Impact of currency ban and Demonetisation In India

Monetary and fiscal policy is usually the realm of Central bankers. The Reserve Bank of India (“RBI”) makes decisions and communicates them to Banks, followed by an appropriate Press Release. But the NDA government has proven itself exceptionally innovative and media-savvy, and thus, on November 8, we saw the perhaps unprecedented spectacle of an Indian Prime Minister making a currency-policy announcement.

In the course of a lengthy speech, the Prime Minister Narendra Modi announced that with immediate effect, all notes of Rs 500/- and Rs 1,000/- would be deemed invalid currency. Provisions for converting the same into smaller denominations and depositing into accounts were also mentioned, and while the final contours of the change might take some time to be known, we can look at the immediate impact on the common man basis the information that is currently available:

1. Does not affect your wealth – unless you have a lot of unaccounted money

Ordinary people do not have a lot of cash lying around, whether in high-denomination notes or otherwise. Indeed, the provision for changing your currency notes in Banks and post offices is very generous, and for the ordinary honest citizen with maybe Rs. 10-15,000/- lying at home, it’s the slight inconvenience of making a couple of visits to the Bank.

2. Expect a bit of chaos at banks

As I have mentioned earlier, unlike earlier instances, these changes have not been implemented with consultation from Banks and the Reserve Bank. As a result, there is likely to be a period of confusion while Banks try to figure this out. So not just exchange of cash, but even normal banking operations could be affected, slowing down your payments and so on.

3. Plastic use will rise

It is obvious that the push is towards moving towards electronic payments. This means those of us with unused Debit and credit cards will have to learn to start using them. And if you don’t have either of these, start preparing your KYC documents, because you will need one soon.

4. Shops will need to adapt

For those who run shops that do not accept cards – which is a lot of groceries, restaurants and so on – it might be time to start looking for card-readers. The fact is that with inflation being what it is, running up a bill of more than Rs 500 – 1,000/- is very easy even at an ordinary grocery. It might be time for the smaller shops to consider acquiring card-reader machines.

5. The poor will need Bank accounts

The definition of ‘poor’ has changed considerably over the past few decades, and it is not unusual for a person who would be considered ‘very poor’, like domestic help and so on, to be drawing a salary in the thousands. These people will need to open bank accounts – or start using the ones they have – and make themselves familiar with using them.

6. The way you do real estate transactions will change

Black money has been the scourge of the real estate sector since time immemorial. With the removal of high-denomination notes and restrictions on withdrawal, it will now become much more difficult to carry out such transactions. If everything goes as the Government has planned it, it should lead to a cleaning up of the market and closer alignment with real value.

The final implications will take, as mentioned at the beginning, some time to become clear. While we wait for the RBI to show us the shape of things to come, it is well to sit back and relax for a while, and remember that this move is targeted at wrongdoers with black money. For the ordinary Indian, its just a small inconvenience that can easily be overcome.

Article by Kunal