Demonetisation of high value currency- 2016: India
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Demonetisation in India
1978
Surprise & panic: History repeats itself 38 yrs later, Nov 09 2016 : The Times of India
2016 was not the first time high value currency notes were demonetised.
In January 1978, the Morarji Desai-led Janata Party government had demonitised Rs 1,000, Rs 5,000 and Rs 10,000 notes to curb black money .This was less than a year after the Emergency was lifted.
Old-timers remember that the decision then too had taken the public by surprise, leading to panic and a rush to banks although people were given time to exchange old notes.
To put things in perspective, a Rs 1,000 note in 1978 could buy 5 sq ft of real estate space in south Mumbai. In 2016, a Rs 500 note would not even be worth 100th of a square foot.
Senior advocate Anil Harish said people with unaccounted money were reluctant to deposit their high denomination currency in banks because of fear of income tax sleuths. “At places like Crawford Market and Zaveri Bazar, people were selling Rs 1,000 notes for as little as Rs 300,“ he said.
At banks, people were asked to fill in a form when they came to exchange old notes.The banks would inform the I-T cell if people walked in with unusually large amounts. “If they were unable to explain the source of income, the I-T wing would levy the prevalent tax, which was as high as 90% in those days,“ he added.
Said advocate Nishith Desai, “I remember 1978, when people had to go with bags full of cash to the bank. It is an excellent step, but the idea is old.“
A senior chartered accountant with Kalyaniwala & Mistry said, “If you want to flush out black money , it is a good step. In 1978 there was no great disruption, however, since the notes were not with common people. Then they had demonetised Rs 1,000 notes which had a huge monetary value. The 500 and 1,000 rupee notes do not have the same value today; even the average man on the street will have these notes.“
2016: Demonetisation of Rs. 500 and Rs 1000 notes
Black Out? Rs 500, 1000 Notes No Longer Valid, Nov 09 2016 : The Times of India
i) thwart Pakistan’s attempts to subvert the Indian rupee (by printing counterfeit Indian currency of high denominations like Rs. 500 and Rs.1,000), and
ii)render useless the illegal cash that political parties had collected and stowed away.
The Times of India
The anticipation built up after PM Narendra Modi met the service chiefs to review the India-Pakistan security situation and news filtered out that he would address the nation. But it was a surgical strike of a different kind, with Modi delivering a stunning surprise by scrapping Rs 1,000 and Rs 500 notes and calling for a “decisive war“ against corruption, black money and terrorism.
“There is a need for a decisive war against the menace of corruption, black money and terrorism...festering wounds which make the country and society hollow from within,“ the PM said in a TV address, his first, to the nation. The decision comes in the backdrop of a fierce political fight over black money with opposition parties claiming Modi has failed to deliver on his pledge to combat black money .
“From the midnight of November 8, Rs 500 and Rs 1,000 will not be legal tender...these will be just worthless pieces of paper,“ Modi said in his 40-minute speech. He said this was being done to combat graft and terror funding. The two high-value notes account for nearly one-fourth of all the notes in circulation. In value terms, however, their share was over 86% as of the end of March.
The PM also said new notes of Rs 2,000 and Rs 500 will be introduced but those being currently held will have to be exchanged at banks. But this is subject to limits and rules out the possibility of large exchanges of illegal stash as these will need to be explained and accounted for. Pitching the decision as a much needed antidote to stamp out the menace of corruption and terror funding, the PM said “Black money and corruption are the biggest obstacles in eradicating poverty...Have you ever thought how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes.“
Describing illegal finan cial activities as the “biggest blot“, Modi said that despite several steps taken by his government over the last twoand-a-half years, India's global ranking on corruption had moved only to 76th position from 100th earlier.
According to the finance ministry , the total number of bank notes in circulation rose by 40% between 2011 and 2016, while the increase in number of notes of Rs 500 denomination was 76% and for Rs 1,000 denomination was 109%.
The World Bank in July 2010 estimated the size of In dia's shadow economy at 20.7% of GDP in 1999, rising to 23.2% in 2007. “A parallel shadow economy corrodes and eats into the vitals of the country's economy ,“ a finance ministry statement said. BLACK OUT? P 2, 13, 14, 15, 25, 29 & 30 It (a parallel shadow econo my) generates inflation, which adversely affects the poor and the middle classes more than others. It deprives government of its legitimate revenues which could have been otherwise used for welfare and development activities,“ a finance ministry statement said.
The move could have political ramifications in the forthcoming state elections as it impacts the capacity of parties to spend unaccounted cash for campaigning and various political payments. ATM withdrawals will be restricted to Rs 2,000 per day and withdrawals from bank accounts will be limited to Rs 10,000 a day and Rs 20,000 a week. Banks will remain closed on Wednesday and ATMs will also not function for the next two days, Modi said.
Apart from depositing money in bank accounts, Rs 500 and Rs 1,000 notes can also be changed for lower denomination currency notes at designated banks and post offices on production of valid government identity cards like PAN, Aadhaar and election card from November 10 to November 24 with a daily limit of Rs 4,000.
The demonetised currency notes will remain valid for transactions like booking of air tickets, railway and government bus journeys and hospitals till midnight of November 11 and 12. The RBI and the finance ministry have set up helplines to answer questions.
A background
The Hindu, November 9, 2016
RBI board had approved production of Rs. 2,000 denomination notes long ago, say officials
The government’s move to scrap nearly 23.2 billion high-value currency notes of Rs. 500 and Rs. 1,000, was in the pipeline for several months but was kept tightly under wraps, with just a handful of officials in the know.
The Reserve Bank of India’s central board had approved the production of the Rs. 2,000 notes several months ago and even began production of the new Rs. 500 and Rs. 2,000 notes, which are to be issued from November 10 a few months ago.
