Rs 1,000 & Rs 500 note exchange: 20 per cent ‘no show’ may lead to Rs 3 lakh crore black money destruction

In the immediate term, cash liquidity in parts of the economy will freeze temporarily, till the new notes are fully introduced.

By: ENS Economic Bureau | Mumbai | Updated: November 10, 2016 1:17 pm
rs 500, rs 1000, rs 500 note, rs 1000 note, arun jaitley, jaitley, narendra modi, pm modi, 500 notes, 1000 notes, 500 notes demonetised, gold demand, real estate prices, notes demonetised, modi address, modi nation, pm narendra modi, latest news, rbi, reserve bank of india, black money The Indian economy had Rs 17.3 trillion (Rs 17,30,000 crore) of currency in circulation as of September 2016.

Many of those holding Rs 500 and Rs 1,000 notes are unlikely to come forward to exchange or deposit notes in banks, fearing detection and action by the Income Tax Department, bankers and analysts said.

There is a possibility that 20 per cent of the notes are unlikely to be exchanged, which could convert them into worthless paper.  “There could be permanent wealth destruction of Rs 3 trillion (or Rs 3,00,000 crore) if 20 per cent of these notes are not exchanged which could impact inter-personal lending, real-estate, jewellery and banks with such exposure,” said Ritesh Jain, chief investment officer, Tata Asset Management.

WATCH: Serpentine Queues Outside Banks To Exchange Rs 500, Rs 1,000 Notes

However, all in all, this would be more than outweighed in the medium term by the positive impact on improved transparency and tax compliance (tax revenues) significantly and consequently benefit public finances, Jain said. The government action will push the country to go cashless and get into the digital economy at the earliest, he said.

The move to withdraw Rs 500 and Rs 1,000 notes could hurt economic activity in the near term, particularly in the rural economy, where a large proportion of transactions are still conducted using cash, and spending on big ticket items such as white goods, autos and property. “This will positively impact the share of financial savings within the economy in the longer term as households could reduce their allocation towards physical assets like gold and property,” said Chetan Ahya of Morgan Stanley Research.

The Indian economy had Rs 17.3 trillion (Rs 17,30,000 crore) of currency in circulation as of September 2016. As per March 2016 data, Rs 500 and Rs 1,000 notes comprised 86 per cent of the value of currency in circulation, or 10.4 per cent of GDP.

Currency in circulation has increased by 15 per cent in the last one year and 42 per cent over the last three years, ahead of nominal GDP growth. “As per the Economic Affairs Secretary, the growth in Rs 500 and Rs1,000 notes has been higher than that of the aggregate currency in circulation and the size of the economy. Part of this, if unaccounted for and becomes illegal tender, also means wealth destruction with its accompanied impact on business activity,” said Gautam Chhaochharia, head of India Research, UBS Securities India.

WATCH VIDEO: Rs 500 & Rs 1000 Illegal: Scuffle At An ATM With People Queuing Up To Withdraw Money

As much as 86 per cent of outstanding currency value in circulation is being demonetised which is a significant step towards the transition to a non-cash economy. In the immediate term, cash liquidity in the large parts of the economy will freeze temporarily, till the new notes are fully introduced.

Jain said inflation will undershoot RBI’s medium-term target of 5 per cent inflation, resulting in 50-75 bps rate cuts in next 6-9 months. “This is a strong and bold step taken by the government to curb the black money; however the ripple effects of this cannot be understated.  There are major industries in India thrive on a parallel economy funded by black money. How will this affect the more legitimate and normal economy? The weeks and months ahead will tell,” Jain said.

It is expected that over next three years, the current PoS (point of sale) base installed will increase from 1.5 million terminals in over 750,000 retail touch points — predominantly in urban areas — to about 5-7 million PoS with penetration in sub-urban and rural markets. India has close to 15 million merchants of which only 7,50,000 have electronic payment acceptance infrastructure.

Sunil Kulkarni, Deputy MD, Oxigen Services, said: “This is a master stroke which will majorly change India’s digital payments infrastructure.” The recent announcement by the government to remove surcharge on electronic transactions for government payments, announcement of Acceptance Development Fund to boost electronic payment infrastructure for retail merchant network and lastly GST with April 1 2017 are all clear direction of move towards large scale digitisation of payments.

Porush Singh, country corporate officer, India, Mastercard, said,” Mastercard welcomes and supports Prime Minister Narendra Modi’s announcement regarding the ban on high value currency notes as it fundamentally addresses the underlying ‘cash engine’ that drives the shadow economy.”

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    Deepak
    Nov 10, 2016 at 10:13 pm
    Best move by any Indian Government for a long time to curb black money and corruption menace. People should stop complaining this and that and declare their true income and get on with life, if everybody had done that earlier they would have this problem.lt;br/gt;They want the entire society to go along with these people illegal activities.
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      Sankar patel
      Nov 10, 2016 at 4:33 am
      My
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        shilia Elizabeth
        Nov 11, 2016 at 7:09 am
        Nice move but Let the new ones be white !and Let not a single new 500,1000,and 2000 turn into black especially by the ruling cl
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          Amit
          Nov 10, 2016 at 3:02 am
          Bold and positive step by the government. A government in majority is supposed to take such bold decisions even if it becomes unpor in some quartets due to misleading information spread and lack of understanding of all aspects.lt;br/gt;This is not entertainment news so I personally urge fellow citizens to read the RBI version and PM's full speech and if they are honest citizens they shouldn't be worried or misled that it will cause inconvenience to them of any sort.lt;br/gt;Please appreciate the fact that those few dishonest citizens might be interested to find flaws with this and sow misleading information seeds of the so called "inconvenience" to "poor and common man". Poor and common man is not in possession of big money, and that too all in cash, so as to be worried in any which way. Also I am happy that government has strategised this well since it came into power by giving citizens ample chance to open bank accounts, RBI giving permissions to so many mobile wallet applications including India post to take care of daily needs payments, voluntary chance given for income declaration etc. So it's a great move and since we have a country of both honest (majority) and a few dishonest people no effort of the government can be certified as 100% satisfactory. So please do not panic fellow citizens and carry on with your honest life. There is no problem for people like us who are willing to work honestly to make India a developed India with equal opportunities of growth for all its citizens! Jai hind!
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            Arun
            Nov 10, 2016 at 5:22 am
            The Common Man very well knows that the Ruling Party at Centre whether it is BJP or Congress, both of them have soft corner towards finding out Black money in and our of India as many well wishers/political leaders are in their parties.Therefore let us not expect more from Modi Govt. No doubt Narendra Modi wants to unearth black money in India and abroad but due to the pressure of his own Party and other political parties, he has to go slow sooner he became PM.Nevertheless removing Rs 5000 and 1000 notes is appreciated.
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              ashok s
              Nov 10, 2016 at 12:56 am
              Big ticket escaped by putting their large chunk in agro commodities. Poor netizens bolded on ransom
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                ashok s
                Nov 10, 2016 at 1:52 am
                I don't simply understand that some economist and author compiled this article. 3 trillion is not wealth destruction but govt becomes rich by same amount less cost of printing those bills. As bills will become useless the govt will not be in obligations to pay them anything and automatic govt becomes rich. Please author refer promisary note printed on bills or go back to school
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                  PN badri
                  Nov 10, 2016 at 5:20 pm
                  People are enled to have the figures from government regarding swap/deposits of demonetised currency notes with the financial insutions after grace period to justify so called surgical strikes on black money. Vibrant Gujarat will lead in this race for converting black in to white.
                  Reply
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