THE GOVERNMENT’S decision to remove existing high-denomination notes of Rs 500 and Rs 1,000 from circulation could lead to serious short-term disruption, especially impacting small traders, wholesalers and those who earn their livelihood in cash, such as vegetable vendors, kirana stores, kiosk-owners and construction workers.
For instance, vegetable vendors at wholesale markets, such as Delhi’s Azadpur Mandi, could find themselves unable to undertake major transactions on Wednesday morning in the absence of Rs 500 and Rs 1,000 notes. As a cascading impact, movement of vegetables from the mandi to the retail market could see a temporary disruption.
In most cases, these vendors borrow funds overnight from local money lenders to purchase vegetables for 2-3 days. Typically, their borrowing needs are about Rs 1,000-2,000 and Rs 500 notes is almost a staple currency denomination.
Bandhan Bank CEO and founder C S Ghosh said the decision to demonetise Rs 500 and Rs 1,000 notes would cause problems to small traders and common public. “The decision to declare Rs 500 and Rs 1,000 notes invalid is a welcome move. But this will cause inconvenience to small traders and public who mainly deal in cash,” he was quoted as saying by PTI.
The issue of black money has a direct relation to a variety of cash transactions in the informal economy. The demand for currency, according to the Finance Ministry’s 2012 White Paper on Black Money, is determined by a number of factors such as income, price levels, and opportunity cost of holding currency. Factors like dependence on agriculture, existence of a large informal sector, and insufficient banking infrastructure with large un-banked and under-banked areas contribute to the large cash economy in India.
“In the short term, everyone will get affected but I think there is a larger economic gain — it is a masterstroke to root out black money. There will be a short term disruption but people should take it in their stride. We will come to know tomorrow as to which particular section of people would be impacted the most,” said Mukesh Butani, Managing Partner, BMR Legal.
The White Paper clearly admits to the primary importance of cash in relation to both generation and use of black money. There have been suggestions earlier that the government may consider amending existing laws, including the Coinage Act 2011, The Reserve Bank of India Act 1934, FEMA, and the Indian Penal Code, or enacting an entirely new statute aimed at regulating the possession and transportation of cash above a particular threshold limit. This may include creating a limitation on cash holdings for private use, as well as provisions for confiscation of cash held beyond prescribed limits.