Demonetisation in India

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So, this had to happen, some day or the other, someone who has the courage, had to do it, and so did the Prime minister Narendra Modi. The brave moves comes after decades, caused by huge amount of black money comprising of both, real currency notes and fake currency notes being circulated in the country in an unimaginably huge amount. It was 8th November 2016 when Mr. Modi suddenly appeared on T.V screens and shattered the dreams of black money holders in his few minutes speech in the evening, by declaring that from midnight, notes of Rs 500 and Rs 1000 will be invalid. It is not doubtful, that the Indian media had prepared for US Presidential election results, but this came out of syllabus, as in the words of social networking sites's viral memes.

Causes of demonetisation International scenario

The Berlin-based corruption watchdog Transparency International (TI) had put India at rank 76 out of 168 countries in its latest Corruption Perception Index. The country’s 2015 corruption perception score remained the same as last year’s – 38/100 – showing lack of improvement. India shares its rank along with six other countries: Brazil, Burkina Faso, Thailand, Tunisia and Zambia. This was one of the reason which led the government to take this step.

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Terror funding

It is a well proven fact that all the terror groups affecting the country, both from outside and from inside, are powered by black money, which are the fake currency notes printed illegally, somewhere in this world, and also a major part of the unaccounted money gave them a push. All the terror activities which happen from across the border, are sponsored by illegally printed fake Indian currency notes. As per a 2015 study, at any given point of time, fake notes with a face value of Rs. 400 crore were in circulation in the Indian economy. After the consistent terrorist activities by Pakistan, Modi government had pressure from all across the country to find an eternal solution for this. This also caused the government to take this decision.

Need to make India a cashless economy

As per the statements issued by RBI " India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced. " This statement clears the doubt up to a large extent. Indians by and large have an habit of using cash instead of internet banking even when they are making big purchases, this practise gives a push to the black economy by evading taxes which are important for a countries development. The need was felt to change the lifestyle of people, shifting it towards digital world and making things much easier.

Cashless society
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Huge amount of black money spent in elections each year

Now, why wouldn't this happen, in an economy where lakhs of crores rupees is circulating in cash, this is a very possible outcome. Political parties spend crores of rupees on elections each year, from buying votes to advertisement, from giving gifts, to giving bribes, it had become a tradition of Indian politics. This made a huge impact on the youth of the country, being the future of the nation and thus, had to be stopped. Now since all the black money has been demonetised, the government claims that it would stop such activities.

Road map of demonetisation

Now, this is obvious, that such a huge step, couldn't have been possible overnight. Modi government had working into this direction since they were flown into the office, How? Let's see.

1) Pradhan Mantri Jan Dhan Yojana

On his first speech of Independence Day in year 2014, Prime Minister Narendra Modi announced the famous Pradhan Mantri Jan Dhan Yojana, which ensures a bank account for every Indian.  In this mass drive, more than 15 million saving accounts were opened across the length and breadth of the country with almost all public sector banks participating in it. It was the first ever financial inclusion program launched in the country and has seen success so far.

2) MUDRA Bank Yojana

This is yet another aggressive scheme launched by the Narendra Modi government.  MUDRA stands for Micro Units Development and Refinance Agency Ltd., which was initiated to bring the general public into the normal banking system. Facilities and benefits like credits, loans, and insurance are not reachable to many in India, especially to those living in rural and far flung areas. MUDRA bank is not exactly a bank but a banking regulator which would regulate the micro finance to the rural and needy population.

3) Pradhan Mantri Jeevan Jyoti Beema Yojana

The PMJJBY is a term life insurance policy that goes a long way in ensuring a safe financial future for the policy holder and comes with lowest cost on a yearly basis.

Anyone who is within the age group of 18 years to 50 years can get enrolled for PMJJBY, provided they have a functional saving bank account.  Within the scheme, the policy holder would have to pay as a premium is Rs 330 per year and they would be covered with a life insurance of Rs 2 lakhs.

4) Digital India

Digital India Program was launched in August 2014 to change the face of India digitally and electronically.  This would in turn pave way for a digitally empowered nation and economy.  As per this campaign, all offices and departments of Government of India would be digitally connected to each other and to the target population, thereby making the government mechanism smoother and malpractices-free.  This would also ensure effective governance in the country. Digital India Program would reduce paperwork to a significant level.

Are you sensing? In which direction is the government working ?

It is clearly visible, through all these schemes, government was trying to make every Indian connected to the banking system. These schemes insisted people to open their bank accounts so that they can at least have a backup plan when demonetisation occurs. The people would then have debit/credit cards to buy daily necessities, and bear trouble for few days till the time the new currency is into the system, an over-viewed system.

Current Situation

New Currency Notes
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Prime minister Narendra Modi gave shocks to the people ranging from a common man to the corrupt officers, from black money holders from to terror organisations. Since all the huge amounts of money is kept in the denomination of Rs 500 and Rs 1000 currency notes, the government made them invalid in a sudden move and issued new currency notes, in the denomination of Rs 500 and Rs 2000.

Advantages / Disadvantages of this step

There are 7 key incentives for this:

1. Bringing out illicit money sloshed stashed in the parallel economy.
2. Having a lid on the fake money racket supported by our western neighbour.
3. Incentivizing India to go cashless. The banks would not hand you wads of the new cash, but will just credit the money to your bank account in place of your old currency.
4. Moving the notes to a more secure standard - with better protection against counterfeiting.
5. Curbing inflation in real estate and reducing gold imports.

