Insights into Editorial: Rs. 500, Rs. 1,000 notes no longer legal tender
The union government has announced that five hundred and thousand rupee notes will cease to be legal tender from today. This move is aimed at rooting out the menace of black money and corruption.
What is this scheme?
The legal tender character of the existing bank notes in denominations of Rs 500 and Rs 1000 issued by the Reserve bank of India till November 8, 2016 stands withdrawn. In consequence thereof, these bank notes cannot be used for transacting business and/or storage of value for future usage. These bank notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any of the bank branches or at any head post office or sub-post office.
How many Rs 500 and Rs 1,000 notes are floating around?
According to the RBI press conference today, there are 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1000-rupee’ notes in circulation right now.
- In addition to this, RBI data shows that the share of Rs 1,000 notes in the stock of currency in circulation at the end of financial year 2014-15 was 39%. Rs 500 notes accounted for a further 45% of currency stock.
- Putting it simply, a little over 80% of the cash in India (by value) will be worthless pieces of paper.
What was the need for such move?
The incidence of fake Indian currency notes in higher denomination has increased. For ordinary people, the fake notes look similar to genuine notes, even though no security feature has been copied.
- The fake notes are used for anti-national and illegal activities. High denomination notes have also been misused by terrorists and for hoarding black money.
- Therefore, in order to contain the rising incidence of fake notes and black money, the scheme to withdraw the Rs 500 and Rs 1000 notes has been introduced.
What’s good about this move?
- First, people who have a lot of cash, legally earned, will deposit it in the bank. This 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. More loans given out increases broad money supply and creates inflation.
- On a long-term basis the government’s decision to curb black money would reduce corruption and bring transparency into the sector.
- The move will benefit the poor, middle class and aspirational middle class by increasing opportunity and bringing real estate and higher education within their reach again.
- The government’s move will benefit companies in the cashless economy.
- Rupee will strengthen as the time passes. Inflation will go down which will benefit poor and middle class people.
- Investments in gold and jewelries will increase as trust on currency will go down. More people will try to convert paper into gold. It will eventually increase investment in the government’s gold monetization scheme.
- More and more businesses will be organized those who accept paper money only such as small jewelers, hotels etc.
- Funding for arms, smuggling, terrorism will take a blow. This is most important advantage to the country.
- Circulation of counterfeit currency will see the end soon.
Who will be affected by this move?
- The lower/middle class will not find it tough to account for or exchange the currency. The real fear will be for those who have unaccounted money.
- Land and property prices, particularly those of luxury homes, are likely to come down in the short to medium term as a result of this move.
- The impact of this will be huge in many markets where payment of cash is mandatory and the major form of profit-taking. These markets will see a major crash making an already difficult situation even more challenging.
- The demand for gold and other investment options such as diamonds and silver may shoot through the roof until the deadline, and beyond it.
This ban on high denomination currency has the potential to dramatically push up the volumes of electronic transactions. Consequently there are new cyber security implications.
- In the emerging cashless transaction environment the government and the businesses will have to be on their feet to guard against cyberattacks as they are carried out not merely by criminals, but also by nation states.
- Cyber warfare perpetrated by enemy states has the potential to hit a country’s economy. Terrorist networks will find ways to penetrate the most protected vaults in the world in the absence of unregulated cash transactions.
What needs to be done?
There is an immediate need for banks to get proactive about information security and beef up their IT infrastructure against potential cyberattacks. What holds good for banks, also holds good for other businesses as cyber criminals are quite capable of targeting Point of Sale terminals, mobiles and a variety of other devices.
With more electronic transactions and monitored cash disbursals the government will have better control on who has access to money. But we will need a robust and a proactive cyber security strategy to ensure these objectives will work.
While political parties welcomed the announcement, they cautioned the government must be open to changes so that common people are not penalized in the process of fighting corruption and black money.
In the medium to long-term the policy that emerges will determine how much corruption will return in due course. The RBI and government will need a massive outreach and communication program to calm the frayed nerves of the common citizen and transition to the new currency notes.
The government’s move is bold in its intent and massive in its measure. While the intent is clear, the implementation and impact is yet to be seen. One thing is sure though – the Indian economy just had a massive disruption overnight.