1. Rs 500, Rs 1,000 notes ban: The gainers, losers and more

Rs 500, Rs 1,000 notes ban: The gainers, losers and more

It could lead to a change in consumption and spending patterns of an average individual

By: | Published: November 10, 2016 6:21 AM
One of the major promises of the Modi-led BJP during the 2014 election campaign was to curb black money.  (PTI) One of the major promises of the Modi-led BJP during the 2014 election campaign was to curb black money. (PTI)

In a move that took the stock markets, India Inc and the country by surprise, PM Modi announced that current high denomination currency notes—R500 and R1000—would not be legal tender starting November 9. While the common man faces immediate problems, the big impact is on the black money stashed. After all, it is believed that the black economy accounts for almost 20% of India’s GDP.

Why was this done and what does this move mean?

One of the major promises of the Modi-led BJP during the 2014 election campaign was to curb black money. While it was believed that the government would target select individuals after the Income Disclosure Scheme, 2016 ended, Modi changed the narrative by scrapping high denomination currency—R500 and R1,000 with immediate effect. That apart, there was worry over the high incidence of Fake Indian Currency Notes (FICN) flooding the markets. It is estimated that there were around 6.5 lakh fake currency notes in the R500 and R1,000 denominations. So, the government has changed the way people spend and keep their money. It could over time lead to a change in consumption and spending patterns of an average individual.

Why were high denomination currency notes targeted?

As of March 2016, there were 22 billion currency notes—15.7 billion R500 notes and 6.3 billion R1,000 notes—in circulation, accounting for 24.4% of the total Indian currency. However, these notes accounted for 86.4% of the total value. Of that R500 notes for 48% and R1,000 for the balance 38.4%. So, at one stroke, Modi has ensured that currency notes worth R14.18 lakh crore out of R16.41 lakh crore in circulation are no more legal tender.

What has the government done to move towards a cashless economy?

The foundation for yesterday’s scrapping of high value currency notes started with the Pradhan Mantri Jan Dhan Yojana (PMJDY), under which bank accounts were opened for those who did not have an account. Two years later, there are 25.45 crore PMJDY accounts of which 15.62 crore are in rural areas and 9.83 crore in urban areas. While 23.37% of the accounts are still zero-balance, the total amount in these accounts is R45,302 crore. Already 53.4% (13.6 crore) have been seeded with Aadhaar numbers and 19.44 crore (76.4%) of the accounts have been issued RuPay cards. That was followed by JAM (Jan-Dhan, Aadhaar and Mobile), which looked to interlink transactions to the mobile phone. Later the government launched the Immediate Payment Service (IMPS) under the auspices of the National Payments Corporation of India (NPCI), that allows instant domestic money transfer across India round-the-clock across the year. In August 2016, the NPCI made the Unified Payment Interface (UPI) operational. UPI allows money transfer between any two banks accounts using a smartphone. In the bigger cities, people have been using mobile wallets like Paytm, Freecharge and MobiKwik over the past couple of years.

Who are the losers and gainers from this? 

The digital payments industry is by far the biggest gainer. This move could well be the catalyst for growth of mobile wallet-based transactions in the country. The big gainers could be popular mobile wallets like PayTM, MobiKwik and Freecharge. Paytm reacted immediately to the currency withdrawal in a tweet that said it all in two words—Paytm karo. To support the move away from a cashless society, e-commerce players like Amazon and Flipkart have also restricted cash on delivery to transactions upto R999. With the government imposing cash withdrawal limits, it’s quite possible that more Indians would look to adopt digital payments in the future. Which industries and businesses are likely to be impacted the most? The biggest hit will be on the real estate sector which is estimated to account for 30% of the country’s black economy. With real estate down, the cement and steel construction equipment business too will be hit. Gold jewellery is also expected to see lower sales over the next few months.

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