How India Abolished Rs 500-1000 Notes
The Rs 500 (top) and Rs 2,000 specimen notes circulated by the Reserve Bank of India
Prime Minister Narendra Modi tonight stunned the nation with an announcement that Rs 500 and Rs 1,000 notes would no longer be legal tender from midnight.
The decision is ostensibly designed to flush out black money lurking in the corners of India's financial system and stamp out the growing menace of fake notes circulating in the $2-trillion economy.
"The Rs 500 and Rs 1,000 notes hoarded by anti-national and anti-social elements will become just worthless bits of paper," Modi said in an address to the nation while asserting that the "rights and interests of honest, hardworking people will be fully protected".
The move is being labelled a "surgical strike" against terrorists who have been flooding the country with fake notes.
The announcement sent people scurrying to ATMs across the country to scoop out Rs 100 notes but many cash-vending machines soon ran dry. All banks and ATMs will be closed tomorrow, prolonging the agony for people who will now have to scrounge for lower denomination notes.
"The spectre of corruption and black money has grown. It has weakened the effort to remove poverty," Modi said while trying to soothe the jangling nerves of citizens who suddenly face the prospect of not having adequate legal cash to pay for petty purchases in groceries and markets on Wednesday.
In order to avoid inconvenience to the public in the first 72 hours, the government has announced some exemptions. (See chart)
The banks will start issuing new notes with denominations of Rs 500 and Rs 2,000 from Thursday. RBI governor Urjit Patel said the new notes would have higher security features to deter counterfeiters. He added that the new restrictions would not impact liquidity in the markets including financial markets.
The RBI plans to issue high- value notes of other denominations at a later stage.
Tuesday's announcement comes just over a month after the government unearthed undisclosed income of just over Rs 65,250 crore through a tax amnesty scheme.
Modi said militants operating against India were using fake versions of the Rs 500 note, worth around $7.50 at current exchange rates. "Terrorism is a frightening thing.... But have you ever thought about how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes. This has been going on for years," Modi said.
The move brought back memories of the demonetisation scheme that Morarji Desai's government had launched on January 16, 1978, when high-value notes of Rs 1,000, Rs 5,000 and Rs 10,000 were discontinued. That scheme impacted only the super rich because most households rarely held these notes. The Rs 1,000 note was reintroduced later.
The finance ministry claimed that a strong economic logic underpinned the demonetisation move with real estate prices expected to come down and higher education and healthcare to "come within the reach of common citizens".
Banks will be shut tomorrow to allow stocking of smaller currency notes and the public will be allowed to tender their now invalid Rs 500 and Rs 1,000 notes from November 10. They will also open additional counters and work extra hours during this period.
The RBI said there would be no limit on customer deposits of the old Rs 500 and Rs 1,000 notes. However, the customer will only receive Rs 4,000 in cash after furnishing valid identity proof. Anything above this sum will be credited to the bank account. The Rs 4,000 limit on cash against deposits will be reviewed after 15 days and, if required, an appropriate notification will be issued, the finance ministry said.
Banks will report any unusual transaction to the Financial Intelligence Unit and tax authorities for scrutiny.
Bracing for a mad rush at bank counters, the RBI as well as the government will set up control rooms in Mumbai and the national capital to avoid any crisis, department of economic affairs secretary Shaktikanta Das said.
Banks will also cap cash payout against cheques and withdrawal slips at Rs 10,000 a day and Rs 20,000 a week - which is a clear signal that the government plans to use this opportunity to nudge the country towards a cashless regime, forcing people to rely on electronic means of payments including Internet banking, mobile wallets, and credit and debit cards which will create an identifiable trail of transactions.
Bengal chief minister Mamata Banerjee called it a "heartless and ill-conceived" decision that would lead to financial chaos and demanded its immediate withdrawal. "The PM could not get back the promised black money from abroad from the rich so a drama to divert (attention from) his failure," Mamata tweeted.
Bankers and industrialists, however, welcomed the move and insisted that a short-term hiccup would not hurt their businesses.#A report by Washington-based think-tank Global Financial Integrity estimated that India lost $344 billion in illicit fund outflows between 2002 and 2011.
In July 2010, the World Bank had estimated the size of India's shadow economy at 20.7 per cent of the GDP in 1999, rising to 23.2 per cent in 2007.
"A parallel shadow economy corrodes and eats into the vitals of the country's economy. It generates inflation which adversely affects the poor and the middle classes more than others. It deprives the government of its legitimate revenues which could have been otherwise used for welfare and development activities," the finance ministry said.
Overall currency circulation in the country has increased by 40 per cent between 2011 and 2016. The circulation of Rs 500 notes has gone up by 76 per cent and that of Rs 1000 notes by 109 per cent, the RBI said.
As many as 16.5 billion notes of Rs 500 denomination are in circulation while 6.7 billion Rs 1,000 notes are in the hands of the public.