Define demonetization and reasons for its enactment

Define Demonetization

Demonetization occurs when a currency ceases to have legal tender. It occurs normally whenever there is a change of national currency, like in the case of the European Union when they move to Europe.

Demonetization in India

India is a unique case of Demonetization, whereby it was used as a national policy tool rather than a rare policy instrument.

When the economy is passing through a severe crisis and there’s economic instability then countries might tend to use demonetization as a policy tool. But when we use demonetization, India’s GDP and growth rate were one of the best in the world. Our macroeconomic conditions were very much stable.

What were the reasons for the enactment of Demonetization?

  1. Limit Corruptions to control in short-run
  2. To phase out counterfeit currency
  3. To check and stop Terrorist financing
  4. Black Money
    • Operation Clean Money – I (2017) → e-verification of cash deposited during a specified time period.
    • Operation Clean Money – II → Started to find black money that returned in banking system divided people into risk categories.

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