Reason of Demonetization

      REASON OF DEMONETIZATION 






The demonetization 2016 decision was taken by the Government in consultation with RBI to tackle:

i.     Black money:      

Black Money is available in various forms like cash, Investment in property and real estate, luxury goods like jewellery or with foreign currency dealers and private financiers. The target was to bring back cash out so that it can lose its anonymity and it can be mainstreamed. Also once such cash is out, it can be invested in clandestine ways apart from yielding significant taxes in the process. Black Money has become a menace for society and the country is not getting it's legitimate taxes which could be used for social welfare.


ii.       Counterfeit Currency:

Counterfeit Currency or fake currency was a big problem which was being promoted by our foreign adversaries with a view to weaken the Indian economy. Once old currency was withdrawn, the counterfeit becomes useless. It cannot be deposited in the banks either.


iii.     Terror Financing:

Terror financing for nefarious activities in jammu and kashmir and maoist and naxalite activities in the central region was being done largely in cash. Once the currency was demonetized, this money kept by such groups would become useless and could not be used in such acts.


iv.      Corruption:

Corruption in public life, illegal gratifications for helping someone, is also largely dealt in cash. Once the cash stream is gone such acts of corruption automatically come down. Also cash kept by such person becomes useless and if the same is deposited in the banks, it loses anonymity and the person may have to pay taxes on the said amount.



v. Digitalization and Formalisation of the Economy:



A large section of India economy was still being run on the cash system. Which does not get captured by the tax department as it does not leave any trail. Therefore, the Government thought about promoting digitalization and formalisation of economy through online transactions, e- wallets, various payment application for payments. The beauty of these instruments is that the entire economic activity get captured. It reduces tax evasion and would improve tax collection. The purpose was also to reduce the level of currency under circulation from about 12% to 9% which is more sustainable.


It was said that the Government also hoped that a portion of the demonetized currency would not return to the banking system and in such a condition the RBI would have to give dividend to the Government of an equivalent amount as it's liability to that extend would cease and such amount may be used by the Government for social welfare purpose.


     

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