Modi scrapping Rs 500 and 1,000 notes is a big, big move against black money

In a big push against black money and clamping down of fake currency notes that have been plaguing the economy, Prime Minister Narendra Modi has announced this evening that from midnight of November 8, 2016, that is 0000 hours of November 9, 2016, the Rs 500 and Rs 1,000 notes will no longer have legal tender, thereby becoming obsolete. The existing notes can be deposited at the nearest bank branch or post office from November 9 to 11, and be exchanged with smaller currency notes.

This major push comes in the wake of PM Modi meeting all three heads of the armed forces as well as the NSA earlier in the day. The move ostensibly comes as a deterrent to the menace of money laundering, tax evasion and even terror financing that are all done via hoarded, untaxed currency, chiefly in the form of Rs 500 and Rs 1,000 notes.

PM Modi started his emergency address with a preface on how the governement is committed towards empowering the poor and coming down heavily on those misusing the economy and financial loopholes in the system. He even said that until two years back, the "I" in the BRICS was considered to be shakey, but now that's not the case.

The major announcement came almost immediately after. The PM appeared assertive and firm and decisive while making the proclamation.

He assured that Rs 500 and Rs 1,000 notes would still be accepted at emergency situations, such as at pharmacies and at government hospitals but said that the existing currency notes need to be deposited soon.

Of course, the ATMs would have to cope with this new reality and refill their coffers with smaller currency notes. For this, the PM said, ATMs would be shut on November 9 and 10. 

But he assured that non-cash transactions, such as demand draft, cheque, electronic and via card / online payments would remain undisturbed.

For the first time, images of the new Rs 500 and Rs 2000 notes thatw ould be issued in some time, were made public. 

The PM also said that the Reserve Bank of India needs to regulate the higher value currency to control misuse and therefore would put a curb on the number of such notes to enter the monetary circulation.

Effects

The impact of this declaration is likely to be staggering.

Firstly, this is a surgical strike on those hoarding enormous amount of cash, mostly in Rs 500 and Rs 1000 notes, which are unaccounted for, untaxed and plainly illegal. This includes those who have got bribes, kickbacks, commissions and other perks in cash. Most of these will go either waste, or in case they are deposited/declared, they will be taxed at 30 per cent standard taxation rates.

Secondly, this is likely to impact domestic money laundering and tax evasion businesses as these are often conducted via petty and undeclared cash reserves. 

Thirdly, terror financing is likely to be hit in a big way. Most of the networks prefer to operate under the radar and do not want to leave any digital imprint by dealing with mostly in cash. With the chunk of cash reserves now null and void, the financial circuits of terror are now in a soup, perhaps looking to convert the cash reserves into other forms of usable money. Fake currency coming in from Bangladesh, Nepal and Pakistan has been a source of big woes, but with this move, much of that can be effectively tackled for a while.  

Fourthly, real estate and property prices are likely to come crashing down. About 40 per cent of real estate transactions happen in the black - mostly in cash of Rs 500 and Rs 1000 notes. Now with these very notes decalred non legal tender, the cash operations in black will take a huge hit. But this may be a temporary drop as with the introduction of the new notes, the prices amy go up once again.

Finally, the present declaration seems to be in keeping with PM Modi's Digital India push and his preference for online/electronic transactions and helping the Indian economy towards an increasingly cashfree system. However, there may be some time until that dream is achieved because rural India is still heavily cash-dependent, and doesn't even have enough bank branches or ATM outlets to help them with online dealings. Moreover, we need to be ultra vigilant about the imminent explosion in cyber crimes given digital would soon be the only way of monetary transactions across the country and even outside of it.  

Also read: Why our banks are not being honest about ATM fraud

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