The internet is flooded with posts discussing the future of the Indian economy and social media has been going crazy since the announcement of discontinuing 500 and 1000s existing notes came up. PM Narendra Modi addressed emergency speech to the nation about his plan to counter black money and corruption, and it has been a topic for all the people from every field since then.
The move has been appreciated and praised at various levels, while some of us are still unclear about the plan and its implementation, and thus we have the question to ourselves: Is this a STRATEGY OR STUPIDITY?
We have to understand some things that include, Why Modi saw the need to change the existing higher currency notes when no one else did? Is it the right time for this kind of move? How will this move have effects on the Indian economy and market in coming time?
Why was the NEED?
It’s all about the black money, unaccounted money used in any form of corruption or illegal deals that usually take the form of higher currency notes. Like Modi pointed out that this kind of money is generally used to fund terrorism and finance corruption. The black money is also used in money laundering schemes, human and drug trafficking and racketeering too. Rs 500 and Rs 1000 notes constitute a huge percentage of the money spent by the government in India also, the political parties and candidates spend the money in the elections is a different part altogether. According to the Centre for Media Studies report, during the 2014 general elections, the money spent was Rs 30,000 crore, while official spending was around Rs 7,000 to 8,000 crore. And unfortunately, this is only about one election. As one of the top Democratic countries, India has spent thousands of crore in elections again and again. Also, these are only scratches on the surface. Major industries such as real estate have been the major culprit. Higher currency notes stand for 80% of total Indian currency and thus, the need was pretty obvious to bring black money into the light.
How will it affect every business?
So, one of the effects of the move will be a significant cash supply shortage over the next month, not just Rs 500 and Rs 1000 that are taking out of the circulation, but almost every other denomination. Okay, Why? Firstly, ATMs will be closed on November 9 and November 10 (some places). This is to take out all existing Rs 500 and Rs 1000 notes from the ATMs. However, it will take almost two or more weeks in urban and semi-urban areas and up to a month or more in rural regions. For consumers, it will be difficult to pay for groceries in small notes as there will be a shortage of it. Small businesses will be having difficulty in making payments for services and also for inventory and goods, as they mostly run on hard cash. Sectors, including real estate or cement, where the amount of black money and corruption will more likely go through a lot of pain in the coming weeks. However, the ripple effects cannot be understood at this point of time, as most of the industries are funded by black money. Also, how it will affect the legitimate economy is hard to tell.
Effects on Vast Sections that depend on cash
The move will deeply impact the working section of the society that only depends on cash: drivers, cooks, maids, plumbers, electricians and everyone else who provide informal service on monthly cash payments. Again, why? Okay, simple example. If you had planned to pay your maid tomorrow and you aren’t able to beat the ATM queues or have enough smaller notes lying around the house, they will have to wait till you get your hands on some cash and from now it seems like it can take weeks also, making it a serious problem. It will depend on how smoothly and easily India’s banking system and the government executes the change. Also, anybody from the rural areas who doesn’t have access to the bank account will be crippled until next notes come through. Because no matter how badly we want to move to cashless payments, a large number of rural India is still not able to access bank accounts.
How much will it cost to replace existing notes?
Yeah, it’s not a single day task to replace every Rs 500 and Rs 1000 notes from all over the nation. According to the RBI, there are 16.5 billion and 6.7 billion notes of Rs 500 and Rs 1000. Yeah, that’s right. For the financial year 2014-15, RBI shows that Rs 1000 notes accounted for 39%, while Rs 500 notes for 45% in total currency. Simply, almost 80% of total currency notes will be replaced. The next thing is, how much it will cost us to produce this much amount of notes? To print Rs 1000 notes, it cost Rs 3 and also, RBI has pointed out that to produce Rs 500 and Rs 1000 in the form of Rs 100 notes, it would be around Rs 11900 crore. Pretty much, right?
Why Rs 2000 notes, if we are to remove high currency notes?
The RBI has already said that Rs 2000 notes are in printing phase and will be circulated soon, according to the report from The Hindu. However, when and in how much amount we will get to see Rs 2000 notes has not been fixed yet. Then the question strikes in our mind, Why we need Rs 2000 notes if we are to remove higher currency notes?
One potential reason is that India is not totally ready for cashless payments and there is still a need for cash, especially among small businesses. Also, the government doesn’t want to spend money in production of notes as higher notes cost less money compared to smaller notes. Till the time India goes cashless, Rs 2000 notes will be there. The new notes will also come with new secure design, making it easier to track. The reports of new notes having “tracker” in it are nothing but a hoax. RBI has not revealed any such information. More details on it are awaited.
Finally, It is obvious that this move will cause short-term pain and chaos for the working class, small businesses and nearly anybody who deals with cash on a daily basis, but the long term goal of combating corruption and black money will be fulfilled if carried out smoothly and easily.
And yes, the move is strategic while making, it’s a history in the Indian economy.