Consider the following statements about the effects of demonetisation of November 2016:
(A) Demonetisation improved tax compliance, as a large number of people were brought into the tax ambit.
(B) Under demonetisation, the savings of individuals were channelised into the formal financial system.
(C) During demonetisation, the shortage of currency in circulation had an adverse impact on economic activities.
(D) After demonetisation, households and firms began to shift from electronic payments to cash.
(E) After demonetisation, banks had fewer resources at their disposal to provide loans.
How many of the statements given above are correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Three
Demonetisation caused a shortage of cash for a while, but it also had positive effects.
(A) Demonetisation improved tax compliance, as a large number of people were brought into the tax ambit. — Correct. Tax compliance means paying the taxes that are due.
(B) Under demonetisation, the savings of individuals were channelised into the formal financial system. — Correct. Savings went into the formal financial system, so banks got more resources.
(C) During demonetisation, the shortage of currency in circulation had an adverse impact on economic activities. — Correct. Long queues and the shortage of cash hurt economic activity for a while.
(D) After demonetisation, households and firms began to shift from electronic payments to cash. — Incorrect. The shift was the other way, from cash to electronic payments.
(E) After demonetisation, banks had fewer resources at their disposal to provide loans. — Incorrect. Banks got more resources to give loans at lower interest rates.
NCERT (2026-27): “Box No. 3.2: Demonetisation … This move received both appreciation and criticism. There were long queues outside banks and ATM booths. The shortage of currency in circulation had an adverse impact on the economic activities. However, things improved with time and normalcy returned. This move has had positive impact also. It improved tax compliance as a large number of people were bought in the tax ambit. The savings of an individual were channelised into the formal financial system. As a result, banks have more resources at their disposal which can be used to provide more loans at lower interest rates. … Demonetisation could also help tax administration in another way, by shifting transactions out of the cash economy into the formal payment system. Households and firms have begun to shift from cash to electronic payment technologies.” |