Ban on Rs 500 and 1000 notes; A gamble or well thought move?

by Vargis.Khan

In what is definitely a shocking move, the government has decided to put a ban on Rs 500 and 1000 notes for any transactions throughout the country (with a few exceptions), making the two largest currency bills as nothing but worthless pieces of paper.

While I definitely support the move, there are however a few questions that still remain unanswered. I am of course no expert on the matter and do not claim to know better than our economists. These are just my two cents on the matter, a common man’s point of view.

The one thing that has been bothering me the most is that do we have enough currency in lower denominations to support the move? I am sure it would have happened with everyone recently that if you tried to withdraw amount lesser than Rs. 500, the ATM would tell you it doesn’t have a note of lower value and you must enter amount in multiples of Rs. 500. This is because, as per RBI, Rs.1000 notes hold 39% share of currency in circulation a further 45% of currency stock is held by Rs 500 notes. So effective today, 80% of the cash in India (by value) in circulation will be worthless. So now the entire country is expected to survive on 20% cash in circulation?

Keeping the above in mind, how is a common man supposed to survive? I myself have only a couple of Rs. 100 notes in my pocket today so how am I supposed to pay for groceries? How am I supposed to pay the maid tomorrow or the guy who cleans my car? Even if I have to buy vegetables, I need to go to a supermarket that accepts credit cards because I do not have cash in hand? Is it not a blow to the common vegetable sellers who can only take cash payments? How many of the vendors, shop owners in our market have a card machine? I am sure the answer is less than 10% so who is going to make up for this loss? Their businesses will go down because no one has enough cash to buy. Slowly they will prepare for cashless transactions but who will pay for the huge losses that these small market will incur in next few days?

The next question is, are our banks ready to deal with this? Is Indian banking really prepared for this? How are they going to handle the long queues of people wanting to exchange currency? Will they have enough currency in lower denominations to provide to a country of almost 1.4 billion? With liquidity drying up, demand for working capital would rise but with banning 80% of the cash, will banks be quick enough to respond?

Is a country with 46% unbanked population ready for this? I really do not think so. I agree that taking a move towards digital money sounds good enough but should this not have been done in a gradual manner rather than in haste like this? Will banning the currency once will really suddenly change the mentality of choosing cash transactions over credit?

So we banned Rs. 500 and Rs. 1,000 to wipe out the black money, good move but then, which segment are we targeting really? I am sure people who have thousands of crores in black money do not just keep in under their bed or in refrigerator in cash. That money is already sitting in Swiss accounts. The one that is still at home is in form of either gold or some other asset but not really cash. So are we just trying to target the common man again who may have a few lakhs of black money?

We ban the existing currency and publish notes of even higher values a few days later? How long before counterfeiting the new currency starts? How is this one move going to help? Should we not have a plan at a broader and a larger scale?

This one move is going to help with fighting terrorism? Really? Is only Indian currency funding those terrorist organizations? We dry up their cash and then what, hope they do not accumulate it again?

We all know that the ones that will get hit the most with this move are local builders. The negative impact on the real estate industry will not be of a smaller scale of course. Other industries like construction material, unorganized trade and services too will see significant pain in the near future. With losses like this, is it really going to benefit the market?

An economic move like this in India never goes without increase in price of commodities. Have we done anything or taken steps to ensure that a common man doesn’t again get unnecessarily burdened?

Please do not take me wrong. I am in no way opposing the move. In my opinion, something is better than nothing. At least someone is bold enough to take a move like this which none of our previous governments were. These are just some questions in my mind. A move like this with a proper follow up actions can definitely be a game changer.

As I said, these are just a few questions I have that I am sure will get answered in long term. Will Mr. Modi’s gamble prove to be really beneficious, only time will tell.

 

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2 comments

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Navin pratap singh November 9, 2016 - 3:25 am

You can still use your CC, DC and all online transactions. And the hassle is just for 72 hours. I think we all can manage that. You have 100 and I just have 50 in my pocket. Just bought cigarettes using DC. So don’t create a panic situation and appreciate a good move.

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Vargis.Khan November 17, 2016 - 12:16 pm

Not creating panic brother, just sharing my thoughts

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