500-1000 Currency Ban Good or Bad for India? Pros & Cons on Economy

Pros and Cons of Banning existing 500 1000 Currency Notes

It’s a bold move by the Government and can be called as the Surgical strike of the Government on Black Money (add Terrorist funding, arms smuggling and Counterfeit currency to that).

The joke on twitter sums it up nicely.

India prepared for Hillary and Trump, Modi came out of syllabus

Currently Rs 17,54,000 crore worth of notes are in circulation according to the RBI’s database on the Indian economy.

Of this Rs 500 notes constituted almost 45% of the currency in circulation while 39% of the notes were of the Rs 1,000 denomination. In value terms.

However in terms of volume, Rs 10 and Rs 100 notes constituted 53% of the notes in circulation.

This measure would mean that from midnight, almost Rs 6,32,600 crore in circulation in the form of Rs 1,000 notes would be illegal tender. To replace them, Rs 2,000 notes would be introduced, which according to the government would be limited in circulation.

RBI data shows that in 2015-16, almost 6.5 lakh counterfeit notes were detected in commercial banks of which almost 4 lakh were in the Rs 500 and Rs 1,000 category. It is in this context that the government wants to re-monetise the Rs 500 note while de-monetizing the Rs 1,000 note. But the number of Rs 100 counterfeit currency were also close to 2 lakh this year.

86% of currency by value in India are of Rs 500 & Rs 1,000 denominations

Immediate Impact: Heavy Deflation

Initially there will be heavy deflation as people who have earned money through illegal means such as smuggling, corruption would be afraid to declare the money as they might be prosecuted by Govt/Income Tax Dept on the legitimacy of their income.

This will reduce the total currency circulation in the economy – leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down.

Gold prices, stocks & commodities will drop.

This will also lead to Inflation (not overnight)

There will be a lot of people who have a lot of cash, legally earned, which they will deposit it in the bank.

Now the bank with more deposits can do more lending.

Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.

Deflation and Inflation will balance out each other in the future.

Some of the benefits of this movie are: (Pros)

  • Reduction in Property Price :- This will also enable people with hard earned white money to bu new homes.
  • Online Shopping portals( like paytm,paypal etc) and many big stores(like big bazaar etc) which have card payment options will make there maximum profits in these few dates.
  • Positive effect on Banking Sector as now banks will have more money and more no of online transactions will be carried out.
  • It will help the government to fight Black money, corruption, terrorism and counterfeit currency with one single decision.
  • Arms smuggling, espionage and terrorist related activities will be choked due to lack of funding.
  • Counterfeit currencies are being used for financing terrorism which is being run by the enemy in India. Now Govt has taken a bold move which enables them to fight counterfeit currency/terrorist funding activities.
  • With the new limits on ATM withdrawals being restricted to Rs 2,000 per day, withdrawals from bank accounts limited to Rs 10,000 a day and Rs 20,000 a week, it will drive the card payments across the country (In simpler words card transactions will slowly replace the cash transactions in daily activities).
  • It will be easy for the Government to track the money being exchanged as exchange can only be done by producing a valid government identity cards like PAN, Aadhaar and Election Card from 10 to 24 November with a daily limit of Rs 4000. There is no limit on the amount as long as it is legal.
  • FIU of India get info about transactions from banks. During this period, banks will take extra precaution. Banks will share info with Income Tax dept. as deemed fit. (So now it is difficult to get rid of the black money which is mostly in 500 and 1000 notes)
  • The traditional benami transactions have already received a big blow as the new legislation has a provision for seven-year imprisonment and fine, replacing the three-year jail term, or fine, or both.
  • This decision will help institutionalize the real estate sector bringing more transparency in the Indian real estate industry. This step would give the Indian real estate sector more credibility making it more attractive to the foreign as well as domestic investors.
  • Housing prices could witness downward pressure, helping revive demand in the sluggish housing segment (this will give much needed bloodline to the sector)
  • It will help the common man by putting an end to the artificial increase in Real Estate, Higher Education and Healthcare transactions bringing them within the reach of the common man.

Cons

  • Inconvenience to common people who will start running to the nearby bank to exchange the 500 and 1000 currency notes.
  • Cost of replacing the 500 and 1000 Rs notes. If all this additional money (a spectacular Rs.6.666 trillion) had to be printed using Rs.100 notes, it would cost RBI about Rs.11,900 crore, which is more than a four-fold increase. This is without taking into consideration the increased costs of operating ATMs (since they would need to be refilled more often), and of handling money in general. Scrapping Rs500, Rs1000 notes a costly idea
  • Very difficult for more than half the population who are not well versed with the card transactions.
  • This move deeply impacts the working sections of society: drivers, maids, cooks, electricians, plumbers. Anybody who provides services in the informal sector and depends on monthly or bi-monthly cash payments.
  • How do you expect a chai wallah to leave his business and stand in a queue to deposit these notes in bank?
  • What will happen to the common man who finds out that the note he is having is a fake one? How is the Govt going to handle such situations?
  • The small businesses will be affected at least in the shorter run.
  • Jan Dhan scheme, UPI/digital payment stack and payment banks are still in the nascent stage. It will be a long time before rural India moves to completely cashless transactions. In the short-term, people in rural India who have a significant amount of Rs 500 and Rs 1000 notes, but no official form of identification will have a tough time in exchanging their notes.
  • The big fish will be left out whose black money is in the form of foreign currency, gold and stashed away in tax havens.

But the Pros which are in the long term interest of the country comfortably outweigh the cons.

I don’t mind my wallet getting fatter, as the wallets of corrupt politicians and businessmen are getting lighter! #byebyeblackmoney!

Originally written as an answer to How does it help ceasing currencies of 500 and 1000 in India?

Top Sources:

To choke black money, Modi withdraws old notes, to introduce new Rs 500, Rs 2k notes

Pieces of Paper: Demonetisation of Rs 500 and Rs 1,000 Notes Explained

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Top 10 Hilarious Twitter Reactions on 500-1000 Currency Ban

How to exchange 500-1000 currency notes in next few days?

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