ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Demonetisation: 1978, the Present and the Aftermath

In the context of the demonetisation of ₹500 and ₹1,000 notes, the issuance of currency and its different denominations are traced over time, while also tracking key macroeconomic features of India's changing economy over the decades. Further, the possible immediate and longer term economic effects of demonetisation are discussed.

It is now widely acknowledged that the public at large is suffering due to the 8 November announcement to demonetise the 500 and 1,000 notes. An overwhelming proportion of the population has been directly punished by this decision that aims to tackle the black economy. Such extreme steps are resorted to only in response to situations of hyperinflation or some form of financial crisis. No such situation exists now.

Indias previous experience with demonetisation was when the then President of India promulgated the High Denomination Bank Notes (Demonetisation) Ordinance on 16 January 1978, demonetising the 1,000, 5,000 and 10,000 currency notes with the objective of eliminating the possible use of such notes for financing illegal transactions (RBI 197778: 77). At that time, demonetisation received limited public attention and had little impact on the daily lives of people. High denomination notes demonetised then, formed just a minuscule fractionabout 0.6%of the total currency in circulation (Table 1, p 14). Further, the demonetised notes were of significantly high value, having little use for common people. The current situation is different, the demonetised 500 and 1,000 notes constitute over 85% of total notes in circulation by value.

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