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Sudden Shock: PM Modi gives a blow to unaccounted cash; discontinues denominations of Rs. 500 and 1000

  • by Aditi Agarwal
  • November 9, 2016

While the media channels prepared really hard to report Hillary vs Trump our Prime Minister gave them something which could surge their TRPs and make them sky-rocket like nothing else. In a surprise decision yesterday Prime Minister Modi addressed the nation and approximately at 8:20 PM made the shocking declaration that notes of the denomination 500 and 1000 in current circulation shall be discontinued from midnight. Suddenly the nation was in frenzy, everyone was calling everyone and telling them about this announcement, and as is the norm of these days and age, social media was abuzz with posts on the same. But in this era of online noises, facts and fiction are rarely differentiated, we look to simplify this scheme and separate myth from facts.

Since coming to power the Prime Minister has looked to crack a whip on unaccounted money in a bid to strengthen the regulated economy. This move can be seen as the strongest step in that direction.

What is the new scheme?

The Prime Minister declared yesterday that notes of the denomination of Rs. 500 and 1000 shall cease to be “legal tenders” from midnight. It means that the notes currently in circulation shall not be valid exchanges and the bearer is not promised to be paid the sum of the face value of the note.

It is in line with the “Kadvi Dawa” narrative of this government and given the innate benefits of this medicine I would not even grimace before taking it.

New 500 rupees notes shall replace the old ones while the 1000 rupees note shall be discontinued completely and new notes worth Rs. 2000 shall be introduced.

What should you do with the old notes you have?

The old notes can be exchanged from 10th November to 30th December at any bank or post offices. However a ceiling limit of Rs.4000 per day has been put into place till 24th November for such exchanges. Deposits however do not have any limits; caps have been put only on withdrawals (10,000 per day and 20,000 per week). It is learnt through sources that this limit shall be increased in the coming days.

What does the government wish to achieve?

By springing a surprise as momentous as this on the economy the Government has successfully caught the alternative (read: black) economy by surprise and the ramifications are hence manifold

  • Fake Currency:- It has been observed generally that fake currency notes of the denominations in question (500 & 1000) have been flowing into the economy at exponentially high level. This curbs this threat automatically rendering all fake currency useless.
  • Unaccounted cash:– Usually all unaccounted cash, commonly referred to as black money, is kept in notes of higher denominations. This therefore would assist the Revenue in bringing such unaccounted wealth into the regulated banking channels of the economy.
  • Inflation:– With a significant gap created between the higher denominations with the scrapping of 1000 rupees note and introduction of 2000 rupees note the “ease of payment” also comes into question leading to a slim reduction in consumer demand. This leads to a reduction in demand against a constant supply leading to a reduction in consumer prices. This has been observed in various economies where such regulatory acts have been done by the Government in the past.
  • Sponsoring of illicit activities:– It is common knowledge that Illicit activities are sponsored by fake currency and unaccounted wealth flowing in from outside the country. This automatically gets nullified by the introduction of the new currency notes.
  • Cleaner elections:It is known to all that elections are fought by using such black money and this is a huge challenge against holding free and fair elections. By this step the Government has also pitched for cleaner and fairer elections.

What does this mean for Rajasthan?

Ours is a state which is run small and medium sized enterprises with many being family businesses. Usually such businesses have unaccounted cash assets and they will be hit hard initially. But in the longer run with a major chunk coming into the regulated fold of the economy previously unavailable avenues of expansion shall be open. Sectors like Real Estate, jewellery manufacturing etc. which contribute a major chunk of the state’s economy will be worst hit in the short run (close to 3 months) after which the situation will improve drastically for these sectors. However the days of free run are now over for these sectors.

Conclusion

This is beyond all doubts, a momentous decision by this Government and will have overly positive long-term ramifications for the economy with curbing of the black money menace and the fake currency conundrum faced by the Indian economy for a few decades now. To the common man it spells a bout of discomfort of paucity of liquidity for at least 7 to 15 days after which normalcy is expected to return. It is in line with the “Kadvi Dawa” narrative of this government and given the innate benefits of this medicine I would not even grimace before taking it.

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