As the 6th incentive, it would impact coalitions ahead of the major elections in UP and Punjab. It is not shocking that elections, especially in these states with multidimensional politics involve a lot of illicit money. MLAs get traded like horses - with suitcases of cash. Some of that trading will get impacted.

7th main incentive is the affect on "hawala transactions" to support terrorism. Since all the terror organisations prevailing in India and outside India who had their eye on the nation, would go empty handed. This moves comes in as a lot of terror activities from across the border had been getting pace specially in last two years.

Unlike in the past, I don’t see much impact on normal users of currency. The transactions that happen on Rs. 500 and Rs. 1000 should be moving to net-banking/cheque/cards anyway. If someone is still holding out against modern transaction methods, this is the opportunity to come out from under the rock.For the poor who don’t have debit/credit cards, there might not be much impact either - as most of their transaction happen under Rs. 500.

Impact of the move

1. Black Money & corruption: The impact on black money usage will be temporary as those would eventually move to the new Rs. 2000 notes in time. Also, a lot of the black money lies in real estate, gold and other physical things. Still even a temporary, small impact on this sector is better than nothing. The mere fear of government taking out your black money is good enough. That the government could so secretly do this will increase the fear.

2. Elections: Especially with the major elections barely weeks away, the move would impact politics in the crucial states. My guess is that the government waited for the Diwali to pass [will be a huge pain for many to have this move before the festival] and do it reasonably before the elections.

Huge amount of old currency notes were found burnt on the roadsides
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3. Counterfeiting: The impact on the counterfeit notes would be more significant. Many “dealers” with the existing counterfeit notes would be stuck as they would have to take the notes to the bank and have better chances of getting their racket exposed. Thus, they are more likely to destroy their notes and incur losses. Losses to the bad guys is good and maybe some of them could get shot unable to pay their debts. It would be quite hard to counterfeit the new currency and until they develop the technology for that, there will be an impact on counterfeit notes and terrorism that is funded through that.

4. Cashless society. All of the above things are temporary things. But, I believe the long lasting one could be in moving cashless. The pain of transferring cash could incentivize many to think about going bits and plastic. Today could be a day to introspect for the legal users of the currency. That could have a more significant impact on counterfeiting and unaccounted money.

5. Gold/silver. In the short term, gold and silver buying will be hampered, as a lot of the buyers buy with their black money. That means less importing. Over the long term, there might be more purchase of gold as the black money guys will be afraid to hold too much cash.

6. Real Estate. In the short term, prices of real estate would come down for the same reason above. There will be less suitcases moving. It is not clear what would happen to this sector in the long term. Maybe there could be a little more land buying, but that could be neutralised by the spiralling down of the prices that could go now.

7. Markets. This is overall a positive move that is lauded by a lot of people and could bring more confidence in Indian markets by overseas investors. However, the exit of black money temporarily could cause other repercussions in buying. I would not be surprised if the market goes a bit down in the short and medium term.

8. Overseas Indians. There is a lot of INR that gets transacted outside of India. Technically it is illegal, but there are not many practical alternatives. They would be impacted as they cannot change the money to the new notes quickly and those overseas currency trading markets on rupee would be impacted.

9. Banking to all. The government’s key objective is to bring banking to all and this will help that.

One of the major disadvantages of this step cam in on the first day, when the banks were opened for exchange of money and deposition as well, as this move affected a common man adversely. People though are ready to suffer for few days for the sake of nation, but this suffering seems like it won't come to an end. ATMs are running out of cash within few hours, People are standing in queues from 4:00 Am since the morning. No doubt, the common man is suffering, but there is a hope, a hope for change.

Common man suffering in queues outside banks and ATMs

In my opinion, this move was a good move, but it was less organised or i would say, the government was not prepared for handling 130 crores of Indian citizens. People who pump money in ATMs, have not slept since a week now, all the bank employees have been working very hard without any holidays. People are crying, running out of cash, there is no food in their houses, and no body is accepting their money, but again, the next thing they say is that the move was good. It is not just a fact that every Indian wants to have a corruption free India, it's their feeling and their dream too. So everyone accepted this decision, but they hoped for a better planned system of money exchange, they hoped the government had done their preparation, which seems like didn't happen.

Reactions and questions!

It was a proud moment for all the Indians when the president of the World Bank, Mr. Jim Yong Kim praised Prime Minister Modi for his move.

Now this doesn't mean that this decision was accepted all around the country, of-course, the opposition criticised it widely by saying that Bhartiya Janta Party had already made their adjustments, who knows? All we can see is that this has become the most prevalent political issue in the country, where all the political parties have come together forming a protest to this demonetisation. I can understand, it must have hurt them a lot when all their money depositions went to waste. Many opposition leaders are trying to propagate that this decision was wrong and has adversely people.

Questions were raised on the government on bringing in the Rs 2000  currency note instead of Rs 1000 which would hence lead to more corruption, but RBI stated that bigger currency notes were needed for banking convenience, Though government plans to bring new currency notes of Rs 1000, Rs 100 and also Rs 50.

In a country like India, which never sleeps, where there are people ranging from rag pickers to billionaires, where there are people from hardworking class to corrupt politicians/officers, This move has affected everyone. What lies is the hope, hope for a better India, a better country where people stand united to make this great nation a better place to live.

Indians found other uses for old currency notes
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