Bad Move | Demonetizing Rs 500 & Rs 1000 Currencies in India
The first thing
It will create a huge Money Scarcity.
Indian Market is surely going to crumple due to this sudden Money Scarcity.
The Second thing is that the nation is not in a form of Emergency for showing this much urgency in bringing a sudden halt to the market.
It’s a wayward step for India because a lot of people were small traders who overwhelmingly did their business in cash.
these are people who probably do have a few hundred thousand rupees – a few thousand rupees – stored under their beds and will have problems when they turn up in the bank on Thursday trying to change their money.
The move leaves a lot of uncertainty about the Indian economy in the short term as well long.
This thing needs long term planning plus confidential execution so that it may cause no losses to the Government and unwanted situation in general.
But here what they also fail to take into consideration is the cost of scrapping these high-value notes.
Presently, the share of Rs.1,000 notes in the stock of currency in circulation at the end of financial year 2015 ;a whopping 39%, with Rs.500 notes accounting for a further 45% of currency stock.
There is a significant cost in stopping issuance of Rs.1,000 and Rs.500 notes, and these costs should have been be weighed well against what misuse of high-value notes costs the economy, before we should have made a decision.
For example, cost of printing a Rs.100 note was Rs.1.79, a Rs. 10 note is 0.96 (according to the RBI data), or 9.6% of face value. The cost of printing a Rs.1,000 note (Rs.3.17), on the other hand, was only 0.32% of the face value.
In other words, for a given amount of money, it costs the RBI 30% less to print it in the form of Rs.1,000 notes than in Rs.10 notes.
It would have been better that first the Govt. should have stopped the further issuance of Rs.500 and Rs.1,000 notes and that instead of printing new notes of these denominations, we would have printed an equivalent amount using Rs.100 and New 500 notes instead. (It is reasonable to assume that the demand for currency notes will remain the same in the new regime.)
By this We could have avoided the whopping loss amounting somewhere between Rs.2770 to Rs.11000 Crore to the exchequer by this hurried banning of 500/1000 currencies as well this huge gap of cash created in the market.
Whats the need of Rs.2000 denomination of Currency. It is a foolish move. It will only help in further raising of cost and prices. Think it is to lower the losses suffered by RBI in scrapping Rs.500 and Rs.1000.
“Any withdrawal would have to be slow: central banks were worrying that an expiry date on cash could undermine the value of the currency.
Absence of coordinated withdrawal of all high-value notes, the move is going to be much less effective.”
The unanswered questions
Much of the government’s new initiative remains mired in confusion. It is not clear exactly what will be the effect on the money supply or whether it will take out a lot of cash in circulation.
Likewise no one knows how much cash will be locked out of the system and how successful forgers will be at catching up. No-one can say definitively whether the new notes will be harder to fake.
Questions arise as to the impact in rural areas. Will they still use the old notes or will “a black market in black market notes” emerge?
It is also not clear how the banking authorities handled and planned for this huge logistical exercise which has caught so many people in jeopardy.
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