Currency Demonetization: Essay by Anubhuti Maithani, NALSAR

By Anubhuti Maithani, NALSAR

On the evening of 8th November 2016, Prime Minister Narendra Modi made an unprecedented speech on national television which opened the floodgates of Facebook memes and WhatsApp jokes before making way for more serious discussions.

All currency notes of denominations Rs. 500 and Rs. 1000 were to lose legal sanction from midnight. While currency notes of Rs. 500 are now to be re-issued, Rs. 1000 currency notes will be completely done away with. Additionally, technologically advanced currency notes of denomination Rs. 500 and Rs. 2000 will be introduced in limited numbers from November 10. However, all notes in lower denomination will remain unaffected.

The objective is to curb black money, corruption and terrorism.

In his 40-minute address, Modi said that notes of Rs. 500 and Rs. 1000 would merely be “just worthless pieces of paper”. Modi talked about how India has become the “bright spot” in the global economy and the government’s dedication to fight against poverty and initiatives towards participation of the poor in the benefits of economic progress.

The Reserve Bank of India, later in its press conference, said that India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw these currency notes has been introduced.

Several impacts of this decision can be ascertained.

Although people with black money obviously stands the most affected, there are several implications that have to be faced by the average middle class person, farmers, banks and the economy as a whole.

Although there will be an apparent inconvenience to the common man initially, given the short span of time to get these currency notes exchanged or deposited in banks and post offices, but he/she is expected to adapt to the new currency system in a reasonable time.

Rural area farmers will have slightly more inconvenience keeping in mind that this is the Rabi crop harvest season, where the farmer must have earned cash for their harvest. This concern was raised by the Congress spokesperson Randeep Surjewalla.

Also, in rural areas the exchange and deposit system can be expected to take a long time in case there is a bank in the village and inconvenience in terms of transportation, additional expenses and time is easily foreseeable in case there is no bank in the village and the people have to go to the city for this purpose.

The banks, however, are expected to experience two types of problems. One is the logistical problem of handling all the money in case a large number of people choose the easier way of depositing all their cash in their bank accounts or of providing smaller denomination currency notes in case there is a huge demand for withdraw or exchange.

The other problem is the managerial difficulty of handling long queues and the overburden of work in the next couple of days. This expectation gave rise to the government’s decision of shutting down banks for public dealings for one day and instead let them deal exclusively with issues relating to deposit or exchange the demonetized currency notes.

In terms of the impact on the economy, there has been speculation about deflation in the economy by one set of people due to expected fall in corruption and black money while the other expects inflation to take place due to speculated increase in investment of Gold, real estate and foreign currency.

Narendra Modi’s decision has also had its share of criticisms and concerns already. These span from the inconvenience caused to the common man to the assertion that the plan does not solve the problem at all.

The obvious concern raised is of the impending inconvenience which will be caused to common man due to the operation of this decision.

ATMs will not operable on 9th and 10th November, only 50 days are provided for exchanging and depositing notes in banks and post offices, and even though officially some emergency places like hospitals, train/bus bookings, petrol pumps, etc. are supposed to accept these invalid OHD notes till 11th November midnight, in reality even these people will avoid taking these notes since petrol pumps and retail outlets will have to keep a record of every single transaction involving these OHD notes.

The Rs. 2000 and new Rs. 500 currency notes will be circulated in limited numbers. National Highways are made toll tax free till November 11th after seeing a day of delays and jams on these highways owing to the lack of smaller currency with people.

Considering the fact that only about half the population of India has a bank account (World Bank report), there is a substantial section of the society that will find it difficult to get their currency exchanged.

In the FAQs provided on the RBI website, it states that in case a person does not hold a bank account, he/she can open one now and then transact through her account. However, this doesn’t seem like an excellent plan. For instance, some expected problems of opening new bank accounts can be lack of incentive and lack of formal identification papers.

Some other concerns that came to light was that even though people applauded the initiative, they were unsatisfied with the small window of time provided for both legal transaction of higher denomination currency and the short span of 50 days provided for exchanging or depositing your currency notes at bank branches or post offices.

Now let’s address the big question: will it work?

Given the fact that black money is stored in various forms such as Gold, real estate, overseas tax havens and cash, demonetizing currency notes of Rs. 500 and Rs. 1000 will only curb black money that is in the form of physical/ hard cash. But since this form of black money, after this step, is the only form we can tackle right now, there does not seem to be a reason why we shouldn’t.

In other words, if the plan does not seem to address all facets of the problem, it does not necessarily mean that it is an inadequate solution. This is all the more legitimate in the face of lack of alternatives. According to the World Bank 2010 report, black money formed about 23.2 percent of India’s GDP in 2007. Given such a state, we cannot afford to wait for a better comprehensive solution.

There have been prior examples of such a move in various countries. In February this year, Europe was considering abolishing circulation of 500 Euro bills in order to curb tax evasion and terrorism funding. In the same month, US treasury secretary Larry Summers recommended that the $100 bill be demonetised.

However, it is essential to note here that although it is an excellent move towards curbing corruption, the plan can by no means be a conclusive step.

The government has initiated a war against corruption and black money but this must be treated as a beginning and further steps should be taken to stop generation of black money and the need to do so. Only then will this decision of demonetising high denomination currency hold the significance the government has intended it to.

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