Midnight stroke: Rs.500, Rs.1000 notes withdrawn as legal tender

Chanakya IAS Academy

Intro: In a move that has rattled the nation, Prime Minister Narendra Modi on Tuesday abolished Rs 500 and Rs 1,000 notes effective midnight. The move, aimed at tackling fake notes and the black money economy, is expected to have a huge impact on the economy, equivalent to a substantial withdrawal of money or a significant hike in the interest rates. He expressed confidence that the staff of banks and post offices will rise to the occasion to introduce the new order within the available time. The Indian government had done something similar in 1978 when it demonetized Rs 1,000, Rs 5,000 and Rs 10,000 notes.

Points to be noted:

1. Currency notes of Rs 500 and Rs 1000 denominations will not be legal beginning November 9
2. New notes of Rs 500 and Rs 2,000 would be released and circulated from November 10
3. ATMs will not work on November 9, and at some places on November 10 as well
4. People can deposit notes of Rs 1000 and Rs 500 in their banks from November 10 till December 30, 2016
5. Those unable to deposit Rs 1000, Rs 500 notes by December 30 for some reason, can change them till March 31, 2017 by furnishing ID proof
6. Currency notes of Rs 1000 and Rs 500 will be just paper with no value
7. Banks will remain closed on 9th November
8. All banks and post offices will remain shut tomorrow
9. Cashless fund transfer won't be affected by this
10. Respite for people for the initial 72 hours, Govt hospitals will accept old Rs 500 and 1000 notes till 11 November midnight
11. Some medical facilities will be exempted from this for the time being
12. Rs 20,000 weekly cap on exchange of Rs 500 & Rs 1,000 notes.

Why this decision taken:

• Fake currencies circulation have grown over the years.launching new currency notes with new designs from November 10. Introducing 200 rupee note with Mangalyan logo.
• It is a bold move. Counterfeit currencies are being used for financing terrorism. Our security measures have not been breached,. This is a powerful measure to combat terrorism. Govt. has taken many measures in last two years. This will go a long way. Fake currencies corrode economy
• Economy grew by 30 per cent between 2011 and 2016 and currency notes in circulation rose by 40 per cent. In contrast, the circulation of ₹500 currency notes grew by 76 per cent and ₹1,000 notes by 109 per cent. The RBI Governor said that despite the high number of fake currency, the security features of the currency have not been breached. “The RBI has ramped up production of the new series of notes,”.

Scrapping Rs.500, Rs.1000 notes a costly idea:

• large denomination notes are highly likely to be used for illegal activities and not so much as a medium of ordinary transaction, and elimination of such notes can go a long way in cutting the stocks of such funds (popularly known as black money in India).
• The reasons cited were similar—that such notes are too large to be used widely in day-to-day transactions, and instead end up serving the purposes of terrorists, tax evaders, money launderers and other criminals.
• what they fail to take into consideration is the cost of scrapping these high-value notes. According to data put out by the Reserve Bank of India (RBI), the share of Rs.1,000 notes in the stock of currency in circulation at the end of financial year 2014-15 was a whopping 39%, with Rs.500 notes accounting for a further 45% of currency stock.
• cost of printing a Rs.10 note was Rs.0.96 (according to the data), or 9.6% of face value. The cost of printing a Rs.1,000 note (Rs.3.17), on the other hand, was only 0.32% of the face value.
• In other words, for a given amount of money, it costs the RBI 30% less to print it in the form of Rs.1,000 notes than in Rs.10 notes.

Whip for whom:

• This will disappoint those who hope that eliminating high-value notes would prompt awkward conversations between criminals and the authorities. There is political resistance too; some worry that abolishing high-value notes is a step on the road to abolishing paper money altogether. And, without coordinated withdrawal of all high-value notes, the move would be much less effective.”

Suggestions and conclusion:

• Given the current demand for high-denomination notes, it will be expensive to get rid of them. The effort should thus be to first curb the demand for these notes, and there is no better way than to encourage electronic payments and move towards a cashless economy.
• IMPS (Immediate Payment Service) has already seen significant traction in peer-to-peer transfers. With the proposed Universal Payments Interface (UPI) coming into force later this year , there will be further incentive to avoid the use of cash.
• Widespread use of cash comes at a significant cost to the economy—not only does it encourage greater use of unaccounted fund, there is also a significant cost borne by the RBI for printing, authenticating, maintaining and distributing currency. In this context, there is a strong case for RBI or the government to provide people monetary incentives in order to encourage the adoption of electronic payments.