Demonetisation

On 8 November 2016, the government announced that the ₹500 and ₹1,000 notes would no longer be legal tender. This is called demonetisation. These two notes made up about 86% of the money in circulation.

Its aims: to curb corruption, counterfeit (fake) notes, the use of high-value notes for illegal activities, and black money (income hidden from tax).

Its features:

• a tax administration measure: cash had to be deposited in banks, so hidden income came on record;
• a signal that tax evasion would no longer be tolerated;
• a push to move savings into the formal financial system;
• a step towards a less-cash economy.

Its impact:

• fewer cash transactions, and more bank deposits and financial savings;
• private wealth and real estate prices fell, since much property had been bought with cash;
• digital transactions grew;
• income tax collection rose, as more income was disclosed.

Digital payments need mobile phones, PoS (card) machines and internet connectivity, which many small traders and villages still lacked.