A few years ago, the Indian prime minister banned the use of 500 and 1000 rupee notes as legal tender. The move, which is meant to, among other things streamline the Indian economy, weed out corruption and tax evasion has put India’s economy in turmoil. Economists around the world have supported the decision, arguing that in the long run, the move will achieve the intended results. However, in the short run the move has had major effects on the economy.
The ban was followed by a directive that would allow banks across the country to exchange old notes for new notes. However, this move has dealt the Indian economy with a huge blow as there is not enough currency circulating in the economy. People with unaccounted money have been using this money to buy jewelry, gold watches and gold. In some areas people were ready to buy gold at double the price and many people could be seen lining up with bags of money outside gold and jewelry selling stores.
Banks have not been spared as they have been charged with the responsibility of exchanging the old notes with new notes. As a result, many banks have been forced to recall retired employees and work for long hours as they help the government with this transition.
The move has also paralyzed the country’s transport sector. Eight days after the announcement 9.3 million trucks were reported to be off the roads as the drivers ran out of money to buy food, to pay boarder checks and to maintain their trucks. This was a huge blow as 65% of freight in the country is carried by road.
The other issue facing the country is that, they will have to reconfigure all the ATM’s as the new notes do not fit into the existing cash trays. It is estimated that it would take close to a month to reconfigure all the ATM’s to start dispensing the new currency.
The move to ban 500 and 1000 rupee notes will help fight corruption in India. People who have earned money legally, will deposit their money into their banks or exchange the money in the banks. However, people who have earned their money through dubious methods like smuggling and corruption, will be afraid to bank this money since the cash has to be declared as income and they also have to pay taxes. They may be forced to answer questions as to how they were able to make such income.
Also, the move eliminates fake currency in the country. For one to be given the new notes, they have to present old authentic notes. As such, this faces out old fake currency. The government has also reduced the amount of money that people can withdraw from the ATM and over the counter. This forces people to start using cards to transact and also limit cash transactions. This eliminates the need for government officers to handle cash leading to less corruption. Cashless transactions also improve proper record keeping and since the money moves from the bank it is easy to trace and tax it. Cashless transactions also enable the government to easily track illegal transactions and help them in revenue collection.