A well organised system of exchange in an economy based on the use of money is described as monetisation. Under monetisation, money is introduced as a medium for the smooth operation of transactions of goods and services for the mutual satisfaction of wants.
A barter economy is non-monetised. Monetisation is a process under which the barter and subsistence sectors of an economy are brought and tied up with its monetary exchange sector.
Monetisation process implies extension of monetary exchange to the barter system. Monetisation, in essence, means conversion of barter into the monetary economy.
Existence of non-monetisation in a modern economy reflects the stage of its economic backwardness. The degree of monetisation is, thus, an index of a country’s monetary development and general economic advancement.
In a backward economy, usually, a large part is non- monetised. The non-monetised sector is subsistence and stagnant. This sector is, by and large, self-sufficient where production is just meant for self-consumption.
There is little marketable surplus. And, a very limited exchange, if any, takes place on a barter basis. Use of money is unfamiliar to the people in the sector.
As per an estimate made by Dr. Madalgi, during the mid- seventies, about 15 per cent of Indian economy’s output in rural hinterland and Adivasi areas was non-monetised.
This non-monetised output includes: (i) partly barter transactions, (ii) partly output for self-consumption, and (iii) payment of wages to workers in kind.
Expansion of money supply in such successive stage of economic development spreads the process of monetisation in the economy. With economic progress, when exchange complexities tend to multiply.
When agriculture becomes more and more commercialised with an increasing amount of marketable surplus, diversified consumption pattern and varied production pattern.
The need for intermediation of money to effectuate smooth and rapid transactions becomes more and more intense which paves the way for the expansion of the monetised sector by bringing the barter sections under its purview.