In an unexpected but strategic crackdown against black money and corruption, Prime Minister Narendra Modi on Tuesday announced that high denomination notes of Rs 500 and Rs 1,000 would no longer be legal tender. In consultation with the Reserve Bank of India, the government will initiate steps to ensure that common man’s money is safe and scrutinise unaccounted money held by the wealthy. As part of the demonetisation process, new notes of Rs 2,000 and Rs 500, with completely new design, would be introduced. This move is expected to have a positive impact on the economy in the short to long term. However, there could be some short-term volatility in the stock market. Sectors such as real estate, housing finance, banks, fintech/payment will cause volatility in the markets. The Centre’s decision mimics European Central Bank’s action to discontinue use of 500-euro notes in an effort to stop illicit transactions, curbing black money and tax evasion. Experts believe that high denomination currency in circulation in the past five years as well as economic growth was giving enough indications of unaccounted money in circulation. For many, it’s a surgical strike on black money by the Government and in the long-run, it will give the economy a positive fillip helping improve the GDP. Tuesday decision is the first time since 1978 when the government has withdrawn money from circulation. When the last high-denomination currency demonetisation happened in 1978, banknotes of Rs 10,000, Rs 5,000 and Rs 1,000, which were in circulation made up for less than 2 per cent of the overall currency in circulation. The challenge now is that the value of 500 and 1,000 rupee notes is about 85 per cent of the total currency in circulation.
Due to the liquidity crunch created by demonetisation, people will start using plastic money and make more online banking transactions. This will also increase usage of cheques, online transfers and payment wallets for day to day use, leading to a less-cash economy. The situation surely poses several operational and logistics challenges in the conversion of huge cash reserves people may be holding in a relatively short period of time (50 days). Though the intention is to track unaccounted money, the coming days will show how much scrutiny is possible since the volume of accounts that needs scrutiny will be very high. The move is expected to significantly impact unorganised sectors such as construction as cash transactions are rampant here. The decision could affect economic activity in the short-term, but will make a positive impact resulting from improved transparency and tax compliance in the short to medium term. There will be some impact on fund allocation decisions and can also have a bearing on financial savings within the economy. For achieving a bigger cause of curbing black money, all the stakeholders will have to work in tandem.