Question

State any four features of demonetisation.

Hint:

Demonetisation is often described as a "Cleaning" process for the economy—it flushes out hidden cash and forces it into the official banking books.

Answer 1

Step 1: Understanding the Concept:
Demonetisation is a policy where the government withdraws the status of "legal tender" from specific currency units. In India, this occurred on November 8, 2016, targeting ₹ 500 and ₹ 1,000 notes.
Step 2: Detailed Explanation:
1. Tax Administration Measure: Demonetisation was aimed at uncovering "black money." People with unaccounted cash had to deposit it in banks and declare their income, paying taxes and penalties.
2. Non-tolerance of Tax Evasion: It signaled that the government would no longer tolerate tax evasion. It forced individuals to bring their hidden wealth into the tax net.
3. Channelising Savings into Formal Financial System: As people deposited cash into banks, it increased the liquidity in the banking system, which could then be used for providing loans at lower interest rates.
4. Creating a Less-cash or Digital Economy: One of the major features was to shift the economy toward digital transactions, reducing the reliance on physical cash and increasing transparency.
Step 3: Final Answer:
Demonetisation acted as a tool for tax transparency, formalizing savings, and promoting a digital, "less-cash" economy.