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Demonitisation Of Rs. 500 And Rs 1,000 Notes – A Good Decision

November 11th, 2016

Demonitisation Of High Value Notes - A Good Decision

With everything that’s going on in the world over the past couple of days, it’s still important to highlight a very important economic change in one of the world’s largest markets and second most populous country. On November 8th 2016, in an address to the nation, Indian premiere Narendra Modi demonetised – with immediate effect – the Rs. 500 and Rs. 1,000 notes.

I believe this is a move that has excellent long-term ramifications for one of the world’s most promising emerging markets. But let’s analyse in greater detail what it entails, and why it was done.

In effect, the decision means the Rs. 500 and Rs. 1,000 notes are no longer legal tender in India. Consumers can’t use them, shops won’t accept them, and they can’t be used in cash transactions. The only thing people can do with them is, declare them at banks and post offices, and get an equal sum back in Rs. 100 notes.

But what were the reasons behind the move? They were pertinent and needed addressing. Mr. Modi felt that there was a large amount of black money floating undeclared in the country – currency that had been accumulated through grey transactions and outright corruption in many cases. And much of this money is denominated in the banned notes. With this one decision, Mr. Modi is taking black money out of circulation – or forcing it to be declared and therefore taxed. This move might have come out of the blue for most, but it was carefully planned. Replacing upward of 23 billion notes1 in circulation is not a task to be taken lightly.

We all know that the Indian economy is performing strongly, and is one of the world’s most high-potential emerging markets. Yet, the fruits of development haven’t been shared equally. Particularly, non-taxed business transactions and grey practices have led to a stockpile of black money concentrated in the hands of the few. By sending this unequivocal message that graft and corruption will no longer be tolerated, Mr. Modi is actually improving long-term investor confidence and improving the ease of doing business in India.

But let’s take a look at how this impacts different segments of the population, Xpress Money customers, and others.

For Indian residents, the instructions are clear, and quite straightforward. Rs. 500 and Rs.1000 notes can no longer be used. Instead, you should exchange your notes at banks

and post offices for other denominations before December 30th 2016.

If you’re an Indian expatriate who regularly remits money home, there’s nothing to worry about. Your money transfer operator will automatically disburse your transfer in notes that are still accepted as legal tender, and will not issue any Rs. 500 and Rs. 1000 notes.

And if you’re an Indian expatriate who happens to have these notes in your possession, you too can exchange your notes for acceptable denominations at a bank or post office in India before the 30th of December 2016 or with the RBI by March 2017. If you are unable to travel back home within the time frame given, you could ask a friend or relative who is going to India to exchange the notes for you by providing them with a valid Id proof.

Regardless of your country of residence, your money is not lost. Mr. Modi has been at pains to point out that your money is still yours – it’s just the notes that don’t work. Of course, this might mean that grey money will need to be taken to banks and declared white after appropriate tax is paid.

As a follow-up, the Indian government is bringing back the Rs 500 note, backed by technology and with added security features. This note will be joined by a newly minted Rs. 2,000 notes to better meet consumer needs.

At Xpress Money, we have always been committed to ethical, fair and transparent financial practices. We are committed to fighting money laundering, counterfeiting and black money. And in this respect, the Indian government’s move dovetails with our principles, and we support it.

Will this all go without a hitch? No, as Mr. Modi has himself acknowledged. There will be temporary inconveniences. Banks were closed to the public for a day, and ATMs in some locations were offline for 48 hours, to transition to legally recognised currency notes. In some localities, money withdrawals are limited to Rs. 2,000.

But these inconveniences are temporary. Meanwhile, the fight for a better, fairer and more transparent financial system is one that will yield results for a long time to come.

 

 

References

1.https://economictimes.indiatimes.com/news/economy/policy/rs-500-and-rs-1000-notes-banned-how-modi-kept-his-black-money-masterstroke-a-secret-for-6-months/articleshow/55327863.cms/


Written by Sudhesh Giriyan, COO, Xpress Money