Denominations of ?1,000 and ?500 in India

What is the biggest headline in the country these days? All media including Print Media, Digital Media and Social Media is flooded with this news only. Well, I gonna talk about most talked issue here. Yes, its currency ban in India. Honorable Prime Minister of India Mr. Narendra Modi announced that from midnight of 8th November, ?1,000 and ?500 notes will not be legal tender money. The common people started running to their nearest banks, post offices and other available options to exchange all these notes they have with themselves. There was a huge panic in the general masses regarding it. Now question arises, what lead the GOI to #denominations of ?1,000 and ?500 in India? Well, PM said “that denomination will help us to trace out all the unaccounted money or Black money”. He also said that “Black money is one of the major hurdles in the economic growth of the country.” “He said that a large amount of money is not in the circulation as it is kept hidden from the view of the Income Tax Authorities to save the tax to be paid on it. This leads to fewer amounts in the public exchequer which can be used for various developmental projects in the country”. As per a #WorldBank study, black money was around 23.2% of the GDP in 2007.

These high value money notes are used in other public offences such as money laundering, racketeering, drugs and people trafficking. The RBI also adds another reason for this decision that “There is a rise in fake money of higher denominations in India and the move will curb this problem.” So the reasons are clear. These note ?1,000 and ?500 which are being banned in India is to the tackle the biggest problem of #BlackMoney and #FakeCurrency in India and to tackle the problems associated with them such as trafficking which have an adverse impact on the economy.

Advantages of Ban on ?1,000 and ?500 Notes:-

Every decision has its own impact which can be measured both on the positive and negative sides. So let me explain the positive impacts of this decision by the GOI.

Positive For Banking Sector:

A large amount of cash in circulation will be brought within the purview of the formal banking system by way of deposits. This is structurally a positive for banks as part of this cash gets deposited as current account and savings account (CASA) deposits, reducing banks dependence on higher cost borrowing. Deposit deployment remains a challenge in the short to medium term due to the current tepid demand for credit, thus pushing deposit rates lower. Major PSU banks are making loss so #Banks need cash for smooth operation. Due to denomination of high value currency, common people will deposit cash into banks.

The Reduction in Black Money

The aim is to reduce black money and this can be achieved through this Ban on ?1,000 and ?500 Notes. The money in circulation has been restricted in this way. The people with black money have no option but to bring out the undisclosed money with them as now this immediate decision has not given them the time to think of any alternative so soon. So they have no options but to take one of the routes provided by the government.

Tackling Counterfeit Currency

As per the data by RBI, in 2015-16 6.5 counterfeit notes were detected in the commercial banks out of which 4 lakhs were in the ?1,000 and ?500 Notes category. So all those who print counterfeit notes their printing machines now are at a hault now and the fake currency can be easily dealt now.

Smuggling and Trafficking will Get Choked

These activities which are associated and grow on this black money will get chocked and they can now be easily perished due to lack of availability of funds.

• The real estate sector will get more ‘white’- The real estate sector where black money is generated at an accelerating rate will get curbed efficiently. This step will give this sector more credibility and transparency.
• The Benami transactions– ‘Bye Bye’: these have already received a big blow as the new legislation has a provision for seven-year imprisonment and fine, replacing the three-year jail term, or fine, or both.

Disadvantages Demonetization of ?1,000 and ?500 Notes

This all does not only has only a happy side. There are some cons associated with Ban on ?1,000 and ?500 Notes too:

Liquidity Crunch in Economy

Liquidity shock means people are not able to get sufficient volume of popular ?1,000 and ?500 notes after denomination. The currency of the aforesaid denominations constitutes around 86% of the total value of the currency in circulation, thus its impact on the cash economy will be significant. Do you know the value of ?1,000 and ?500 notes in circulation? Let me tell you the value and volume of ?1,000 and ?500 Notes. There’re 3,917 crore pieces of ?500 legal notes in tender and value of ?500 notes are 47.8 lakh crore. Similarly, there’re 632 crore pieces of ?1,000 legal notes in circulation of 38.5 lakh crore. ?1,000 and ?500 notes together valued at 16.4 lakh crore which is 86% of all legal currency. Economy will be breathless if 86% of money goes out of market suddenly.

Welfare Loss for the Currency Using Population:

Most active segments of the population who constitute the ‘base of the pyramid’ uses currency to meet their transactions. The daily wage earners, other labors, small traders etc. who reside out of the formal economy uses cash frequently. These sections will lose income in the absence of liquid cash. Cash stringency will compel firms to reduce labor cost and thus reduces income to the poor working class. There will be a trickle up effect of the liquidity chaos to the higher income people with time.

