Rs 14 lakh crore — or $217b, 86% of the value of Indian currency currently in circulation — became useless from midnight of November 8, 2016, part of the government’s crackdown on black, or unaccounted, money.
Rs 500 notes amount to Rs 7.85 lakh crore (approx. $120b), while Rs 1,000 add up to to Rs 6.33 lakh crore ($97b), according to Reserve Bank of India data.
Here are three ways in which this move should affect the black-money economy, which according to an 2016 report by Ambit Capital, a financial research company, forms a fifth of the Indian economy:
1. The sudden announcement will directly affect black money hoarded by Indians, and will possibly present them two alternatives: either deposit the money after identifying themselves to banks, or exchange the money by November 24, 2016.
According to basic calculations, with a daily limit of Rs 4,000 a day, a maximum of Rs 60,000 can be exchanged by a person, in 15 days from November 10 to November 24. From November 24 onwards, the exchange process will be eased for convenience, meaning the exchange limit will be increased. However, there is no limit on deposits.
2. As the deadline for Indian individuals to declare undisclosed income — the Income Declaration Scheme — ended on September 30, 2016, no Â‘unaccounted for’ money can be declared now. It ceases to be money, instead it will be a Â‘worthless piece of paper’, as PM Modi termed it in his speech.
3. Instances of cash-for-vote prevalent in Indian elections — in the form of bundles of cash in deligitimised denominations — may not work anymore.
While bank notes increased 40 per cent from 2011 to 2016, Rs 500 notes increased 76 per cent and Rs 1,000 notes increased 109 per cent, the finance ministry said.
New notes of Rs 500 and Rs 2,000 will be introduced for circulation from November 10, 2016. Rs 2,000 notes will be monitored and regulated by RBI.
The Rs 2,000 and Rs 500 do not have a ‘nano chips’ and cannot be tracked, as WhatsApp forwards have been claiming.