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The Demonetisation of Indian Currency – Explained

2016 has been filled with a lot of twists and turns – from Donald Trump besting Hillary Clinton in the American presidential race to Leicester City winning the English Premier League – this year has seen it all. But India will distinctly remember 2016 for Independent India’s most significant financial reform.

On November 8th 2016, Shri. Narendra Damodardas Modi, the Prime Minister of India, announced on national television that all 500 and 1000 rupee notes would be scrapped, effective from midnight of 9th November, 2016. He provided the nation with a 50-day deadline within which everyone had to either exchange or deposit all notes of these denominations and convert them into legal tender. The RBI Governor, Shri. Urjit Patel, introduced the new 500 and 2000 rupee notes to the country on the very same day. This demonetisation scheme was welcomed by most citizens of the country but also sparked off protests in certain places.

If you feel content just because you have exchanged your existing notes, think again. The ripples this move created will be felt in the near future as well. Take a look at some of the points to take away from the entire demonetisation episode.

The Crux of Demonetisation:

  • The primary motive of demonetisation was to unearth the black money locked all across the country and catch the tax defaulters red-handed. There were instances where people had deposited excess money in different bank accounts meaning that demonetisation did not serve its primary purpose.
  • The new 500 and 2000 rupee notes have eliminated the higher currency’s fake notes from circulation. The quality of the new notes is far more inferior compared to the old ones. Also, they tend to stain in the presence of moisture so handle them with care.
  • Moraraji Desai, ex-Prime Minister of India (1896-1995), announced a similar reform in the 1970’s but it turned out to be a tremendous failure. Let us hope that Modi got it right this time.
  • People were forced to open new bank accounts and existing account holders had to use their debit/credit cards to meet with the immediate financial pinch. Ultimately, cashless transactions have increased manifold.
  • M-wallets have gained a lot of popularity among shopkeepers and the public and so the reform turned out to be paisa-less publicity for such companies.
  • Real estate, Healthcare and Higher Studies are predicted to become cheaper if the reform turns out to be a hit.
  • Scrapping of existing currency generally results in the Indian rupee’s value plunging when compared to foreign currencies. So Indians who get paid in foreign currency, ‘ache din aane wale hai’.
  • Our recognised currency printing presses are estimated to print new notes equivalent to the scrapped ones in about 175 days. The conversion period stipulated was just 50 days. Best be prepared for this cash crunch to stretch to the early parts of 2017.
  • Our former Prime Minister, Dr. Manmohan Singh, has predicted a decrease of 2% in the Indian GDP. So it is evident that an economic slowdown is right around the corner.
  • Policies laid down by the Government during its budget presentation in early 2017 will be very conservative. Don’t expect any big-ticket reforms.

ATMs were recalibrated at break neck speed to minimise the cash shortage but the cap on withdrawal means that the people will have to spend the available money in a miserly fashion. Expect that cap to return to normal come early 2017.

A reform of this magnitude will require a considerable amount of time to stabilise. Demonetisation of higher currency notes has invariably portrayed the ease of cashless transactions to the Indian people. So are we moving towards a cashless economy? It’s certainly a possibility. Countries like Sweden, Canada and South Korea are on the verge of achieving this status. It is the Government’s duty to ensure that all Indians become accustomed to such cashless transactions, else the big picture will be lost in the silhouette of this demonetisation scheme.

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