India recently scrapped two of its large denomination currency notes. Starting midnight November 8, all 500 and 1,000 Rupee notes currently in circulation in the country were declared invalid. Shockingly, the country’s administration might be considering extending the demonetization plan or replacement program to include all lower denomination currency notes as well.
The Indian government, led by Prime Minister Narendra Modi, recently and abruptly invalidated all 500 and 1,000 Rupee notes circulating in the country. Although the Indian administration has made several provisions to facilitate a smooth collection and exchange of paper-based legal tenders, the country’s 1.25 billion citizens have been facing a lot of inconvenience, confirmed multiple local news publications. Hence the indication that the government is planning to replace all paper currency with new and improved versions may cause widespread panic.
The Prime Minister of the largest democracy in the world, Narendra Modi, invalidated all the 500 and 1,000 Rupee notes with a mere four-hour window. Needless to say, the entire population faced a huge dilemma, because all the large denomination currency notes in their wallets were now useless from a transactional perspective. Moreover, a majority of the people had far fewer lower denomination currencies ready for immediate, low value, and daily purchases.
In his emergency broadcast, Mr. Modi acknowledged that his decision would inconvenience all the citizens, as well as foreigners who were within India. But he stressed that the measure was critical to stem the flow of counterfeit currency as well as black money currently being hoarded in huge amounts. By declaring all the large denomination current currency notes as invalid, the government was forcing the black money out. Moreover, the government has decided to slap heavy penalties on cash deposits in case the Income Tax Returns (ITR) filed by the depositing person is way too low for the cash bundles being brought in.
Incidentally, many countries have in the past scrapped large denomination currencies. But the Indian government is merely replacing them. After the 500 and 1,000 Rupee notes are collected and accounted for, the administration plans to introduce new 2000 as well as 500 Rupee notes. Interestingly, Economic Affairs Secretary Shaktikanta Das hinted that the government might also introduce 1,000 Rupee notes shortly, reported the India Times. The secretary did not offer any specific timeframe but implied that the current process might just be the beginning of a complete overhaul of the physical currency in India.
Interestingly the Indian government managed to keep the decision a secret until the last four hours it was made public. Since it affects more than a billion people, the decision wasn’t a small one, and had been in the pipeline for “last few months.” But, according to Das, “Only 2-3 people in the RBI were involved in the designing of notes.”
The demonetization plan was kept a closely guarded secret, and only a handful of top officials were privy to the same. As an added measure, all the ministers associated with the move, were quarantined. Not taking any chances, all the members of the country’s apex banking organization, Reserve Bank of India, left the undisclosed premises only after Mr. Modi had completed his televised address.
While addressing the Economic Editors’ conference in New Delhi today, Mr. Das explained the reasoning behind the abrupt decision that left no time in the hands of the common citizenry.
“[The decision was taken to] halt terror being funded by Pakistan, and to stem the rising tide of black money.”
He even claimed that the demonetization process would “affect the spending habits of people.” He was referring to the cash-only deals in some large sectors like gold and jewelry, and real estate. In an attempt to avoid taxes, even large deals in the country are conducted in cash exchanges. Cash transactions have resulted in a lot of “unaccounted wealth,” lamented India’s Chief Economic Adviser Arvind Subramanian.
But those who deal with other legal techniques, including electronic payments, debit/credit cards, and cheques, need not worry, assured multiple experts.
According to official numbers, there are more than 2.3 billion 500 and 1,000 Rupee notes in circulation. These large denomination currency notes constitute almost 80 percent of all the monetary transactions.
With no adequate time to replace all these notes with those of lower denomination across the big country, there were bound to be a lot of problems. However, the inconveniences are quite insignificant in comparison to the benefits, said India’s Finance Minister Arun Jaitley,
“There will be an impact on small purchases for a few days, till there is adequacy of currency, but it is beneficial in long run. It is only those with large amounts of undisclosed money who will have to face the consequences under existing laws.”
The government has ordered all the major banks in the country to remain operational over the weekend. Additionally, many of the financial institutions have waived off the various charges associated with physical handling of the cash.
[Featured Image by Diptendu Dutta/Getty Images]