FROM CLEANING up the economy to squeezing funds for terror, the government’s move to scrap the existing currency notes of Rs 1,000 and Rs 500 is being seen as a big-ticket reform. But how will it impact daily life, what will happen over the next few months? The Indian Express explains.
What do you do with Rs 500 and Rs 1,000 notes?
The government has declared that the existing notes of Rs 500 and Rs 1,000 will not be valid from November 8 midnight. Such notes can be exchanged at all banks and post offices from November 10 to December 30, once you confirm your identity by producing an official ID card, such as passport or Aadhar card. Until November 11, all government hospitals, chemists, petrol pumps, railway booking counters and airports will accept the old Rs 500 and Rs 1,000 notes.
How will you conduct financial transactions now?
Banks will be shut on November 9 to facilitate the withdrawal of old Rs 500 and Rs 1,000 notes. But you can continue to conduct electronic transactions using credit or debit cards, and through online transfers. While some ATMs will work on November 9, others will start working from November 10. From November 11, ATMs will start dispensing Rs 100 notes and the new Rs 2,000 notes. However, ATM withdrawal limits have been capped at Rs 2,000 per day per card till November 18 and Rs 4,000 from November 19. Withdrawals over the cash counter has been capped at Rs 10,000 per day per individual till November 24. The limits will be reviewed later.
What about cheques and demand drafts?
Transactions through cheques and demand drafts will not be affected. But there could be a slight delay this week, with banks being closed for business on Wednesday.
What should you do once banks reopen?
Banks will start counters for the exchange of old Rs 500 notes and Rs 1,000 notes. Post offices will also exchange old notes. This will continue until December 30. The government has advised people to refrain from exchanging notes on behalf of strangers because the exchange will be tracked by the income tax department.
Will the latest move lead to a short-term liquidity crisis?
No, according to the RBI, as the new notes of Rs 500 and Rs 2,000 will be circulated in the market from November 10. But in the near term, it is bound to affect cash payments, especially with a cap on daily withdrawal limits and given the cash economy in India.
Why has the government demonetised Rs 500 and Rs 1,000 notes?
The move is aimed at curbing funding of terrorism through counterfeit notes, mostly of Rs 500 and Rs 1,000 denominations, and curb the flow of black money in the economy.
How big is the fake currency problem?
As many as 250 out of every 10 lakh notes in circulation are fake, according to a study conducted by the Indian Statistical Institute. At any point in time, banknotes with a face value of Rs 400 crore are said to be in circulation in India. The study found that fake notes with a face value of Rs 70 crore are infused into the system every year, and law enforcement agencies are able to intercept only a third of this. The study found that Rs 1,000 notes constitute about 50 per cent of the total value of counterfeit notes.
How do these fake notes find their way into India, and who profits from them?
Pakistan’s military intelligence agency, the Inter-Services Intelligence (ISI), has been raking in an annual profit of around Rs 500 crore by circulating counterfeit notes in India, according to a report prepared by the IB, R&AW, Directorate of Revenue Intelligence and CBI. The ISI has been making a profit of 30-40 per cent on the face value of each counterfeit rupee produced in Pakistan, according to the report.
The cost of printing a Rs 1,000 counterfeit note, for instance, is Rs 39 (the RBI spends Rs 29 to print a Rs 1,000 note), but is sold at Rs 350-Rs 400, according to the report. The total number of fake notes that came into India in 2010 from abroad was pegged at Rs 1,600 crore, the report said. According to official sources, the move to stop Rs 500 and Rs 1,000 currency notes is a “death blow” to terrorist agencies and their sponsors.
Won’t there still be attempts to counterfeit the new series of high value notes?
This is a constant challenge. The plan is to introduce new currency notes marked by security features that can be detected by machines, as in the case of RFID technology.
Will the government move curb the circulation of black money?
Yes, according to official sources, as individuals and entities that have physically stocked black money or undisclosed cash will now have to disclose their holdings to banks if they want to exchange the old notes. In the case of big transactions, banks will inform the income tax department, which will verify the disclosures made by the taxpayer. To some extent, the proposed demonetisation will also curb hawala transactions and domestic cash transactions that use couriers to transport money on a daily basis. However, the percentage of black money floating in the market is estimated to be less that five per cent of what is hoarded by Indians so the impact of the latest move may be limited.
This is the third time that high value notes have been demonetised at such a large scale. How much has it helped in the past?
Such moves were undertaken in 1946 and in 1978 but had a limited impact. Particularly so, in 1978, when it was seen as a political move aimed at curbing the funding activities of some political parties.
Was there a better option available?
Perhaps, withdrawing a series of currency notes over a period of time may have been a better option as it leads to less disruption. Many countries opt for this route, especially the UK, where notes can still be exchanged at banks long after they are withdrawn.
Will the latest move encourage a cashless economy?
Yes. Over the last few years, electronic transactions had outstripped those through cheques, for instance, especially in the bigger cities and towns. As the use of cash gets reduced progressively, it would mean a boost to the economy in terms of higher revenue and transaction trails. That is now reflected in the success of new electronic payment platforms such as e-wallets.