Rs 500 and Rs 1000 notes Scrapped!
In a game changing move at 8 P.M. on November 8, 2016, PM Modi addressed the nation to announce that w.e.f midnight of 8th November all existing Rs 500 and Rs 1000 currency notes have been scrapped. These will now be replaced with new Rs 500 and Rs 2000 currency notes, which will be progressively introduced starting November 10, 2016.
The Prime Minister acted on the advice of the Financial Intelligence Unit (FIU); the concern that suspicious money circulation had increased 13 times and was being used to fund terrorist and other criminal activities. This advice was sent this afternoon to the Finance Ministry and therefore, there was an added urgency to this step.
Here, it must be said that this move was in the planning for some time and the complete secrecy surrounding the public announcement by the PM on television shows the government’s ability for pulling off a major reform without business cronies getting the heads-up. That’s a first in India.
What people need to know
- The existing Rs 500 and Rs 1000 will seize to be legal tender w.e.f midnight of 8 November, 2016.
- New Rs 500 and Rs 2000 notes will be issued in exchange of existing Rs 500 and Rs 1000 notes from 10 November onwards.
- All ATMs to remain shut on 9 November and all banks will remain shut as well.
- Between 10 November and 11 November, 2016 government hospitals and pharmacies, Railways, Airlines will accept the existing notes but upto a maximum of Rs 5000 per person per transaction. This is only a special facility as an emergency relief.
- People have until 30 December, 2016 to go to any Post Office or bank and exchange the existing currency for either the new ones or existing currency of lower denomination.
- Cash withdrawal limit of Rs 4000 till 25 November, 2016.
- Daily withdrawal limit from ATMs capped at Rs 2000.
- Daily cash withdrawal from banks capped at Rs 10000 per day.
- Limits on currency exchange in the initial period which will be raised progressively as more currency is released into the economy.
Impact on economy
- All hoarders of illegal cash comprising Rs 500 and Rs 1000 now hold just plain paper of no value. The fear is that they will now try and employ common people for a commission to go to banks and post offices and exchange these for new notes.
- Fake money circulating in the economy will cease completely, at least in the short to medium term, till counterfeiters try and replicate the new currency.
- Government has said the move will fight inflation. The impact on inflation will be minimal as there will be a cost of changeover for the government to absorb.
- In the short term, sectors like Railways will be impacted the most. Also sectors like construction will experience disruption in the short to medium period. However, in time this will stabilize.
- Political parties that survive on cash will be affected as well.
- Traders that hoard black money will suffer huge losses and this may actually fuel commodity prices to rise.
- There will be an increasing preference for cash-less transactions by citizens.
- Forthcoming elections in UP and Punjab to be impacted as political parties and individuals holding existing illegal cash will now have a major funding problem.
Introducing Rs 2000 note questioned
The Prime Minister announced that the big move towards rendering Rs 1000 notes useless is a move towards curbing circulation of black money and fighting fake money circulation. The move, with new Rs 500 currency notes, will certainly stop fake money dead in its tracks but the introduction of Rs 2000 note only brings the problem back.
Finance Secretary Shaktikanta Das clarified that Rs 2000 currency note was being introduced to ease the exchange of currency; he also added that introduction of Rs 2000 notes would be regulated and monitored by the RBI.
In the coming days, the government will have to come up with a better explanation on why the government introduced Rs 2000 currency note when just withdrawal of Rs 1000 note along with replacing Rs 500 with a new one would have gone a long way in the fight against black money. The opposition is already beginning to raise its voice on this.
India Inc. has largely hailed the move as reformist and timely to curb both black money and fake money in the economy.
- Chanda Kochhar – MD & CEO, ICICI Bank welcomed the move as helping towards curbing black money circulation. She spoke of short term disruption to citizens but said that it will smoothen out in a few days.
- Rahul Bajaj – ex-Chairman, Bajaj Auto praised PM Modi on taking the bold step which was major reform.
- Justice MD Shah – Head, Black Money, SIT said the move would curb circulation of both black money and fake currency in the economy.
- Bibek Debroy, Member, NITI Aayog said that there could be a small transaction cost that the government will have to address. He also allayed fears regarding the Rs 2000 currency fuelling the black money rather than fighting it in the medium to long term. He confirmed that the move to introduce Rs 500 and Rs 2000 notes was a step towards moving towards a cashless society.
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