Demonetisation of Indian Currency Notes: Implications and Effects
What demonetisation is….
The act of banning a currency of being a legal tender is termed as demonetisation. Whenever a country changes its national currency in order to curb counterfeiting and money-laundering, it issues a notice of demonetisation of its older currency of particular denomination and the particular currency is retired and replaced with the new currency. A recent example of demonetisation is that of 500 and 1000 denomination currency units of India.
Demonetisation of 500 and 1000 denomination currency in India
In a recent address of Prime Minister Narendra Modi to the nation he announced the demonetisation of Rs 500 and Rs 1000 notes of Indian currency. He said that from November 8, 2016 midnight, the Rs 500 and Rs 1000 currencies of India will no longer be a legal tender and they will be just worthless piece of paper. While announcing current demonetization, PM Modi also clarified that new Rs 500 note and Rs 2000 denomination banknote will be introduced from November 10. However, this is the first time that Rs 2000 currency note is being introduced.
The step has been put into action in order to:
- Curb currency counterfeiting, money laundering and corruption.
- To lower the cash circulation in India so as to eradicate corruption.
- To remove deceitful funds that is being used by various terror organisations to fund terrorism in India.
The current notice has panicked the nation although they have gracefully accepted the order. PM Modi have also given people 50 days from the date of announcement to exchange their high denomination currencies into smaller ones from post offices and banks as the smaller currencies remain unaffected and continues to be the legal tender.
Earlier demonetisations of Indian currencies
The recent move to demonetize the currency is not new. Here are some of the earlier demonetisations of Indian currencies:
- The highest denomination note ever printed by the Reserve Bank of India was the Rs. 10,000 note in 1938 and again in 1954. But these notes were demonetised in January 1946 and again in January 1978, according to RBI data.
- Rs 1000 and Rs 10000 currencies were in circulation prior to January 1946. Higher denomination banknotes of Rs 1000, Rs 5000 and Rs 10000 were reintroduced in 1954 and all of them were demonetised in January 1978.
- The Rs 1000 currency made a comeback in November 2000. Rs 500 note came into circulation in October 1987. The move was then justified as attempt to contain the volume of banknotes in circulation due to inflation.
- Bank notes in Ashoka Pillar watermark series in Rs 10 denomination were issued between 1967 and 1992, Rs 20 in 1972 and 1975, Rs 50 in 1975 and 1981 and Rs 100 between 1967–1979. The banknotes issued during this period contained the symbols representing science and technology, progress and orientation to Indian art forms.
- In the year 1980, the legend Satyameva Jayate—‘truth alone shall prevail’— was integrated under the national emblem for the first time.
- In October 1987, Rs. 500 banknote was introduced with the portrait of Mahatma Gandhi and Ashoka Pillar watermark. Mahatma Gandhi (MG) series banknotes were issued in the denominations of Rs 5, (introduced in November 2001), Rs 10 (June 1996), Rs 20 (August 2001), Rs 50 (March 1997), Rs 100 (June 1996), Rs 500 (October 1997) and Rs 1000 (November 2000).
- The Mahatma Gandhi Series – 2005 bank notes were issued in the denomination of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1000 and contained some additional security features as compared to the 1996 MG series.
- The Rs 50 and Rs 100 banknotes were issued in August 2005, followed by Rs 500 and Rs 1000 denominations in October 2005 and Rs 10 and Rs 20 in April 2006 and August 2006, respectively.
Impact of recent demonetisation of Indian currency on economy
The recent sudden demonetization of India’s highest currency denomination has shook the lives of not only upper middle class and rich people but also the common man, small savings of housewives and piggy banks of school children. As per RBI’s annual financial report for the year 2015–16, the two presently demonetised denominations account for more than 86% of all currency notes circulated in the market.
India’s real Gross Domestic Product for the year financial year 2015–16 stood at Rs 113.5 lakh crore, which indicates that Rs 500 and Rs 1000 banknotes accounted for approximately 12% of India’s GDP, revealing how integral these banknotes are to India’s economy.
According to Economic Affairs Secretary, Shaktikanta Das, “What accounted for this move was the rapid rate at which these notes have grown in circulation in the last five years—the Rs 500 notes by 76% and the Rs 1000 notes by 109% over the 2011 numbers”.
The move is being assumed to beneficial for the economy in the long term but will impose a negative impact various industrial sectors like real estate, unorganized trade and services. Since the liquidity of higher denomination is drying up, the Non-Profit Assets (NPA) and demand for working capital credit will rise.
This move will also help industries to fight more effectively for elimination of section 43CA of the IT Act because after this move, there will no longer be any reason to charge tax on deemed income to both the buyer and seller.