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Business News/ Politics / Policy/  Rs500, Rs1000 notes scrapped as legal tender: Narendra Modi

Rs500, Rs1000 notes scrapped as legal tender: Narendra Modi

The Modi government move to withdraw currency notes of Rs500 and Rs1,000 denominations, hits a fundamental reset in the Indian economy

RBI governor Urjit Patel with finance secretary Shashikant Das showing specimens of new Rs2,000 notes during a press conference in New Delhi on Tuesday. Photo: PTIPremium
RBI governor Urjit Patel with finance secretary Shashikant Das showing specimens of new Rs2,000 notes during a press conference in New Delhi on Tuesday. Photo: PTI

In a surprise move intended to eliminate black money and the growing menace of counterfeit currency notes, the Union government on Tuesday, effective midnight, scrapped currency notes of Rs500 and Rs1,000 denominations. These account for over 80% of all currency in circulation by value.

“In every nation’s destiny comes a time when the actions taken have a defining impact on its destiny. We are at one such moment today," Prime Minister Narendra Modi said in a televised address to the nation.

Not only does the move hit a fundamental reset in the economy, it also risks a political backlash, both against Modi and the Bharatiya Janata Party (BJP).

Also read: Scrapping Rs500, Rs1000 notes a costly idea

Implicitly, this is also a signal that this government is determined to steer the country towards a cashless economy, which strikes at the very root of black money transactions.

Newly designed notes of Rs500 and a new Rs2,000 currency will be available starting 10 November. The Rs1,000 note will be reintroduced in due course, along with new notes of Rs10, Rs20 and Rs100 denominations.

While ATMs will remain closed on Wednesday and partially on Thursday, banks will initially allow cash withdrawals of only Rs2,000 per day up to 18 November and Rs4,000 per day from 19 November onwards.

Also read: Retiring the 1,000 rupee note

People have a window of 50 days to return the notes. Further, use of the old high denomination currency notes will be allowed in government-run hospitals, pharmacies, railway and air ticket counters and petrol pumps until 11 November. Those unable to deposit their Rs1,000 and Rs500 notes by 30 December for some reason can change the notes till 31 March 2017 by furnishing identity proof.

The government argued that the move will benefit the poor, middle class and aspirational middle class by increasing opportunity and bringing real estate and higher education within their reach again.

It has long been alleged that terrorists and drug cartels from neighbouring countries have been supplying high-value fake currencies into India. Revenue secretary Hasmukh Adhia tweeted that the move “is like a surgical strike on black money".

Modi said the plan to scrap 500 and 1,000 notes was kept secret till the last minute to take such elements by surprise. “An element of surprise is essential, or else they would have made necessary arrangements."

The Modi government has taken a number of steps to curb black money since coming to power in May 2014. It has enacted two laws to curb black money generation within and outside the country.

The implementation of the goods and services tax (GST) from the next fiscal will also help the government fight against black money. Registration under GST is PAN-based, ensuring that direct tax and indirect tax transactions will be linked.

Modi disclosed that so far, the government has unearthed Rs1.25 trillion in black money.

According to the Reserve Bank of India’s annual report, there were 15.7 billion Rs500 currency notes and 6.326 billion Rs1,000 currency notes in circulation as on 31 March 2016. According to data collected by Bloomberg, currency in circulation was worth Rs17.773 trillion as on 28 October, compared with Rs15.16 trillion a year ago.

The government’s move will benefit companies in the cashless economy.

Vijay Shekhar Sharma, founder of e-wallet company Paytm, said that the targets his company had set aside for the next three years will now be achieved within one year.

According to Sharma, the company did 99.4 million transactions last month and about $ 345 million GMV (gross merchandise value, or cost of goods sold). The company now expects to achieve a billion dollars in GMV by March 2017. “There could have been no bigger catalyst for digital economy and for digital wallets in the country," he added.

Vishwanath Nair in Mumbai and Elizabeth Roche and Gireesh Chandra Prasad in Delhi contributed to this story.

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Published: 08 Nov 2016, 08:38 PM IST
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