On Tuesday evening, Prime Minister Modi made a key announcement while addressing the nation to scrap 500 and 1000 rupee notes. The higher denomination notes, i.e. Rs. 500 and Rs. 1000, will no longer be legal money, and hence these currency notes cannot be used as a medium of exchange. Existing currency notes of 100, 20, 10, 5, 2 and 1 rupee continue to be legal tender, and could be used for buying and selling. Moreover, the new notes of Rs. 500 and Rs. 2000 has been launched on November 10.
Clamping down on the circulation of counterfeit notes, the decision also aims at rooting out the menace of black money and corruption in India. The move is a necessary step to stop illegal cartels and funding to terrorist organizations. This would result in a reduction of inflation as conspicuous consumption will come down. The decision will give a massive boost to digital money as there will be no restriction of any kind on non-cash payments by credit and debit cards, Unified Payment Interface (UPI), mobile wallet, cheque, demand drafts and electronic funds transfer.
Here’s the expected implications of demonetisation of the currency notes:
Curbing Corruption and Circulation of Black Money
The magnitude of cash in circulation is directly linked to the level of corruption. With the deployment of cash earned in corrupt ways, inflation becomes worse. Such circulations also strengthen hawala trade, which eventually leads to generation of more black money. The demonetisation of the currency notes will help in crippling the purported black money cash flow. It will unearth the source of black money, and thereby clamping down on the illegal circulation of such untraceable money. This will also stop circulation of counterfeit higher denomination notes, i.e. Rs. 500 and Rs. 1000, as it is evident from the fact that the black money is kept undisclosed largely in the form of Rs. 500 and Rs. 1000 notes. This step will further curb the circulation of black money during polls.
Massive Boost for Digital Money
At present, there are around 200 million users of digital wallets in India as per the industry estimate. Since there will be a certain limit of the transaction amount in ATMs/Banks and hurdles in the withdrawal of cash in initial days, there will be an upsurge in the number of digital money users. This move will give a sharp boost to all the financial institutions and companies which provide e-wallet services.
Stocks entering bear market
As far as the impact of demonetisation on the stock market is concerned, there is no doubt about the fact that the market is expected to have a negative impact. The day after the announcement came from Mr. Modi, a sharp correction was seen on Wednesday in the consumption and real estate stocks. Since most consumption activity in the country happens through cash, shares of the smaller companies were massively hit. The shares of the consumption and realty companies had seen a selling pressure after the announcement.
Offline Travel Business Hit By The Demonetisation
The travel agencies which have an offline mode of payment option, may face a temporary set-back due to the demonetisation. There will be a temporary inconvenience to foreign visitors carrying notes of Rs. 500 and Rs. 1000. However, the decision will benefit the online travel business companies as they have an online mode of payment option.
Ease in Tax Compliance
The key reason for demonetisation of Rs. 500 and Rs. 1000 is not only tackling black money, but also curbing the menace of fake currency and make India a cashless economy. Therefore, the government has directed the Income-tax department to co-ordinate with all the banks and keep a record of every individual, who exchange cash amount of Rs. 2 Lakh and above. The bank will also furnish their PAN card details. Furthermore, the department has been asked to tally it with tax filing and impose the penalty between 30% to 120% accordingly. The initiative will make Indians tax compliant, which eventually lead to higher revenue for the government.