Prime Minister Narendra Modi announced Tuesday evening that higher denomination Indian currency notes of Rs 500 and Rs 1000 will be demonetised. Demonetising the Rs 500 and Rs 1,000 denomination notes will affect 86 per cent of the bank notes currently in circulation. These currency denominations are used largely by people stashing black money and for funding criminal and terrorist operations. Also, counterfeit currency of these denomination has been hurting our economy for long. The move now follows the culmination of the government’s black money disclosure scheme where over Rs 65,000 crore of black money and undisclosed assets were disclosed to the government.
But the idea of this demonetisation has been floating around for quite a while now. Demands started coming as early as in 2010 to demonetise the Rs 500 and Rs 1,000 notes. Yoga Guru Baba Ramdev, who has been a anti-black money crusader for several years now, started a public demand and campaigned for demonetisation of these bank notes and bringing all black money from offshore and inhouse stashes.
According to an Assocham study, Rs 500 denomination notes account for at least 46 per cent of the banknotes in circulation and Rs 1,000 notes account for around 40 per cent of the total notes in circulation.
Economist Ajit Ranade called for scrapping higher denomination notes last year as he argued that higher denomination notes of Rs 500 and Rs 1,000 are highly unlikely to be used for day-to-day common transactions. Knowing the fact that higher denominations are not feasible for normal transactions, the governments and the RBI over the past few years have increased the number of these notes in circulation for encouraging electronic transactions. Paper currency not only adds to unaccounted cash, but it also increases financial strain on the RBI for printing of the currency along with its maintenance, authentication and distribution.
Again the demand for decommissioning a large amount of currency to fix the huge mismatch in large and small denomination currency for daily transactions. As much as 94.4 per cent of the currency in circulation was decommissioned in 2012 and much of it was large denominations. A larger proportion of Rs 100 notes were infused into the market to phase out the older notes which were easier to counterfeit.
The demand went up again in 2014 when the Modi government came to power. An SIT was formed to tackle the black money issue. After the black money disclosure scheme, this is seen as the next big step to cleanse the economy. The government is soon set to introduce newer Rs 2000 denomination banknotes to ease the process.