CURRENCY DEMONETIZATION

On the evening of 8th November, Narendra Modi, gave the news of the year. The scrapping of
the two largest Indian notes, 500 and 1000, shall hit hard the black money hoarders and the
counterfeiters. It is being hailed as the smartest move by our Prime minister till date to curb the
menace of black money, prevalent throughout the country. But, it is not the first time that the
withdrawal of high-denomination rupee notes has taken place. It has been done at least twice in
India’s history in the past time. This time, the attempt is to crack down on black money.

In January 1946, Rs1,000 and Rs10,000 banknotes were withdrawn. In 1954, Rs1,000 , Rs5,000
and Rs10,000 notes were reintroduced and were again demonetized in January 1978. In 1978, the
Janata Party coalition government decided to withdraw Rs1,000, Rs5,000 and Rs10,000 notes by
issuing an ordinance on the morning of 16 January that year.i

SHORT TERM AND LONG TERM IMPACTS

A significant impact on Counterfeit notes- There will be an impact on counterfeit notes and
terrorism that is funded through that. Black money, often used in any form of corruption or illicit
deals, usually takes the form of high-value notes, which in this case are the Rs 500 and Rs 1,000
bills. In his speech, Modi specifically pointed out that these large-value notes were being used to
finance corruption and fund terrorism.ii Until and unless, the counterfeiters develop the new
method of technology to print out the newer version of notes, they are going to lose out big in the
coming months.

A big but a short term impact on curbing Black Money- The sudden move of demonetization
was taken by the government to ensure hoarders of black money and money launderers do not
have any time or option to react. But one has to notice the fact that most of the black money lies
in gold, real estate, and other physical things. And, moreover, with the coming of Rs 2000 notes
in the circulation, the black money shall get tucked away in suitcases in these denominations.
I.G. Patel recalled in his book Glimpses of Indian Economic Policy: an Insider’s View, that when
finance minister H.M. Patel in 1978 informed him about the decision to withdraw high-
denomination notes, he had pointed out that such exercises seldom produces striking results as
those who accept illegal gratification or are otherwise recipients of black money, rarely keep
their ill-gotten earnings in the form of currency for long.iii

Cashless society –Any person can get the money exchanged of not more than Rs.4000 and
anything over and above will be transferred to bank account. This clearly shows that government
wants to discourage the cash transactions. This move by the government would incentivize
people to deal with plastic money as they would be forced to go for non-cash transactions. With
all the transactions being done online, it would become all the more easier for the government to
keep track of all the money movement in the economy.

Jandhan accounts shall become operative- Banks will increase CASA deposits as the lower-
income strata people will have to open their accounts to exchange their money. The Jandhan
accounts that have remained inoperative or unused shall become operative. (CASA stands for
current and savings account. Different kinds of deposits current account, savings account and
term deposits form the major source of funds for banks. A higher CASA ratio means higher
portion of the deposits of the bank has come from current and savings deposit, which is generally
a cheaper source of fund.)iv

Reduction in The Non-Performing Assets- The increase in the CASA deposits will lead to the
decrease in the NPAs (Non-Performing Asset). This is because the banking regulations give the
banks teeth to square off money from savings/current accounts to loan as installments. Therefore
as the economy becomes more formal and there is an increase in savings of the people with the
banks, we will see a reduction in the NPAs.

Choking funding to political parties and their election campaign- The political parties who
disburse cash to gain the votes of the public can no longer be able to do that. And polls around
the corner in Uttar Pradesh and Punjab, the pulling out of 500 and 1000 currency notes would be
a big blow to the campaign financing of the political parties. This move to bring fair elections in
the country is further strengthened by the words of our Prime Minister.

“We talk about the use of black money in elections. We have to set the country free from
corruption and black money,” Modi said in his televised address to the nation while announcing
the surprise move.

Inconvenience to the poor man- The below-poverty-line segment gets paid only in cash and
have no Bank Account or ID proof. They will bear the brunt of it as being illiterate, they might
not even know of the latest developments. They might innocently accept the Rs 500 note one
shell out to them and having no means of exchange, completely lose out on the amount. Also, the
notes are not ready yet. The banks are not ready to meet the demand with notes of smaller
denomination, like Rs 100. It is sure to lead to a huge cash crunch in the country in the initial
days.v

A costly process – According to RBI, in 2014-15, the cost of printing the incremental notes of
'500 and '1,000 denomination was '2,770 crore. That year, the total stock of '500 notes in
circulation increased by '3.59 trillion, while that of '1,000 notes increased by '3.076 trillion. If all
this additional money (a spectacular '6.666 trillion) had to be printed using '100 notes, it would
cost RBI about '11,900 crore, which is more than a four-fold increase.vi Therefore, a huge
economic cost has to be incurred by the government in replacing the notes of 500 and 1000 with
100.

It is through these impacts that one need to assess the masterstroke played by the central
government. This move could not have been timed well as it made sure that the black money
hoarders do not get rid of their high-value currency similar to what happened in the 1970s.

i
Rs500, Rs1000 notes may be back, if history is a guidelivemint.com.
ii
Pieces of Paper: Demonetisation of Rs 500 and Rs 1000 Notes Explained: http://thewire.in/78694/paper-money-
ban-rs-500-rs-1000-notes-explained/ via @thewire_in
iii
Supra note 1.
iv
http://economictimes.indiatimes.com/money-you/what-is-casa-ratio/articleshow/4504623.cms.
v
http://www.india.com/news/india/can-ban-on-rs-500-and-1000-currency-notes-by-narendra-modi-solve-the-
problem-of-black-money-or-will-it-only-hurt-the-aam-aadmi-1636486/.
vi
Scrapping '500, '1000 notes a costly idea MintAsia (India) March 18, 2016 Friday.