Why Demonetization is important for an economy?
It is important step for an economy:
To eradicate the endemic corruption at all levels of the society.
To takeout the infusion of fake currency into the system by people.
To eliminate black money which is playing havoc on Indian economy.
To curb the hawala transactions.
To improve the tax collection which is evaded.
To stop the activites of terrorist in the country by using or printing fake currency,
To eliminate drug trafficking by smugglers.
To eliminate human trafficking, kidnapping and other illegal activities.
Why only Rs. 500 and Rs.1000 notes banned in India?
Rs.500 and Rs.1000 till now considered as high denomination notes in India. The incidence of fake Indian currency notes in higher denomination has increased in last few years. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for anti-national and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money.
Why Rs. 2000 Notes released before Rs.500 ?
Before banning Rs.1000 and Rs.500 notes, Government has announced that Rs.2000 will be released. The notes of Rs.2000 already sent to banks before demonetization, instead they wanted people to think that 2000 Rupee note is going to be introduced in the near future instead of demonetization of 500 & 1000 (if corrupt people by chance got to know that new notes of 2000 Rupee are coming in the banks).
So, the release of 2000 Rupee note helped RBI to keep the buffer notes for the exchange ready after 10th November without creating any doubt of demonetization amongst corrupt people.
Why Rs. 2000 Note came why not Rs. 1000?
Ours is a cash based economy. Demonetization of 500 and 1000 rupee notes will create severe liquidity crisis in the short run. Small businesses will take a hit and the growth will stall. This is very bad for the lower strata of the society. If not handled properly the country can face other issues varying from protests to bankruptcy.
Rs 2000 is a highly practical solution.
The only way to handle this short term liquidity crisis is to infuse liquidity (money for quick disposal) into the economy in a very short span (HERE IT IS HOURS TO DAYS). [Currency is the most liquid asset and hence it is the obvious choice.]
This is where Rs 2000 note comes to the rescue. It is a fairly high denomination. Printing them for a certain value will take less time compared to Rs 500 or Rs 1000.
Transportation and refueling ATMs becomes easy and less time consuming (remember that even a 24 hour liquidity crisis can turn country’s economy upside down. So here we are not talking about months or weeks. We are talking about hours and days)
Why new Rs 500 note then?
Handling Rs 2000 denomination creates chillar (change) problem. So, Rs 500 new note will address this problem.
Won’t Rs 2000 note create a new Blackmoney Bank?
It will be demonetized too in a year or two.
Any denomination higher than 100 will be demonetized in a year.
Features of Rs.2000 and Rs. 500 Note—
Rs. 2000
Color- Magenta
Width- 166mm
Height- 66mm
Year of Printing- Nov 2016
To celebrate India’s Mars mission, the notes will carry an image of the Mangalyaan, depicting the country’s first venture into interplanetary space, and the logo and tagline of the Swachh Bharat Abhiyan. The reverse side features a motif of the Mars Orbiter Mission (MOM).
There will be a windowed security thread with the inscriptions ‘Bharat’ (in Devnagari), RBI and 2,000 on banknotes with color shift. The color of the thread changes from green to blue when the note is tilted.
Guarantee clause, Governor’s signature, RBI emblem shifted towards right.
There will be a ashoka pillar emblem to the right of the Mahatma Gandhi portrait and electrotype (2000) watermarks.
Denominational Numeral with Rupee Symbol, 2000 in colour changing ink.
For visually impaired –
Rectangle with Rs. 2000 in raised print on right.
Seven angular bleed lines in raised print.
Rs. 500 Note(new)
Color- Stone Grey
Width- 150mm
Height- 63 mm
Year of Printing- Nov 2016
Red Fort and Mahatma Gandhi’s image on each sides.
Latent image of the denomination numeral.
Orientation of Mahatma Gandhi’s portrait changed.
Windowed security threat changes from green to blue when note is titled.
Guarantee clause, Governor’s signature, RBI emblem shifted towards right.
Portrait and electrotype watermarks.
Number panels with numerals growing from small to big on top left and bottom right sides.
For visually impaired—
Circle with Rs. 500 in raised printed on the right.
Bleed lines on left and right in raised print.
IMPACT on Indian Economy:
Pros:
One of the biggest benefits of this move is that it is going to drastically affect the corrupt practices. People who are holding black money in cash will not be able to exchange much as they would be in a fear of getting penalized and prosecuted by the authorities. Enemies of the country which are involved in counterfeit currency and terrorism will not be able to continue if further for quite some time at least.
Banking system will improve as it will slowly head towards a cashless society. Cashless society will increase credit access and financial inclusion. The existing white money of people will be known to the government and it will remain with banks so that it can be put on loan, and interest can be generated from it (though interest rates would fall) with a corresponding fall in inflation. Further Banking system will get a boost, as more than Rs.7-8 lakh crore base money (new legal money) will enter the system. However, it needs to be seen how much money actually remains in the system, once the cash withdrawal limits are eased.
It will reduce the risk and cost of cash handling as soft money is safer than hard money. It will reduce government liability. Since every note is a liability for the government, the old currency will become worthless for those people, who choose not to disclose their income. Thus, this will extinguish government’s liability to that extent.
It will also reduce tax avoidance. Whatever money will be deposited or exchanged, authorities will keep a track of it and they will be extra cautious in this period. Sectors like jewellery and real estate will be on radar and those entering into Loan transactions may also undergo tax scrunity. Search and Seizure activites of the IT Department will also rise to curb such malpractices.
For the long tun, tax and interest rates on loans are expected to come down as higher income tax collections arising from better compliance would offer scope to reduce rates over the long term. This, in turn, will drive up disposable income. This can give a positive impact on consumption demand in long term.
Cons:
The liquidity squeeze caused by demonetization will be negative across sectors with high level of cash transactions. Real estate, jewellery, retailing, restaurants, logistics, consumer durable and luxury brands, cement and some segments in retail/SME lending space will be facing short term instability. Those companies with high level of debt will face more pressure and can face loan defaults.
There will be added replacement costs of currency. We cannot ignore the increased cost of operating ATMs need to be refilled more often and also it will be a huge burden on banks. It is very difficult to create a cashless society as more than 50% of Indian population is not well versed with card transactions. But government is taking steps to improve liquidity into the system and reduce inconvenience as much as possible.
The decision of this surgical strike on black money was not taken in a day or two. It is the result of PM’s Meticulous planning and never ending fight against corruption. As a result, he has successfully made the right stroke at the right time.
Despite certain short term troubles, demonetization is certainly going to give a boost to the Indian economy in the long run.
~Article by RUCHI.
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To Read Part I : CLICK HERE
To Read Part II : CLICK HERE
Thank you Ruchi for sharing such vital information.
Part IV coming soon..