft since such individuals are faced with only two options: either deposit the money with the bank or be left with currency that has no value.
Growth in a country’s GDP: Due to low lending rates, improved revenue collection, and growth in savings and deposits, a country that has demonetized is likely to see an improvement in the growth of its GDP.
Introducing new bank note designs:Demonetization is also a good opportunity to redesign bank notes. This might involve making them more durable, for example.
A measure of good governance practices: Some experts claim that demonetization policies improve the ease of doing business and is also a measure of good governance.
Good income management habits:People will opt to invest their money in properties such as real estate or deposit cash in banks to safeguard against some negative effects of demonetization.
Reduction of lending rates: Availability of cheap deposits in financial institutions means that people can borrow money at low interest rates.
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.
Disruption of Trade: The normal trading activities may be disrupted by this process since it takes time for consumers and suppliers to adjust to the new monetary policy.
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