Prime Minister Narendra Modi on Tuesday, October 8 night announced demonetisation of ₹1000 and ₹500 notes with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption.
People with notes of ₹500 and ₹1000 can deposit the same in their bank and post office accounts from November 10 to December 30.
Reactions have been swift. Dr Naushad Forbes, President, CII, said “Demonetizing high denomination notes can be an effective means of checking accumulation of wealth in cash. The government has taken a measure aimed at the heart of the black cash economy. Not only is the measure important but it requires extensive preparation for effective execution.
Petrol pumps, airline counters, railway stations will have to accept Rs 500,1000 notes till Nov 11. Here’re the FAQs https://t.co/nULwjDn5lx
— India Today (@IndiaToday) November 8, 2016
While the measure will be welcomed by different strata, many are likely to be directly impacted.
India is still essentially a cash economy, especially outside the big cities. Nearly two-thirds of India’s GDP, ($1.4 trillion or ₹90 lakh crore), is a cash economy. Outside the top cities, buying goods, paying for services, or paying wages are by cash. Unauthorised estimates peg the black money economy at 25-30% of GDP or $600 billion annually.
According to a Reserve Bank of India’s (RBI) report released in March, Concept Paper on Card Acceptance Infrastructure, India’s average number of card transactions per inhabitant at 6.7 is among the lowest in the world. In Australia it is 249.3, in Canada it is 247.9, in the UK it is 201.7, Brazil 54.8, and it is China 14.4.
And this illegal economy is spread across many sectors, and impacts both urban and rural India.
Travel trouble
How will it impact tourism? The travel agents, especially those catering to local clients, are likely to be majorly impacted.
Most of the 20 million odd who travelled abroad last year, many, especially those travelling for pleasure, paid in cash. Off the record, some travel agents say this is likely to hit them hard.
In fact, a major reason for travel agents flourishing in India, even as they are on the decline in the first world, has been their ability to do cash transactions for their clients.
Cashless payment companies have been quick to welcome the move.
“Mr Modi’s move is a watershed moment in India’s fight against the ubiquitous black money issue executed with the finesse and secrecy this issue deserves,” says Amit Sachdev, Co-founder and CEO, CoinTribe. “While this will have several significant benefits for the economy in the long term, there is likely to be a negative impact on sectors with high cash economy in the immediate term.”
Sachdev says sectors such as real estate, construction material, unorganized trade and services will see significant pain in the near term. “With liquidity drying up, both NPA and demand for working capital credit are likely to go up. In view of bank’s ongoing NPA issues, how fast will banks react to this situation will be interesting to watch. With limited tax arbitrage between organized and unorganized segments, India will see much sharper move from unorganized to organized segment.”
“This is the biggest surgical strike on the menace of cash ever heard of anywhere in the world,” said Bipin Preet Singh, CEO of MobiKwik. “This is a historic policy change and will do down in democratic India’s history as more impactful than the economic reforms of 1990s. Within a 50-day period a billion Indians will change their payments behaviour – we will move from cash only to a cash-free economy. This is a strong step taken by the Modi government and will benefit the growth of digital payments and digital banking in India. We (MobiKwik) are excited to be a part of this historic moment.”
Incidentally this was Modi’s first televised address to the nation.
As the US counts votes, Indians are busy counting notes! Can they still afford to travel?
Industry Reaction
Debt markets: Murthy Nagarajan, Head-Fixed Income, Quantum Asset Management Copmany
“The debt market has been pleasantly surprised by the abolishment of Rs.500 and Rs.1,000 notes. This could improve tax compliance and increase tax collection of the government. This will also keep prices in check as the ability to hoard commodities and other assets will greatly reduce. This is a long-term positive for the debt market and may lead to repo rate cut of 50 basis points. The long-term impact of the crackdown on black money will be positive for tax revenue collection and instilling confidence of doing business in India.”
Adhil Shetty, Co-founder & CEO, Bankbazaar.com
“This is a bold move by the government. We are confident that the move will cut down the menace of fake currency as well as reduce black money in circulation. This will add a great deal more liquidity to the formal banking system, that will benefit immensely from the legal flow of liquid cash. This is the right time to go #cashless, as it is both highly transparent and accountable, making life easy for the government and the common man.”
Radhika Aggarwal, CBO, Shopclues
Radhika Aggarwal, CBO, Shopclues said, “Very proud of the bold decision taken by Prime Minister Modi – will be great for the economy in the long run. We are expecting a temporary disruption in the business – but that’s something that we are prepared for! ShopClues is where “real INDIA shops” for unstructured products – our low ASP and low COD reduces the impact on business.”
Kumar Abhishek, Founder & CEO, ToneTag
The landmark decision to remove 500 and 1000 notes will be a positive for digital / mobile wallets and a will work towards the govt’s aim of moving to a cashless economy. Today more than 90% transactions are still in cash, majority due to black money. This decision goes a long way in making people declare their income. Once you declare, you go digital.
