The demonetization of 500 and 1000
rupee banknotes is a step taken by the Government of India on 8th November 2016
to fight corruption and black money issues in the country. Starting from
midnight of 8 November 2016, all 500 and 1000 rupee notes ceased to be accepted
as a form of legal tender in India. The announcement was made by the Prime
Minister of India, Mr. Narender Modi in a live televised address to the
nation. In the announcement, Mr. Modi declared circulation of all 500 and 1000
rupee banknotes (approximately $7.50 and $15 USD respectively) as invalid
and announced the issuance of 500 and 2000 Rupee banknotes in exchange for the
old banknotes.
On 28 October 2016, the total currency
in circulation in India was Rs. 17.77 Lakh Crore (US$260 billion). In terms of
value, the annual report of Reserve Bank of India of 31 March 2016 stated that
total bank notes in circulation valued to Rs. 16.42 lakh crore(US$240 billion)
of which nearly 86% (i.e. Rs. 14.18 lakh crore (US$210 billion)) was 500 and
1000 rupee notes. In terms of volume, 24% (i.e. 2,203 crore) of the total
9,026.6 crore banknotes were in circulation.
Globally, this is not unusual. Central banks of several
countries pump massive amounts of cash into the economy, mostly in very large
denominations. Across countries, most of this cash has been supporting
underground black economies.Governments have been minting money
for centuries. Government-issued money promises a strong backing, but history
shows that such promises have been hollow. Governments have flooded markets
with currency at their whims to hide their failures. The resulting inflation
has eaten away the hard work and savings of their own citizens.
Why it is done?
It
was found by government of India that fake currency notes of the specified bank
notes have been largely in circulation and it has been found to be difficult to
easily identify genuine bank notes from the fake ones and that the use of fake
currency notes is causing adverse effect to the economy of the country.
The demonetization was done in an
effort to curb financing subversive activities
such as drug trafficking and terrorism, causing damage to the economy and
security of the country.
This is a major setback to the
parallel black money economy because a lot of currency operating outside the
system will now have to be brought into the banking system. The government
believes that this decision has been welcomed everywhere. This major step will
help India's credibility. It will help lower the cash circulation in the
country which is directly related to corruption in the country. Moreover, it
will eliminate fake currency and dodgy funds which have been used by terror
groups to fund terrorism in India.
Impact of the move
It is a big reform which no one
expected and will have a huge impact on people who are hoarding money and not
disclosing money for tax purposes. This is overall a positive move that is
lauded by a lot of people and could bring more confidence in Indian markets by
overseas investors.
It's perhaps the most significant move
ever taken to curtail the parallel economy. It will give a sharp boost to all
formal channels of payments (a shift from cash economy to cashless digital
economy) which in turn will help the formal economy to grow at a faster
clip in the long term.
Mr. Modi has made the right investment
for the next generation. This move should improve India's position on
transparency and corruption in the global league table enabling higher capital
flow (FDI/FII) into India.
Also, demonetization will increase
bank's deposits by a huge margin. This will also increase the lending activity
because banks have a CRR (cash reserve ratio) to maintain and with more
deposits they can do more lending. Credit (loans) will become easier and
interest rates may come down. Thus, it will attract more foreign investors to
do business in India.
Further, the move may push down Real
Estates prices, including land prices as investors will not be able to utilize
their cash in real estate and thereby forcing builders& developers to sell
at lower prices. Greater transparency in Indian real estate sector will assist
in improving the country's image and attract more foreign investments.
Such a move of government will support
overall economy in long run and particularly technology, financial &
banking, logistics, Renewable Energy, Oil & Gas, Roads & Infrastructure
and many more. It is also expected that India will get positive ranking in
terms of curbing the corruption practices and will move upward in doing
business in India index published by World Bank every year.
