What Happens After The Rs. 1000 Notes Have Disappeared Into Thin Air?

The Government of India and the RBI announced a series of measures late in the evening of 08 November, 2016 in order to curb counterfeit currency of denominations  Rs. 500 and Rs. 1000. Subsequently, it also announced issue of new currency notes of Rs. 500 and Rs. 2000. A detailed FAQ sheet was released by the RBI on its website over how the forfeiture of the old notes will take place.

Targeting counterfeit currency and black money are noble goals that the Government is undertaking. However, taking an extreme position by demonitisation of two denominations entirely futile  and issuing a higher denomination is illogical. Keeping aside the fact that temporary inconvenience will be caused to citizens, if everything else remains constant, things will go back to square one in a maximum of two years. Once the black money is unearthed and brought back to the system, keeping it in is going to be a paramount job for policy makers.

Banks were incentivised to expand their ATM infrastructure. Basically, you are encouraging people to withdraw money and spend in cash, which is difficult to trace. The new guidelines that put tighter restrictions on withdrawal of money via ATMs and cheques, and the gradual loosening of the same, is an obvious disincentive to cash use. If cash use is literally to be reduced, there has to be a good amount of incentive to use your debit/credit cards everywhere. For example, kirana stores should be equipped with PoS machines. The Government has to be proactive and promote the use of online payments in small shops. An equal amount of incentive to online transactions along with disincentives to cash transactions will balance the see-saw.

Black money is an evil to any developing economy, and so is counterfeit currency. Again, the move by the Government largely fails to block these practices in the long run. Let’s admit it, converting money to black is not a big deal, and so is not converting it back. Tax evasion has long gripped the country. And the real stacks of black money are actually sitting in offshore accounts, which this move completely ignores. Once the new currency notes are full-fledged out in circulation, people are going to do their thing and hoard money as usual. In a year, or two at most, this process will start. The same goes for counterfeiting notes. It is a piece paper with some security features. If the bad notes have been invisible to the naked eye for so long, they will remain to be so even with the new ones. It should be kept in mind that the agencies which carry out the counterfeiting process are career counterfeiters. They are masters at reverse engineering and nothing is stopping them to get hold of the new notes. The only way to get rid of the counterfeit notes is to identify and crack down hard at these centres where printing of such notes take place and burn them. Such illicit businesses should be attacked by the Government and shut down. This will promise some amount of long term relief from counterfeit notes.

What is done is done. We all have to go through the ordeal of standing in long queues at banks and do with low amounts of cash for at least the next two weeks. While the black money stashed offshore stays there, the Government should quickly roll out a series of reforms that help this move make sense. Along with giving incentive to online and PoS transactions, it should make online/ cheque transactions compulsory where instances of cash transactions are the most. Many sectors completely fall outside the purview of banks, for example, imitation jewellery and printing and stationary. Many such other sectors where online transactions have not seen the light of the day should be gradually brought under the same conditions other industries are operating. Rural areas where agricultural income is not taxed at all is another area where black money is stashed. A complete shift to online transactions at urban centres is completely possible and should start to move towards it if there has to be a commencement to actually curb black money.

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2 thoughts on “What Happens After The Rs. 1000 Notes Have Disappeared Into Thin Air?

  1. Very well written Harsh 🙂
    Just to comment on the move, it might not be as futile as we think. After the government’s black-to-white money scheme wrapped up in September, no one expected this move. Maybe the government still has a few cards up its sleeve.
    Also, it has worked to weed out black money from the very sectors you’ve mentioned – jewellery, agriculture, small businesses. Most of the black money in these sectors is not stored offshore. Trust the baniya talking. Long term, yes, definitely much more will need to be done. But I for one will concede to Modi this one time. 🙂

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    1. I think to keep the black money out, there needs to be a serious thought given to whether you need the notes back again. Introduction of notes again in a month or two will set off the same cycle. And a lot of hard push to online transactions needs to be given! Atleast in urban areas where the Infra is slightly ready and there is awareness. It could have been a good move of it were a complete one.

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