Demonetization is an out-of-the-blue situation because currencies are demonetized without prior notice to curb black money in political, economical, and normal obligated transactions.
When a legally accepted exchange is banned from the use of common people, it’s called demonetization. The government demonetizes the denominations which controls the excess money supply in the economy and regulates corruption, hyperinflation.
Demonetization aids economic stabilization by controlling inflation only when the money is in native currency. As hyperinflation leads to less spending and thickens the line between poor and rich society, that has come under control. The people will grow at the pace of the economy with acceptable inflation rate.
It ensures that all the money which the central bank believes to be under circulation is not just parked in foreign lockers or within homes.
The people of the country come to exchange the old currency notes with the new ones. When a citizen of the country brings more cash that was not under circulation because of him/her is either fined or leads to investigation. Now that those who tried evade tax, holding up with underground transactions were fined and issued a penalty. This stops the rich from getting richer illegally and saves the poor from getting poorer.
At the initial stage of demonetization, liquidity crunch doomed throughout the country as the supply of physical money got hauled due to inadequate capability in printing of new notes. This led to chaos and confusion among the people and the officials who were helpless themselves. Developing countries like India, the households, daily wagers, poor people who had no bank accounts were traumatized, since withdrawal from banks were done with new notes account holders no problem in exchanging other than withdrawal limits set at INR 2000/account.
- People started to drop their money at banks and promoted the circulation of money.
- Demonetization promoted digital transactions, helping us with digital India.
- Demonetization controlled inflation and stabilized the GDP of the economy.
- It kept a check on the underground monetary activities and corruption.