History of Demonetisation

History of Demonetisation

This is not the first time the Indian governments has demonetised currency notes. RBI first demonetized Rs1,000 and Rs 10,000 banknotes  in January 1946. Banknotes for Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954. However,  Rs 1,000, Rs 5,000 and Rs 10,000 were once again demonetised  in January 1978 once again. In 1978 the then Government said the move was aimed tackling the issue of the black money which had grown to large proportions at that time. The measure was enacted by passing the  High Denomination Bank Note (Demonetisation) Act, 1978. The law’s preamble said that this was  an Act to provide in the public interest for the demonetisation of certain high denomination bank notes and for matters connected therewith or incidental thereto.

However, Rs 1,000 was big money in those days, clerks earned Rs 200-300, most officers earned between Rs 500- 1500 and even President of India earned a mere Rs 10,000, while Managing Directors of even the largest corporation earned just Rs 5,000. Most Indians in those days had never seen such a note in their lifetime. 

Why was the decision taken ?

Prime Minister Mr Modi had promised to combat the menace of black money when he came to power two-and-half years back,  pledging to crack down on parallel economy  in india which has seen tax to GDP ratio being abnormally low. While the Indian economy grew by 30 % during 2011 and 2016, the circulation of money in the economy increased by 40 %. However circulation of Rs 500 notes increased by

76 % and of Rs 1000 notes by an astounding 109 %. Which means the demand for high denomination notes grew at a faster rate, causing suspicion that much of this was being hoarded as black money. 

“This measure was necessary to maintain the financial integrity of our economy,” said Secretary Economic Affairs Shaktikanta Das. Demonitisat-ion is a move which had been suggested by several quarters. 

The move will also check fake note flows, a bane which has been dogging the Indian financial markets for years. The Reserve Bank said while the Indian currency’s security features have not “been breached”, the fake notes being pushed by Pakistan’s spy agencies were similar to legal tender and were causing confusion in the market. Currently there are 16.5 billion legal Rs500 notes and 6.7 billion Rs1000 notes. But estimates point to larger numbers of high denomination notes circulating in the market, clearly pointing to fake currency being pushed into india in large numbers.

The  Government’s decision to demonetise Rs 500 and Rs1,000 currency notes will also push India towards a cashless economy. “This one decision will change the way the people spend and keep their money,” asserted Finance Minister Mr Arun Jaitley. India has been trying to push the country’s cash dependent economy towards paperless transactions. It published a draft paper of sops and incentives, which may be considered for those opting for online and plastic payments. However, the move has remained nascent at best till now. 

High-denomination banknotes account for 86 % of the 1,64,000  crore rupees of currency in circulation. With inflation raising prices, most people preferred higher denomination notes. However, by now taking steps to discourage high value notes, the government could push more people to opt for e-commerce and plastic money. Analysts believe the move to scrap high denomination notes will now force people to use their accounts and financial technology for transactions. Estimates say the mobile commerce market in India will grow from a current $2 billion to $19 billion by 2019. 

Officials point out that studies by McKinsey suggest large-scale adoption of digital finance by emerging economies could boost their GDP by up to 6 % The study says “India could see a boost of $700 billion, an 11.8% increase by 2025. This additional GDP could create up to 21 million.”  The idea is to move society towards electronic transactions and away from cash, as this helps us monitor money flow and check black money. 

Real Estate

Real estate sector, particularly property resale market, is expected to take a hit because of the decision. With large caches of black money eliminated, black money deals are expected to reduce in the realty sector. This is expected to bring down prices of property and bring about transparency in the industry which unfortunately has earned a dubious reputation of being flush with  black money.  According to an expert, prices coming down to more reasonable levels in the housing market cannot be ruled out. In the immediate future, the sector will be under serious pressure with volume and number of transactions in residential and land markets seeing a substantial downward trend.

The author is a senior journalist based in New Delhi. Views expressed are personal

Source:Employment News