The Indian government has long struggled with the issue of the fake currency and black money. In 1946 and in 1978, the respective Indian governments turned to demonetization as the long-term solution to the problem. The same historical event would take place in India in 2016.
The Process of Demonetization in India
On November 8th 2016, India’s prime minister made the announcement of demonetization of all 500 and 1000 rupees notes. Thus, the government announced that both the Rs. 1000 and Rs. 500 would not serve as legal tender.
Thus, the cash in circulation were to be replaced by other forms of cash (digital forms). This caused a rush to the banks.
- The old 500 and 1000 rupee notes were to be deposited with bank withing 31st December, 2016. That meant that money, in the form of old 50o and 1000 rupee notes, were to become useless post 31st December, 2016.
- The cancelled notes were to be deposited with the bank and /or replaced with new 500 and 2000 rupees.
- New types of notes which are of the same currency were introduced in the market.
- The challenge had been the slow circulation of the new currency.
- Most of the banks didn’t had enough new currencies. Even today, this new challenge is still there and is expected to continue for a certain period of time.
- At ATMs there was some daily cash withdrawal limit. In addition, there was a weekly withdrawal limit as well (for example rupees 24000 per week).
- In the business world, there had been a cash crunch since not many customers had access to the large amount of the new currencies.