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.