Question

State any four features of demonetisation.

• A. Subjective/Descriptive Question
• B. Not Applicable
• C. Not Applicable
• D. Not Applicable

Hint:

To remember the four features of demonetisation, use the acronym T-S-D-N: - Tax administration measure. - Savings channelized into formal banks. - Digitalization promotion (Cash-lite economy). - Non-tolerance of tax evasion.

Answer 1

The Correct Option is A

Concept: Demonetisation is an economic policy measure where the government officially strips a currency unit of its status as legal tender. A prominent example was implemented by the Government of India on November 8, 2016, withdrawing the legal tender status of \(\text{₹ }500\) and \(\text{₹ }1,000\) currency notes. This policy serves several economic functions and features: Step 1: Feature 1: Demonetisation as a Tax Administration Measure
Demonetisation forces individuals holding cash to deposit their currency notes directly into commercial bank accounts.

• People with legally declared income could deposit their money without issue.

• However, those holding undisclosed income (black money) had to declare their unaccounted cash, pay the appropriate taxes, and face statutory penalties. This process effectively transformed hidden cash into formal, taxed bank deposits.

Step 2: Feature 2: Channelizing Savings into the Formal Financial System
Prior to demonetisation, a significant portion of household savings was held in physical cash at home, which did not yield returns or contribute to economic growth.

• As these funds were deposited into bank accounts, banks saw a major influx of liquid cash deposits.

• This increased liquidity allowed commercial banks to offer more loans and credit lines at lower interest rates, directing public savings into productive economic investments.

Step 3: Feature 3: Shift Towards a Digitized, Cash-lite Economy
One of the key long-term structural features of demonetisation was its role in shifting consumer behavior away from cash transactions toward electronic payments.

• The temporary shortage of physical currency notes accelerated the adoption of digital transaction systems, such as the Unified Payments Interface (UPI), internet banking, mobile wallets, and credit/debit card swipe machines.

• This transition increases financial transparency, reduces the costs associated with printing currency, and makes it easier for the government to track transactions.

Step 4: Feature 4: Non-Tolerance of Tax Evasion
Demonetisation sent a clear message that tax evasion would no longer be tolerated by the state administration.

• It demonstrated the government's resolve to clamp down on black money, counterfeiting, and the informal parallel economy.

• By showing that unaccounted wealth could lose its value overnight, the policy aimed to improve future tax compliance across the country.