Thursday Trivia – Demonetization understanding the impact

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Thursday Trivia – Demonetization understanding the impact


Evening of November 8, 2016 marked another bold move by our Government and Reserve Bank of India (RBI).  While everyone were recovering from their long and tiring day, Prime Minister Narendra Modi gave a mild shock by simply removing currency notes of ₹ 500/- and ₹ 1000/- effective midnight.  It was a strike of armageddon because only 4 hours were left to exchange them for other currency notes.  Long queues were spotted majorly at ATM branches, jewellery shops and petrol pumps.  Why petrol pumps, since everyone wanted to simply spend any extra notes which they had.  Every social media page was filled with songs of praises of our Prime Minister.  It sounded as if he delivered a trio of Satyam Shivam Sundaram, by tackling the issue of black money, corruption and terrorism.  Once again, everyone was as happy as the day we woke up to find Indian army had committed surgical strikes. Also, for some time attention of elections held in United States of America was diverted to currency demonetisation.


This is not a one way street, Government will re-introduce the currencies of ₹ 500/- and ₹ 2,000/- in 2017. While ₹ 1,000/- rupee note will be kissed a good bye mostly forever.


Is it really the first time, RBI has attempted a currency demonetisation? Well certainly not. There were 2 times when a similar action was taken.


  1. In January 1946, currency notes of ₹ 1,000/- and ₹ 10,000/- were withdrawn under the leadership of British India.
  2. Second time, it was under the leadership of then Prime Minister Morarji Desai, currency notes of ₹ 1,000/-, ₹ 5,000/- and ₹ 10,000/- were withdrawn on January 16, 1978.


One may argue, that such an exercise has already been done twice in history and still India had a massive parallel economy of black money.  How is this one so different?  Will this also be a failed attempt or third time is a charm? Only time can give that answer, right now we can just try and rationalise the impact of this decision.


In the previous 2 attempts, usually the unaccounted wealth was considered to be had with super rich. They would not really keep such money with them and spend it or stash it away in their foreign bank accounts.  This time, the unaccounted wealth can be freely measured everywhere as most people do not pay proper taxes pinching a whole into those who pay them. Especially the salaried class, has the most impact because their taxes are deducted even before the cash is deposited in their banks. With prices going up of bare minimum necessities, they feel the burn.


For now, let’s consider the impact of this decision :


  1. Corruption and Black Money : The impact on black money usage maybe little because those who deal in it will eventually move to ₹ 2,000/- currency notes. A lot of unaccounted money also lies in real estate, gold and other physical commodities. But a fear of government tracking it such unaccounted wealth is far more important as income tax department will easily track these deals once the payments are through.
  2. Counterfeiting : The impact on counterfeit notes will be massive. As dealers with existing counterfeit notes would be stuck.  They will not be able to take it bank and change it, so they will have to eventually burn their money incurring huge losses. Terrorism which is funded through such notes will have a huge impact as they will have to build a new technology that would print new currency notes.
  3. Cashless Society : In the long run, this move will prove a very significant ground for going cashless. I am sure, many people who are already living on a cashless life and transacting their money through internet were the happiest. This will ensure complete accountability in the system and we will get our hard earned money’s worth.
  4. Inflation : When there is a lot of unaccounted wealth in an economy, there is a price rise because people who hoard such money can pay for their luxuries and in turn raising the price of necessities. This creates a massive impact on those who account their wealth and pay taxes on time. Prices continue to rise of mere necessities as everyone wants their homes to run. When such unaccounted wealth is brought into the system, government can spend enough money to cool down the prices. This in turn will reduce inflation too.
  5. Banking for all : Under Jan Dhan Yojana, a lot of new bank accounts were opened. Now, these new accounts would be used to deposit old notes and banks will issue them fresh notes with the same. This means, Indians will start taking their steps towards understanding the banking system. It will eventually help the Government in framing better structures for the whole country.
  6. Inconvenience : As the window of opportunity to convert existing ₹ 500/- and ₹1,000/- rupee notes to ₹ Rs. 100/- and below was only 4 hours and banks were closed the following day. This caused a little inconvenience for those who had not anticipated such an unprecedented move. This caused a little shift in planning their expenses, but everyone knew that such a move is beneficial for them in future years.
  7. Increase in loans and advances to SME sector : One of the reasons why ex-RBI Governor Dr. Raghuram Rajan was not lowering interest rates was low deposits in banks and in exchange higher stressed loans. There was a wide criticism that because the interest rates were so high, businesses could not afford taking loans. This will change as we will see good amount of deposits which will provide a cushion for banks to give more loans. In turn, more Small and Medium Enterprises will get funding to expand their production capacities. Goods produced and sold in India will attract cheaper selling prices than goods produced outside India.


As more money will start to get accounted for, India will see it’s own form of deleveraging which other developed countries such as United States of America, Europe and China are struggling to do in last 5-6 years.


Let’s now simply look at our to-do list in the next few days to arrange our finances.

  • First of all, don’t panic and don’t worry.
  • There is a limit for exchanging your currency. Upto ₹ 2000/- per day (from 18th November) with a valid ID proof (Aadhar card, PAN card or Passport).
  • The above limit will be reviewed by RBI on a regular basis.
  • Withdrawals from ATM are limited to ₹ 2,500/- per day per card until further review.
  • Cash withdrawal from a bank account, over the counter is restricted to ₹ 24,000/- per week.
  • No-restriction on the use of non-cash method of operating the account such as cheques, demand drafts, credit / debit cards, mobile wallets and electronic fund transfer mechanism.
  • To avoid any inconvenience in emergency situations till November 24, 2016, old currency notes are accepted at :
    Government Hospitals and Pharmacies in the Hospitals
    Railway Ticketing counters
    Ticketing counters of Public Sector undertaking buses
    Milk booths
    Cremation / burial grounds
    Petrol / Diesel / Gas stations
    Airport ticketing counters and Forex counters upto a limit


There are enough options available for exchanging old currencies.  So it would be better not to worry and just work with our Government to help them bring this change.  It has been generally seen that, most people over-estimate the impact of change in the short run and under-estimate the impact in the long run.  So let’s not entertain endless discussions on this subject because it will not solve any purpose.


Image courtesy : PMO India



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