Launching a frontal and unprecedented attack on black economy and corruption, the government on Tuesday declared R500 and R1,000 notes in circulation “not legal tender” with effect from midnight, a historic move that took banks, financial market participants and the people at large by surprise. The Reserve Bank of India (RBI) will release new series of R500 and R2,000 notes and these will come into circulation from November 10.
Analysts said the decision, announced by Prime Minister Narendra Modi in his first televised address to the nation, would deal a body blow to the black economy, the size of which is variously estimated but is widely believed to be about about 40% of gross domestic product (GDP). It could boost tax collection — evasion will become difficult — boost logistics and could help increase India’s global competitiveness, they said, but added that property prices could plunge as a result of the effective curb on cash transactions. The general reaction of financial sector experts was that though the decision could cause some unmerited temporary irritants for the white money holders also, especially because of its suddenness, it would ultimately have a wholesome effect on the economy.
Modi said people holding notes of R500 and R1,000 denomination can deposit the same in their bank and post office accounts from November 10 till December 30. ATM withdrawals will be restricted to R2,000 per day and withdrawals from bank accounts will be limited to R10,000 a day and R20,000 a week. Banks will remain closed on Wednesday and ATMs will also not function on Wednesday and Thursday.
Calling it a bold and powerful decision to fight black money and fake notes — which have been misused for terror financing — economic affairs secretary Shaktikanta Das said there has been disproportionately high use of higher denomination currency notes in recent years. RBI governor Urjit Patel said although there has been a “growing menace” of fake Indian currency notes, there hasn’t been any breach of the security features of the genuine notes.
Referring to the recent steps taken by the government to curb black money, including the income disclosure scheme, justice MB Shah, chairman of the special investigative team on back money, said , “Those holding untaxed assets and income despite government giving them opportunity to declare will suffer; such a move was necessary.”
“It is a very powerful measure to curb black money,” said Nirmal Jain, chairman of IIFL Holdings. “It will have a deflationary impact in general and more specifically on real estate prices and make homes affordable.”
“Black money to the tune of R1.25 lakh crore was unearthed during the last two-and-a-half years,” Modi said. He expressed confidence that political, other sections and the media will help make the new measures successful. He said that the rampancy of cash transactions by dealers in back money has over the years led to “artificial increase” in prices of property. The government’s Financial Intelligence Unit had earlier informed the finance ministry that suspicious transactions had risen by close to13 times over the last five years.
Although Patel said that the RBI has been ramping up production of notes and adequate number of new series of notes will be available without delay, there will be concerns over whether the demand for high-denomination notes would be seamlessly met in the initial weeks.
Besides depositing money in bank accounts, the R500 and R1,000 notes can also be exchanged with lower denomination currency notes at designated banks and post offices on production of valid government identity cards like PAN, Aadhaar and election cards from November 10 to November 24 with a daily limit of R4,000. Those unable to deposit R1,000 and R500 notes till December 30 this year can do so in designated RBI offices till March 31 next year after filling a declaration form along with proof and reasons. The R500 and R1,000 notes will be valid for transactions related to booking of air tickets, railway bookings, government bus tickets and at hospitals till the midnight of November 12.