ISS Previous Year Paper 2018 GS Solution Question 3(c) Demonetisation and Its Effects on the Economy and Black Money

ISS Previous Year Paper 2018 GS Solution Question 3(c) Demonetisation and Its Effects on the Economy and Black Money. Detailed answer discussing the objectives, benefits, and challenges of demonetisation in India.

ISS Previous Year Paper 2018 GS Solution Question 3(c) Demonetisation and Its Effects on the Economy and Black Money

ISS Previous Year Paper 2018 GS Solution Question

Q.3(c) Explain the term ‘Demonetisation’. Assess the effects of demonetisation on the economy and on black money.

Answer :

Demonetisation is the process through which a government withdraws the legal tender status of existing currency notes and replaces them with new ones.

The Government of India demonetised ₹500 and ₹1000 notes in November 2016 to address issues such as black money, fake currency, tax evasion, and illegal financial activities.

One of the positive effects was the promotion of digital payments and financial inclusion. The use of online banking, mobile wallets, and electronic transactions increased significantly. Demonetisation also expanded the tax base by encouraging greater disclosure of income and financial transactions.

However, the policy caused short-term disruptions in the economy. Cash-intensive sectors such as agriculture, small businesses, construction, and the informal sector experienced difficulties due to cash shortages. Economic activity slowed temporarily, affecting employment and consumption.

Regarding black money, demonetisation helped identify suspicious financial transactions and increased scrutiny of unaccounted income. However, since a large proportion of demonetised currency returned to the banking system, debates continue regarding its overall effectiveness in eliminating black wealth.

Thus, demonetisation had mixed outcomes, producing both economic challenges and structural changes in the financial system.

Conclusion

Demonetisation was a major monetary policy intervention aimed at promoting transparency and reducing illegal financial activities. While it accelerated digital transactions and improved tax compliance, its impact on black money and economic growth remains a subject of discussion.