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Prime Minister Modi recently announced a ban on Rs 500 and Rs 1,000 currency notes, making 86% of all the currency in the market right now void. The decision was made to reset the scale, rendering all black money in these denominations invalid from 9 November.
However, there’s some harm done with no time given to the public to prepare for the change, and thus, mass confusion is the mood of the hour. People have questions; The Quint decided to ask around for you and get some answers.
Anupam Manur: It is only meant to be a one-time removal of all money that has already been accumulated due to corruption or any other economic activity, on which tax has not been paid. This move attacks the stock, but there might always be more flow.
However, one point to note, though, is that corruption or unaccounted money might reduce only if people begin to fear a repetition of such a move. Since this was sudden and a lot of people lost wealth because of it, they would be hesitant in the future (that Rs 2,000 may also be repealed).
Anmol Soin: Essentially, the first benefit is the immediate washing away of what is currently black money. And when currency is re-issued, we know for a fact that that by 30 December/31 March all the Rs 500 and Rs 2000 notes are as white as the new US President-elect likes them.
The benefit, however, makes it worth the trouble it causes. For terrorism and trafficking, the counterfeit bills are to blame (allegedly). These would solve that. I like this as a policy that punishes, not fixes. It’s a monetary Swachh Bharat, of sorts.
Anmol Soin: I understand that there are cases of people who don’t have money/are poor and needed to exchange this money for their day-to-day provisions or emergencies. A measure like a fast-tracking of exchanges or effective use of business correspondents for deposits would have been nice. There is no doubt that there will exist logistical and technical friction and this demographic will suffer. In my interaction with some, their political and/or nationalistic pride has helped them persevere.
Anupam Manur: The point of this exercise was never to go cashless.
Anmol Soin: We’ve been going cashless for a while but it’s never really hit us in the face as strongly. The introduction of UPI, RuPay, Payments Banks, and so many other measures under the RBI and the government pushing for PM-JDY is clear indication of that. Now, what this does first is that it gets people motivated to actually start using digital means. In THIS two month period. Get them hooked.
Anupam Manur: Real Estate and property prices will definitely go down in the coming few months. Since people used to buy land/property using cash and now their possession of cash has greatly reduced, it will reduce the demand for these. If the demand reduces and supply remains the same, the prices will go down. This is in the short run, say for two months or so.
Anmol Soin: I think the value of property will face a correction. Property prices could fall. Builders will be forced to sell to get some liquidity (most don’t have any). Renting will be hit, as well, since many landlords take cash. Again, years of earnings not disclosed will go away and well, they had a chance to explain themselves. Additionally, many will lower rates if they plan to take cash now. Is there a hint of schadenfreude to my answers? Probably.
Anupam Manur: There will not be a big impact on gold prices in the short run. However, in the future, you can expect a lot of people to convert their black money immediately into gold and other assets.
Anmol Soin: It will go up in the short-term. It’s a global commodity; we will cause a spike, not a crazy surge.
Anupam Manur: This move does not affect that in any way. That must be tackled separately.
Anmol Soin: Nothing.
Anupam Manur: Not if you can prove your source of income. The IT department will closely monitor the cash deposited in bank accounts and any amount higher than Rs 2.5 lakhs, which can lead to an audit. If you have not paid taxes on this amount, then, it will invite fines and penalties.
Anmol Soin: The way I understand it, it depends on your declared income levels. If you drew a salary of Rs 5 lakh per month and withdrew Rs 2.5 lakh earlier this month to do Diwali “things” and now want to put Rs 2 lakh back, I don’t think there will be an issue.
Anupam Manur: In the short run, yes. The RBI proposes to inject enough 100 rupee notes to ensure there is enough liquidity in the system. And yes, it is expensive. The cost of printing a lower denomination note is nearly 5.5 times higher. But, this will be done only in a limited fashion until the new 500 and 2000 rupee notes take over.
Anmol Soin: They have said they’re going to issue the Rs 100 notes with the new designs as well, so yes. The cost should be offset in the additional revenue made by the government and regulator.
Anupam Manur: I don't think this move should really affect the price of any asset by a great deal. Even if it had, the market would have already factored all of this in and there will not be any change from hereon.
Anmol Soin: Anything you would have otherwise.
Anmol Soin: I hope so. I hope they don’t burn them near Delhi– or at all.
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