At 8:50pm on Tuesday 8th November, the Prime Minister of India, Narendra Modi, addressed the nation on TV. We just happened to be watching NDTV as The British Prime Minister Theresa May has visited Bangalore that day and our daughter Zahra had met her at school. The TV cameras from NDTV were there and we hoped to see her on TV meting the Prime Minister. It was therefore purely by chance that we had this news channel on when Mr Modi delivered his speech (in English).
It was with shock we listened as the Prime Minister declared that all Rs500 and Rs 1000 would be illegal tender from midnight that night. This is a cash economy and the majority of payments are made in cash. We had orders being delivered in a few days and people to pay the next day – and our money had just become worthless pieces of paper. It was alarming. We have never experienced anything like it before. In the U.K. when new currency notes are introduced there is a long period (1-2 years) during which the old notes are phased out of the system. The speed of this change was astonishing and there was nothing we could do. Banks were closed and our driver had gone home a long time ago so we couldn’t get to an ATM to withdraw Rs100 notes to keep us going.
Prime Minister Narendra Modi made the formal announcements in his speech. It included the following:
1. All 1000 and 500 notes illegal after 12:00 Tonight (Tuesday 8th November)
2. Rs500 and Rs1000 notes banned from today (Tuesday 8thNovember) midnight to keep the black money market in check.
3. Rs500 and Rs1000 notes can be deposited between 10 Nov to 30 Dec into banks and Head Post offices
4. Corruption, fake currency and terrorism are festering wounds, holding back the Indian economy
5. On November 9 and in some places November 10, ATMs will not work
6. Rs 20,000 weekly cap on exchange of Rs 500 & Rs 1,000 notes
7. Those unable to submit notes by Dec 30 will be given a chance to submit notes by giving declaration to The Reserve Bank of India
8. For 72 hours (until 11 Nov midnight), Rs500 & Rs1000 currency notes would be acceptable in the hospitals
9. There will be no change in any other form of currency exchange be it cheque, DD, payment via credit or debit cards etc
10. All banks will remain closed on 9th November for public work
There was an acknowledgment that there would be a few days of hardship and inconvenience but that it was worth it for society as a whole as black money was removed from the economy.
Why is this necessary?
Fake rupee notes of high currency have increased and they look the same as the real notes but without security features. It is difficult to decipher the difference. It is alleged that the fake notes are used for “anti-national” and illegal activities (used by terrorists and those hoarding black money). As India is a cash based economy it has been difficult to tackle the fake notes and black money.
Currency will be exchanged exactly i.e. on a like for like basis but with a limit of Rs4000 per person cash with the remainder deposited into your bank account. Everyone is being encouraged to use cheques or electronic banking for any transactions requiring more than Rs4000. Exchanges can take place at branches of commercial banks, the Reserve Bank of India and at post offices. It does not need to be your own bank to exchange up to Rs4000 in cash but for amounts more than that it has to be at a branch of your own bank to facilitate a deposit into your account. ID proof is required to exchange notes.
Further announcements followed clarifying which places would still accept Rs500 and Rs1000 notes until 11th November. These included hospitals, chemists, petrol stations, LPG gas cylinders, railways and metros, crematoria and burial grounds and authorised milk booths.
We were able to fill up with diesel on Wednesday 9th and paid using Rs500 notes. Change was not being given (they simply didn’t have any) so the tank was filled to the nearest Rs500 and no more.
All banks announced that they would remain open on Saturday 12th and Sunday 13th to facilitate the demand for exchanging notes.
The Finance Ministry announced that deposits would not fall within the tax immunity scheme and all deposits of Rs500 and Rs1000 notes would be taxable (sort of the whole point of this exercise really). They also announced that they would be tracking accounts into which 2.5 lakh (thousands) and above were deposited.
The Reserve Bank of India issued Rs2000 notes in large boxes and asked banks to ration the distribution of them from Thursday 10th. They would be only available from branches, and not ATMs, for a period of two weeks.
ATMs resuming operations in Friday 11th November would dispense Rs100 and Rs50 notes only.
Thursday 10th November
The day the new notes were expected, banks opened and some ATMs were working. Well that was the theory anyway. In reality banks had huge queues (as expected) and ATMs were not working and new notes were not available. Instead the old Rs500 and Rs1000 notes, subject to a maximum of Rs4000 per person, could be exchanged for Rs100 notes. Photo ID (passport) and FRRO copy was necessary for the transaction. A form had to be completed with the amount of notes and value being exchanged and a declaration signed to say that it was a maximum of Rs4000 and you hadn’t exchanged any money anywhere else. After completion of the forms, copy signatures taken, signing the copy ID documents and money taken, I was asked to wait for 10 minutes whilst they processed everything. It did only take 15 minutes before the clerk returned and handed me a wedge of Rs100 notes. At least I had money to spend.
I returned to the house and was immediately asked by the gardeners and housekeeping ladies to see the new notes. They were disappointed to discover that they were not yet available. There was then a general discussion about who would take Rs2000 notes when Rs1000 notes were already difficult to spend. Such high value notes are not appreciated by shopkeepers or roadside sellers who usually carry very little change.
As I had cash I was also immediately asked for small loans (Rs200-Rs500) so people could buy rice and vegetables for their dinner. It was revealing that people really do live day to day and do not stock up on essentials such as food. Also notable that the impact on daily wage labourers was immediate and harsh – they were using all their small change and low currency notes to get by and to buy tiny amounts of food.
The news reported that ATMs would be operational from Friday 11th November but would only dispense Rs100 and Rs50 notes. Newspapers reported that toll booths were free until midnight on 11th November, police fines were being waived, bus conductors were turning people away and chaos at tourist destinations as no one had any change. Low value currency notes were a precious commodity suddenly. Shopping streets were deserted and restaurants had low attendance as they were refusing to accept the old notes (rightly).
More disturbing was the reports of Hawala operators making large margins. These people are effectively money exchangers and brokers in a system based on honour and trust. The Hindu newspaper reported that Rs500 notes were being exchanged for Rs350 and Rs1000 notes were being exchanged for Rs700. That’s a huge cut for any daily wage labourer to suffer. (Daily wage labourers are least likely to have a bank account).
My phone was awash with text messages from stores confirming that they would not accept Rs500 and Rs1000 notes in line with the Government’s announcement. Flipkart, Big Basket and Amazon messaged advising that they had stopped the cash on delivery option.
Tackling the black economy
It is a bold move by Prime Minister Modi and one which caught everyone off guard. Media outlets had no idea. It was a very well kept secret. The effect is immediate. Anyone with a stash of cash is going to have to deposit it and explain themselves or be stuck with a pile of worthless paper. Questions will be asked and of course tax will have to be paid on the deposits made. It has been greeted gleefully by those at the poorer end of society, who see it as a great move to rid the economy of black money and make the middle classes and the rich pay their taxes.
Anecdotal hearsay is that some people have already been approached by their landlords to bank cash on their behalf. Thankfully tenants are refusing and rightly stating that they would not be able to justify having such large amounts in their possession considering the job they do and the wage they receive. Those unscrupulous tax avoiders are having to face the reality that black money is not acceptable and everyone has to pay their taxes. It will hit some people hard and immediately – and that is not a bad thing.
Hopefully the reliance on cash transactions will diminish as a result and transparency will prevail. Only time will tell but it is a laudable aim and a very bold move which is to be congratulated.