The Prime Minister of India, in an unscheduled televised address to the country, declared that the current 500 and 1000 rupee notes issued by the RBI will no longer be legal tender from the end of day of 08-Nov. ATMs and banks will be shut and withdrawals thereafter will be restricted to INR 2000 a day initially, increasing to 10000 a day and 20000 a week for 2 weeks. Cash will still be accepted for 72 hours at government hospitals, pharmacies, petrol pumps, milk booths etc.The demonetized notes can be deposited at the banks and post offices till Dec 30, 2016. After that they can be exchanged at the RBI offices till March 31, 2017,
New bank notes of 500 and 2000 denomination will be released by RBI. The current lower denomination notes, of INR 100, 50, 20, 10, 5, 2 and 1 will continue to be legal tender.
This is the single biggest move by the government to curb black money, which is the biggest source of currency in circulation in high denominations. Counterfeit currency, being promoted by cross-border elements and funneling terrorism has also been cited as a big tipping point for this change to come about. This also will have an impact on upcoming swing state elections (e.g. in Uttar Pradesh, which is notorious for cash for votes), apart from the large increase in bank deposits that are expected to occur due to the increased deposit base as well as improved coffers of the government due to increased tax collection base.
It is important, however, to note that this announcement, though sudden and well planned, gels well as an important component of the necessary activities needed to reduce circulation and creation of black money/ cash in market, and move more transactions to electronic and traceable transactions. Consider the following:
1) recently relatively unsuccessful VDIS (Voluntary Disclosure of Income Scheme) that ended on Sep 30, 2016.
2) The move to bite the bullet on rolling out GST with fully electronic transactions, even though its implementation could result in immediate inflation and chaos among the government biggest support base - the trading community - risking its primary vote bank in next elections.
3) Becoming part of the global information exchange system for curbing illicit overseas holdings .
4) Propagating Adhaar based Jan Dhan Scheme, and funnelling government payments and subsidies into these accounts - improving financial inclusion to convert the unbanked into banked
5) Pushing for the UPI interface from NPCI to go live to allow real time non-repudiable transactions
6) Creating and promoting a Rupay payment switch to reduce transaction costs,
7) Promoting non-cash transactions at petrol pumps, railway stations, mass transit etc.
8) Promoting availability of non-cash acceptance infrastructure at small retailers
9) Promoting availability of more payment infrastructure through small banks and payment banks, apart from mobile wallets etc.
These are all answers to the problems ordinary citizens would have faced if this demonetization was done earlier or shortly after this government came to power. Granted that the ball was rolling on some of these from previous governments or from the regulator unilaterally. But now, the infrastructure is in place for this demonetization to not be such a problem, and is expected to contribute materially to our overall goal of reducing physical cash in the world.
Next few weeks are critical for this move to make its full impact felt.
New bank notes of 500 and 2000 denomination will be released by RBI. The current lower denomination notes, of INR 100, 50, 20, 10, 5, 2 and 1 will continue to be legal tender.
This is the single biggest move by the government to curb black money, which is the biggest source of currency in circulation in high denominations. Counterfeit currency, being promoted by cross-border elements and funneling terrorism has also been cited as a big tipping point for this change to come about. This also will have an impact on upcoming swing state elections (e.g. in Uttar Pradesh, which is notorious for cash for votes), apart from the large increase in bank deposits that are expected to occur due to the increased deposit base as well as improved coffers of the government due to increased tax collection base.
It is important, however, to note that this announcement, though sudden and well planned, gels well as an important component of the necessary activities needed to reduce circulation and creation of black money/ cash in market, and move more transactions to electronic and traceable transactions. Consider the following:
1) recently relatively unsuccessful VDIS (Voluntary Disclosure of Income Scheme) that ended on Sep 30, 2016.
2) The move to bite the bullet on rolling out GST with fully electronic transactions, even though its implementation could result in immediate inflation and chaos among the government biggest support base - the trading community - risking its primary vote bank in next elections.
3) Becoming part of the global information exchange system for curbing illicit overseas holdings .
4) Propagating Adhaar based Jan Dhan Scheme, and funnelling government payments and subsidies into these accounts - improving financial inclusion to convert the unbanked into banked
5) Pushing for the UPI interface from NPCI to go live to allow real time non-repudiable transactions
6) Creating and promoting a Rupay payment switch to reduce transaction costs,
7) Promoting non-cash transactions at petrol pumps, railway stations, mass transit etc.
8) Promoting availability of non-cash acceptance infrastructure at small retailers
9) Promoting availability of more payment infrastructure through small banks and payment banks, apart from mobile wallets etc.
These are all answers to the problems ordinary citizens would have faced if this demonetization was done earlier or shortly after this government came to power. Granted that the ball was rolling on some of these from previous governments or from the regulator unilaterally. But now, the infrastructure is in place for this demonetization to not be such a problem, and is expected to contribute materially to our overall goal of reducing physical cash in the world.
Next few weeks are critical for this move to make its full impact felt.
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