Consumption Will be Hit:

When liquidity shortage strikes, it is consumption that is going to be adversely affected first.

Consumption ↓→ Production ↓→ Employment ↓→ Growth ↓→ Tax Revenue ↓

Replacement Cost in New Currency Printing:

There is a cost involved in the printing of these notes which varies according to the denomination of these notes for example cost of printing ?1,000 and ?500 notes are ?3.17 and ?1,000 and ?2.5 respectively. So a huge amount involved in printing these notes will get wasted. To put in simple words 86% of the cash in India has become worthless. In total, removing the old notes and replacing them with the new ?2,000 and ?500 notes will cost the central bank a total of at least ?16,000 crore. This figure is likely to go up since additional security measures, which the new notes are set to have, will only add to the cost of printing.

Loss of Growth Momentum:

India risks its position of being the fastest growing largest economy: reduced consumption, income, investment etc. may reduce India’s GDP growth as the liquidity impact itself may last three -four months.

Impact on Small Businesses

The small businesses strive on day to day cash transactions for payments etc. They will suffer a blow in the short term till New ?2,000 and ?500 notes are in plenty supply in the economy.

High End Retail Demand to Fall

The impact on high end fashion retail and luxury goods is expected to be more pronounced as discretionary demand in this segment will be curtailed. In case of Quick Service Restaurants, although 60%-70% of the transactions are currently in cash, the impact is likely to be moderate due to the low ticket size of purchases and high likelihood of patrons adapting to plastic money. We expect a limited impact on the food and grocery retail sub-segment, given the non-discretionary nature of purchases in this segment, as well as since the buying cycle for the current month would have been largely completed. Ind-Ra expects demand across the retail sub-segments to shift to the organized segment over the medium term.

India Standing in Queue:

While Indian cities are full of bank branches, those living in rural areas are in big trouble exchanging the old notes a little difficult. Only 23% of Indian villages have a bank within 5 km (three miles). The sudden decline in money supply and a simultaneous increase in bank deposits are going to adversely impact consumption demand in the economy in the short term.

Lethal Denomination:

Many media shows that people standing in queue day and night to exchange old currencies and withdraw new notes. As lines outside banks and ATMs continue to grow, the death toll rises as well. In the past 10 days since the GOI scrapped ?1,000 and ?500 notes in a bid to weed out black money, 50 deaths have been reported across the country that can be directly or indirectly linked to the sudden currency ban move.

Apart from above mentioned unfavorable conditions we also have to see the impact of denomination of Indian economy.

Black Money is Still There:

The major black money which is in the tax havens in the foreign banks and gold still remains unaccounted and unaffected. The time to switch over to the new notes of ?2,000 and ?500 will cause chaos and pain for a short duration of time. Only a small portion of black money is actually stored in the form of cash. Usually, black income is kept in the form of physical assets like gold, land, buildings etc. Hence the amount of black money countered by demonetization depend upon the amount of black money held in the form of cash and it will be smaller than expected. But more than anything else, demonetization has a big propaganda effect. People are now much convinced about the need to fight black income. such a nationwide awareness and urge will encourage government to come out with even strong measures.

Highlight about New Notes of ?2,000 and ?500

Features of the new ?2000 Note

1. See through register with denominational numeral 2000 can be seen when the note is held against light
2. Latent image with denominational numeral 2000 which can be seen when the banknote is held at 45 degree angle at the eye level
3. Denominational numeral 2000 in Devnagari
4. Portrait of Mahatma Gandhi in the centre
5. Micro letters ‘RBI’ and ‘2000’

Features of the new ?500 Note

1. See through register with denominational numeral 500 can be seen when the note is held against light
2. Latent image with denominational numeral 500 which can be seen when the banknote is held at 45 degree angle at the eye level
3. Denominational numeral 500 in Devnagari
4. Portrait of Mahatma Gandhi in the centre
5. Micro letters ‘RBI’ and ‘500’

The scheme closes on 30th December until which you can exchange all your notes of these denominations of ?2,000 and ?500 notes. The scheme has a mixed effect on the public. Some take it as a welcome step towards combating the problem of black money other regard it as a nuisance only time will tell how effective it has been. Till then exchange ?1,000 and ?500 notes from banks.

Note: Denomination is a good move. Execution was very poor. Government's duty is to not to create problems for common people. Views are my personal. While writing this article, I have use my knowledge & understanding and took help from RBI website, Business World, The Hindu, Economics Times and other sources. I’m sure, many of you may not agree with my points or facts/figure.

Amar Kishore Thakur | Digital Marketing

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