System ready
“The timing [of the announcement by the Prime Minister] was appropriately chosen as we should be ready with adequate number of notes to replace the existing ones. We had ramped up production in the past few months of the new notes, and hence, it was decided to do it now as we can provide more of them in the weeks and days to come,” said RBI governor Urjit Patel at a briefing.
Security concerns
The case for introducing new notes followed prolonged deliberations within the top echelons of government, based on inputs from security agencies and the central bank.
“There’s been no breach of security features of our notes. But for ordinary citizens, it is often difficult to tell a genuine note from a fake. There’s now a confluence of thought between the government and the Reserve Bank of India. Multiple objectives can be met so this led us to withdraw the legal tender character of Rs. 500 and Rs. 1,000 notes,” Mr Patel pointed out.
Mr. Das said the bold and decisive step to fight black money and the use of fake currency notes to finance terrorism was backed by analysis of India’s currency trends.
‘Disproportionate rise’
“Statistics show that high denomination currency in circulation has risen sharply between 2011 and 2015. When all currency notes grew 40 per cent, Rs. 500 notes in circulation rose by 76 per cent and Rs. 1000 notes went up by 109 per cent. But during this period, the economy expanded by 30 per cent so the circulation of such notes had gone up disproportionately,” he said.
“The long shadow of the ghost economy has to go for the real economy to grow. This will add to our economy’s strength,” Mr. Das stressed.
Terms and conditions for denomination
The Hindu, November 8, 2016
Demonetisation of Rs. 500 and Rs. 1000 notes: RBI explains
From midnight of November 8, 2016, Rs. 500 and Rs.1000 will cease to be legal tender.
Taking the nation by surprise, Prime Minister Narendra Modi announced demonetisation of Rs. 1000 and Rs. 500 notes with effect from November 9, 2016 making these notes invalid in a major assault on black money, fake currency and corruption.
In his first televised address to the nation, Mr. Modi said people holding notes of Rs. 500 and Rs. 1000 can deposit the same in their bank and post office accounts from November 10 till December 30.
Six months’ preparation
RBI got 6 months to prepare for this, Nov 09 2016 : The Times of India
Around six months ago [around May 2016], the government asked the RBI to prepare for its latest assault on black money , and told the currency manager to print more Rs 50 and Rs 100 notes, with PM Modi having decided to phase out the current lot of Rs 500 and Rs 1,000 notes earlier this year.
After all the task was hu mongous: replacing 23 billion notes.Besides, the information had to be kept confidential at all costs.
In any case, apart from the PM, only finance minister Arun Jaitley knew, and two senior officers each in the finance ministry and the RBI were in the loop.
The six months were used not just to print enough Rs 50 and Rs 100 currency notes, but also to plan the operations meticulously . This meant that, on Tuesday 8 Nov 2016, the Reserve Bank of India initiated the first “public“ move when its board met around 6pm and recommended the withdrawal of Rs 500 and Rs 1,000 notes. Soon, the government, which was ready with the notification, moved the Cabinet, which met at 6.30pm on Tuesday . The decision was taken and the PM went on air to announce the first demonetisation in 38 years.
The government's calculation was simple. It sees major gains accruing to the economy , beginning with an immediate halt to black money transac tions -at least in the near run. This is ex pected to force peo ple to use only legal channels, which will result in higher tax es in the govern ment's kitty .
While those showing “agricultu ral income“ can still use a possible loop transact in cash, the hole to transact in cash, the window is seen to be limited and the government expects bulk of the funds to flow into the banking system. This itself is going to provide more boost for lending, which has remained subdued, a senior government official said. “We have hastened the printing of these notes,“ RBI governor Urjit Patel said.
Cost to RBI
The Hindu, November 9, 2016
New notes to cost RBI more than Rs. 12,000 crore
Sharad Raghavan
By removing the Rs. 1,000 note, the government is doing away with the cheapest note to print in relation to the face value of the note.
Replacing all the Rs. 500 and Rs. 1,000 denomination notes with other denominations, as ordered by the government, could cost the Reserve Bank of India at least Rs. 12,000 crore, based on the number of notes in circulation and the cost incurred in printing them.
Data from a Right to Information answer by the RBI in 2012 shows that it costs Rs. 2.50 to print each Rs. 500 denomination note, and Rs. 3.17 to print a Rs. 1,000 note.
That means that it cost the central bank Rs. 3,917 crore to print the 1,567 crore Rs. 500 notes in circulation, and Rs. 2,000 crore to print the 632 crore Rs. 1,000 notes in circulation currently.
Assuming that the new Rs. 500 notes cost the same to print, then that is an additional Rs. 3,917 crore spent in simply maintaining the same number of notes in circulation.
The new Rs. 2,000 notes are likely to cost about the same or a little more than the Rs. 1,000 notes, which means an additional cost of Rs. 2,000 crore to print them.
In total, removing the old notes and replacing them with the new Rs. 500 and Rs. 2,000 notes will cost the central bank a total of at least Rs. 12,000 crore. This figure is likely to go up since additional security measures, which the new notes are set to have, will only add to the cost of printing.
By removing the Rs. 1,000 note, the government is doing away with the cheapest note to print in relation to the face value of the note.
Highest cost
The Rs. 3.17 it costs to print a Rs. 1,000 note is the highest in absolute terms across denominations, but it is the lowest when compared to the face value of the note.
For example, a Rs. 10 note costs only Rs. 0.48 to print, but that works out to 9.6 per cent of the face value of the note. Printing a Rs. 10 note costs 10 per cent of what that note is worth. This, for a Rs. 1,000 note, is 0.3 per cent.
