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Demonetization

Context: Constitution Bench of the Supreme Court on Monday found no flaw in the Union

government’s process to demonetize the banknotes of ₹500 and ₹1,000.

What is Demonetization?

Demonetization is the act of stripping a currency unit of its status as legal tender.

Legal tender is acknowledged by the laws as a mechanism to settle a public or private debt

Or in order to meet a fiscal responsibility that includes paying taxes, abiding by

Contracts, and finally damages or fines. Currency being the prime example.

Advantage and Disadvantages of Demonetization

Disadvantages:

• Expenses issuing new currency and coinage minting can be high
• Illegal activity will not be stopped entirely
• May create disturbances among individuals

Advantages:

• It will control criminal activities
• It Forbids tax avoidance and other financial crimes
• It contributes to a paperless financial system. India received a major boom in digital

Transactions after 2016 exercise

Demonetization in India

On November 8, 2016 Prime Minister had announced demonetization of old Rs 1,000 and Rs

500 banknotes

The the key objectives of decision was to promote digital payments and curb black money

Flows.

Before 2016, the government had already demonetized the banknotes on two occasions in 1946 and 1978.

Supreme Court Decision

A majority of four judges on a Constitution Bench of the Supreme Court on 02/01/2023 found

No flaw in the government’s process.

The statutory procedure under Section 26(2) was not violated merely because the Centre

Had advised the Central Board of RBI to consider recommending demonstration.

The government was empowered under the provision to demonetize all the series of

Banknotes.