#MASTERSTROKE

On Tuesday, 8th November 2016, in an unscheduled live televised address to the nation at 8:15 pm, Prime Minister Narendra Modi in a 40 minute long speech announced the demonetization of existing notes of Rs 500 and Rs 1000 with immediate effect. In the announcement, Mr. Modi declared circulation of all 500 and 1000 banknotes of the Mahatma Gandhi Series as invalid from 8th November 2016 midnight. He further announced the issuance of new 500 and 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old bank notes effective from 9th November 2016. Mr. Prime Minister announced that the notes of Rs 500 and Rs 1000 “will not be legal tender from midnight tonight” and these will be “just worthless pieces of paper. PM also urged people to ‘join this Mahayagna against the ills of corruption.

What is demonetization of currency?

Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as an official mode of payment. According to Investopedia, demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of National Currency. The old unit of currency must be retired and replaced with a new currency unit.

Similar measures have been taken in the past. In January 1946, currency notes of 1000 and 10,000 rupees were withdrawn and new notes of 1000, 5000 and 10,000 rupees were introduced in 1954. Notes of 1000, 5000 and 10,000 rupees were again demonetized on 16 January 1978 as a means to curb forgery and black money.

A recent example of demonetization occurred when the nations of the European Monetary Union adopted the euro. In order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into Euros. When the euro was introduced, the old national currencies were demonetized. However, the old currencies remained convertible into Euros for a while so that a smooth transition through demonetization would be assured.

What was the reason?

The reasoning given by Modi was:

1) To tackle black money in the economy.

2) To lower the cash circulation in the country which “is directly related to corruption in our

Country”, according to PM Modi.

3) To eliminate fake currency and dodgy funds which have been used by terror groups to fund

terrorism in India.

4) The move is estimated to scoop out more than more than  Rs 5 lakh Crore black money from

the economy, according to Baba Ramdev, a staunch Modi supporter.

After the official announcement by Prime Minister Modi, the Governor of the Reserve Bank of IndiaUrjit Patel and Economic Affairs secretary, Shaktikanta Das explained in a press conference that while the supply of notes of all denomination were increased by 40% between 2011 and 2016, the 500 and 1000 banknotes increased by 76% and 109% respectively in this period owing to counterfeit money. This was then used to fund terrorist activities against India. As a result the step of eliminating the notes was taken.

Patel also informed that the decision was made about six months ago and printing of new currency notes of denomination 500 and 2000 had already been started. However, only the top members of the government, security agencies and the central bank were aware of the move

Reactions:

  • Finance Minister Arun Jaitleysaid that demonetisation would clean the complete economic system, increase the size of economy and revenue base
  • CM of West Bengal Mamata Banerjee called the new declaration as “drama”
  • Indian National Congress spokesperson Randeep Surjewala welcomed the move but remained sceptical on the consequences that would follow
  • Former World Bank Chief Economist, Kaushik Basu, said that the ‘damage’ is likely to be much greater than any possible benefits
  • Chief Minister of Bihar Nitish Kumar supported the move.
  • The demonetisatioin also got support from Chief Minister of Andhra Pradesh Nara Chandrababu Naidu.
  • Former Chief Election Commissioner of India  Y. Quraishi said demonetization could lead to long term electoral reforms
  • The decision was both praised and criticised by businessmen, bankers and politicians. Businessmen Anand Mahindra(Mahindra Group), Sajjan Jindal(JSW Group), Kunal Bahl (Snapdeal and FreeCharge) also supported the move adding that it would also accelerate e-commerce.
  • According to MD & CEO, ICICI Bank, Chanda Kochhar, “this move will definitely bring about a whole amount of transition to no cash or low cash kind of transactions,”.
  • “A parallel black economy will collpase,” one of the leading lawyers in taxation laws, Harish Salve told ET Now.
  • Narayana Murthy, founder of the InfosysBSE -1.78 %, welcomed the government’s move in its fight against corruption. Murthy also added that “the dishonest will have to suffer; absolutely that is the right thing.”
  • The opinion of the masses varied both ways on micro-blogs and social media sites like Twitter. In general, the move to demonetise and try to hinder black money was appreciated, but the manner in which it was carried out by causing hardships to common people was criticised.

 Aftermath:

  • About 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (which hundreds of millions don’t have) and the additional hardship of standing in many queues for many hours.
  • Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 130 million Indians have mobile wallets (about 25 million have credit cards) and there are maybe 550-600 million debit cards in circulation. So access to cash is very, very important for average Indians.
  • Lineups at banksand ATMs are long.
  • Demand for goldis up giving some jewelers a temporary albeit welcome windfall. Perhaps most telling is that at Zaveri Bazaar in Mumbai old notes were going at a 60% discount–that is a very heavy discount. Other sources, however, indicate that discounts can be had for as low as 20%. Discounting, however, is illegal and the government is cracking down.
  • Major highway toll junctions on the Gujarat and Delhi-Mumbai highways also saw long queues as toll plaza operators refused the old banknotes.
  • Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai, Chandigarh, Ludhiana and other cities that traded with demonetised currency.
  • The scarcity of cash due to demonetisation has led to chaos and long queues at ATMs and banks across India.
  • The move also crippledNaxalite financing through money laundering. Mumbai Police reported setback to Hawala operations. Hawala dealers in Kerala were also affected
  • Large sum of cash were seized in different parts of the country. Bag of burnt notes was found in Uttar Pradesh following demonetization. In Chhattisgarh cash worth of 44 lakh was seized. In Malda, a large sum of cash deposits in dormant accounts were reported. According to National Investigation Agency the district is transit for fake Indian currencies.
  • According to the RBI directive, citizens are allowed to exchange old banknotes upto a value of 4000 with new 2000 and 500 banknotes and 100 banknotes only once till 24 November 2016. However, there have been reports of people circumventing the restriction by making multiple such transactions at different bank branches.

– Yash H. Doshi

http://www.investopedia.com/terms/d/demonetization.asp

http://marginalrevolution.com/

https://en.wikipedia.org/wiki/Indian_500_and_1000_rupee_currency_demonetisation

http://economictimes.indiatimes.com/

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s