Demonetisation of Indian Currency – A Detailed Study Part 1

In this series called “Demonetisation of Indian Currency – A Detailed Study” we shall conduct a detailed examination of the so-called demonetization ( currency-swap) announced by Indian Prime Minister Narendra Modi on 8th Nov 2016, and assess its impact on Indian economy. In the first part, I have talked about the initial announcement and the reason behind this drastic and sudden economic move.

Demonetisation Announcement

On 8-Nov-2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes. Prime Minister Narendra Modi in his special address to the nation on the evening of 8th Nov 2016 announced that that Rs 500 and Rs 1000 banknotes would be withdrawn from the financial system “to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes”. (1) The Department of Economic Affairs Notifrication Dated 8th November, 2016 reads: S.O. 3407(E). ─ Whereas, the Central Board of Directors of the Reserve Bank of India (hereinafter referred to as the Board) has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender. (2)

The address to the Nation by Shri Naremdra Modi may be seen here in this video:

 

Key Highlights of Demonetization Speech by Shri Narendra Modi

The key message of his speech on demonetization regarding Rs 500 and Rs 1000 notes were: (3)(4)

  • From midnight of 8th Nov 2016, notes of Rs 500 and Rs 1000 would cease to be legal tender.
  • Citizens would have 50 days (between November 10 and December 30) to deposit/ exchange notes of Rs 1000 and 500 at post offices and banks.
  • Those unable to submit all their old currency notes within the deadline, would be able to do so at the Reserve Bank of India up till March 31, 2017 by providing a declaration.
  • ATMs will not function on November 9, and on November 10 in some places.
  • For 72 hours, until the midnight of November 11, government hospitals, government-authorised consumer stores like milk booths and ticketing counters, will continue to accept the old Rs 1000 and 500 notes.
  • RBI’s proposal for new Rs 2000 note has been accepted.
  • All banks will remain closed on November 9 for public work.
  • ATMS will limit money to Rs 2,000 a day initially.
  • There would be no change in any other form of currency exchange be it cheque, DD, payment via credit or debit cards etc.

“Your money is yours. You will note lose anything. The government will ensure that,” said PM Modi, in his address to the nation.

Demonetisation of Indian Currency - A Detailed Study Part 1 - Narendra Modi

Rationale for Demonetisation

In Prime Ministers 8th Nov announcement of demonetization, he gave the rationale for this sudden decision which many dubbed as a “surgical strike“on black money in reference to India’s surgical strike on terrorists in Pakistan occupied Kashmir. “We should be able to make the sacrifice of adjusting to the such a move in national interest, as it aims to tackle the evils of corruption, black money, fake currency and terrorism,” said PM Modi.

India among fastest growing economy

  • This speech is for a special request that I am going to make to the nation.
  • We are for empowerment of poors and for their rights.
  • This government is committed to the poor.
  • The various schemes launched by the government are aimed at empowering the poor. It shows the government is dedicated to the poor.
  • In spite of two years of continuous drought, in the last two-and-half years, India has made its presence felt in the global economy.
  • We are among the fastest-growing economies, but we also rank high in global corruption rankings
  • India a bright spot in global economy. This claim is not by us, but by the IMF.

Black money a hindrance to growth

  • Corruption and black market is a big hindrance in removing poverty.
  • Black money and corruption has taken roots in the country, these are the biggest obstacles in eradicating poverty.
  • India’s common citizens live their lives honestly. But black money, corruption make the nation hollow from inside.
  • In the last two-and-half years, at least Rs 1.25 lakh crore of black money has been recovered.
  • Corruption is the biggest bane for us. We are Number 70 on corruption index.
  • Terrorism is being funded from across the border using fake currencies.
  • We took many steps to contain the menace of black money.
  • We made an SIT on black money with a retiredd judge of Supreme Court.
  • We entered into agreements with various countries to contain black money transactions.
  • We introduced the amnesty scheme to announce black money.
  • Corruption, black money etc are such things which are pushing teh country backwards.
  • Rs 125 lakh crores came out during amnesty scheme on black money.
  • Some people have misutilised their positions for corrupt practices.
  • Some honest people have fought corruption as well.

Fake notes, economic concerns and terrorism

On one side terrorism, fake note currency is destroying the country and on the other corruption and black money is destroying the country. According to The Department of Economic Affairs Notification Dated 8th November (3): it has been found that fake currency notes of the specified bank notes have been largely in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones and that the use of fake currency notes is causing adverse effect to the economy of the country. It has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country and the Central Government.

Demonetisation of Indian Currency - A Detailed Study Part 1 - Narendra Modi 2
Source:
(1) https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520
(2) http://www.hindustantimes.com/india-news/live-india-shining-star-of-the-global-economy-says-pm-in-address-to-nation/story-dXUQ1bbIzbNeCwhEjIjBqI.html
(3) Saurabh Garg (Jt Secy) – http://finmin.nic.in/172521.pdf
(4) http://indiatoday.intoday.in/story/live-pm-narendra-modi-addresses-nation/1/805755.html

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A Few Last Words

Before making any investment decision, please contact your financial adviser.

I have provided this article for educational purpose only.

I hope you found this article on Demonetisation of Indian Currency – A Detailed Study Part 1 useful. If you have something to add please leave a comment in the post. Please feel free to contact me.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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