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Why is Rs 500 Note Banned in India?  

November 9, 2016

Why has India Banned 500 Rupee Currency Notes

A Clear Vision

In what is now being called a “Surgical Strike Against Black Money”, PM Narendra Modi announced last night that INR 500 and INR 1000 notes will no longer be considered legal tender. The reasons for such a sudden and drastic move are very clear. Black money hoardings (in cash) have now lost their value. Why was the move a sudden one? To preempt any action to convert the black money into gold, property, or any other such holding.

Must Read : Features of New Rs 500 and Rs 2000 Currency Notes

When we stop to consider the fact that apart from illegal hoardings, most of India’s drug money too is held in high value denominations, the government’s decision prompts us to cheer. But was the decision a necessary and well-considered one? Read on.

Executed With Discretion

From the very fact that the new INR 500 and INR 2000 notes are slated to bear the signature of former governor of RBI, Raghuram Rajan and a 2015 printing date, one may infer that the move to demonetize the old notes (of 500 and 1000 rupees) was planned well in advance and executed discretely.

  • To start with, the NaMo government launched the Jan Dhan Yojna bank accounts bringing in the masses into the mainstream banking system. As of June 2016, over 220 million bank accounts were opened under this scheme, making way for every Indian to have access to the banking system and to legitimate financial institutions.
  • In his budget speeches, FM Jaitley has repeatedly stressed the need for Indians to come clean with their accounts and has passed guidelines to recover black money stashed away.
  • In 2015, the NaMo government launched its Voluntary Disclosure of Black Money scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015. Foreign assets worth about INR 4,147 crore were declared under this scheme.
  • In 2016, again, the government launched the Income Declaration Scheme (IDS) allowing every tax assessee to file returns and pay the taxes of previously undisclosed income.

Having provided the people of India ample opportunity to come clean with any undisclosed black money hoardings and to legitimize them, the government finally decided to close the dragnet and demonetize the higher currency notes which are largely used to hoard cash outside of the accounts. With the demonetization, all the cash stashed away by hoarders shall lose its value.

The masses will be inconvenienced for a short period but will not be affected, since the government has opened up a window for depositing and exchanging any cash in INR 500 and INR 1000 notes held by the people.

Fake Money

The battle against fake currency has been a rather old one. Fake Indian Currency Notes (FICN) have caused untold damage to the Indian economy and have destabilized our country’s financial well-being for well over a decade, experts believe. FICN are also the means of funding terrorist activities in the country, says the National Investigative Agency (NIA). In fact, repeated discoveries of incredibly large numbers of INR 500 and INR 1000 notes in circulation have disturbed investigators since the 2008 Mumbai terror attacks. According to the Central Forensic Science Laboratory (CFSL), most of the FICN in circulation are high quality counterfeits and are quite indiscernible under normal conditions.

In 2015-16, there are about 6.5 lakh FICN of INR 500 and INR 1000 in circulation, said the RBI. And this is a conservative estimate based on the fakes detected in banks. Demonetization and issuance of new notes with better security features seems to be the only way this menace can be combated and routed.

The Black Money Conundrum

Black money is money that has not been accounted for and on which the government has not received its due taxes. The Special Investigation Team (SIT) set up by the government has reported that unaccounted domestic wealth in the country is close to INR 14,958 crore. Apart from this, INR 4,479 crore is believed to have been hidden away in Swiss accounts.

This means that the taxes due to the government of India from these funds amount to hundreds of crores. This is the money that the government may utilize to improve infrastructure, create social security, and subsidies for the low income groups and fuel development of the nation. The government’s attempt to flush out black money by demonetizing INR 500 and INR 1000 notes is a very important milestone in this battle against black money and corruption.

Timing It Right

The timing of the demonetization of INR 500 and INR 1000 notes couldn’t have been better. The retail business in India booms through the festive season. Predictions from early October suggest that the sales numbers of online retail giants Flipkart, Amazon, Myntra, Snapdeal, and Shopclues put together this year were likely to top INR 18720 crore. The offline retail sales are likely to have accounted for much, much more. This makes early November the time for many to hold illegitimate cash. The demonetization announcement made on 8 November, 2016, is thus likely to flush out huge hoards of black money.

Another way that PM Narendra Modi got this right is when we start to consider the upcoming state assembly elections of 2017. Uttar Pradesh, Punjab, and Gujarat assembly elections of 2017 are all set to be the highlights of the Indian political landscape in months to come. Traditionally, in the absence of detailed election funding reports, every poll in India – both Lok Sabha and state assembly – has been generously peppered with illegal transactions and exchange of black money running into many crores. The move to demonetize the old INR 500 and INR 1000 will force many parties to play straight and clean up the electoral process as well. Buying votes for notes may now be a thing of the past – a much needed reform in Indian politics.

Promoting Plastic Money

The demonetization of the larger denomination notes that make up about 86 percent of the currency in circulation is an attempt to push India towards a cashless economy. Though this may not have been the intended outcome, the transition is also inevitable. With development, it is necessary to increasingly accept the use of cards, electronic and paper money for financial transactions. To make this possible, the government of India had launched the RuPay debit cards linked to the Jan Dhan Yojna bank accounts in 2014.

Read More:

Can India really become cashless?
How to Convert Black Money into White
Note Ban Juggernaut May Hit Poll Campaigns in UP, Punjab
Spiritual Life Lessons after Note Ban in India
Rubbing salt worth Rs 400/kg into people’s wounds?
Rs 500 and Rs 1000 Note Ban Imapct on Economy, Real Estate and Other Sectors
Why India Banned 500 Rupee Currency Notes
Rs 500 and Rs 1000 Notes Banned, New Rs 2,000 Note to be out on 10th November
Will India be able to bring back the Black Money?
Modi’s Vision for Banking Industry
Black Money Law: Will it Make a Positive Difference?


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An Indian. Born a princess, now a storyteller. A gypsy at heart, rebel by nature, TamBrahm by nurture. Quintessential wine woman. An empath. A fauji biwi.

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