Indian 500 and 1000 Rupee Note Demonetisation

The demonetisation of ₹500 and ₹1,000 banknotes was a policy enacted by the Government of India on 8 November 2016, ceasing the usage of all ₹500 (US$7.40) and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series as legal tender in India after 9 November 2016.The announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live televised address at 20:15 Indian Standard Time (IST) on 8 November. In the announcement, Modi declared that use of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series would be invalid after midnight of that day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes. However, the banknote denominations of ₹100, ₹50, ₹20, ₹10 and ₹5 of the Mahatma Gandhi Series remained legal tender and were unaffected by the policy.The government claimed that the demonetisation was an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crack down on black money in the country. The move was also described as an effort to reduce corruption, the use of drugs, and smuggling. However, in the days following the demonetisation, banks and ATMs across the country faced severe cash shortages. with severe detrimental effects on a number of small businesses, agriculture, and transportation.People seeking to exchange their notes had to stand in lengthy queues, and several deaths were linked to the inconveniences caused due to the rush to exchange cash. Also, following the announcement, the BSE SENSEX and NIFTY 50 stock indices crashed for the next two days.The move received support from several bankers as well as from some international commentators. But it was heavily criticised by members of the opposition parties, leading to debates in both houses of parliament and triggering organised protests against the government in several places across India.

Background

Historically, previous Indian governments had demonetised bank notes. In January 1946, banknotes of 1,000 and 10,000 rupees were withdrawn and new notes of 1,000, 5,000 and 10,000 rupees were introduced in 1954. The Janata Party coalition government had again demonetised banknotes of 1,000, 5,000 and 10,000 rupees on 16 January 1978 as a means of curbing counterfeit money and black money.

In 2012, the Central Board of Direct Taxes had recommended against demonetisation, saying in a report that "demonetisation may not be a solution for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewellery". According to data from income tax probes, black money holders keep only 6% or less of their ill-gotten wealth as cash, hence targeting this cash may not be a successful strategy.

On 28 October 2016 the total banknotes in circulation in India was ₹17.77 trillion (US$260 billion). In terms of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to ₹16.42 trillion (US$240 billion) of which nearly 86% (around ₹14.18 trillion (US$210 billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90266 million banknotes were in circulation.

In the past, the Bharatiya Janata Party (BJP) had opposed demonetisation. BJP spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and the aadmis (general population), those who are illiterate and have no access to banking facilities, will be the ones to be hit by such diversionary measures." On 8 May 2014, RuPay, domestic card system, was launched. The Government of India had launched Jan Dhan Yojana for financial inclusion of people having no banking system in August 2014. The Government of India devised an Income Declaration Scheme (IDS), which opened on 1 June and ended on 30 September 2016. Under the scheme, the black money holders could come clean by declaring the assets, paying the tax and penalty of 45% thereafter. The scheme yielded ₹65,250 crore (US$9.7 billion) from 64,275 declarations with 45% of it as the revenue to the government. The Unified Payments Interface was launched by National Payments Corporation of India in April 2016 to encourage cashless payments.

Modi said that the queues due to demonetisation were the last queues that would end all other queues.

Televised address

On 8 November 2016, an announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live televised address to the nation at 20:15 IST. In the announcement, Modi declared circulation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.

After the official announcement by Prime Minister Modi, the Governor of the Reserve Bank of India, Urjit Patel, and Economic Affairs secretary, Shaktikanta Das explained in a press conference that while the supply of notes of all denominations had increased by 40% between 2011 and 2016, the ₹500 and ₹1,000 banknotes increased by 76% and 109% respectively in this period owing to forgery. This forged cash was then used to fund terrorist activities against India. As a result the decision to eliminate the notes had been taken.

Patel also informed that the decision had been made about six months ago, and the printing of new banknotes of denomination ₹500 and ₹2,000 had already started. However, only the top members of the government, security agencies and the central bank were aware of the move. But media had reported in October 2016 about the introduction of ₹2,000 denomination well before the official announcement by RBI. This statement has led to much debate, because the Reserve Bank governor six months before the announcement was Raghuram Rajan, while the new banknotes have the signature of the newly appointed governor, Urjit Patel.

Exchanging old notes

The Reserve Bank of India laid down a detailed procedure for the exchange of the demonetised banknotes with new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series and ₹100 banknotes of the preceding Mahatma Gandhi Series. Following are the key points:

• Citizens will have until 30 December 2016 to tender their old banknotes at any office of the RBI or any bank branch and credit the value into their respective bank accounts.
• Citizens will have until 30 December 2016 to tender their old banknotes at any office of the RBI or any bank branch and credit the value into their rCash withdrawals from bank accounts were restricted to ₹10,000 per day and ₹20,000 per week per account from 10 to 13 November 2016. This limit was increased to ₹24,000 per week from 14 November.espective bank accounts.
• For immediate cash needs, the old banknotes could be exchanged for the new ₹500 and ₹2,000 banknotes as well as ₹100 banknotes over the counter of bank branches by filling up a requisition form along with a valid ID proof. It was announced that this facility would be available until 30 December 2016.
• Initially, the limit was fixed at ₹4,000 per person from 8 to 13 November 2016.
• This limit was increased to ₹4,500 per person from 14 to 17 November 2016.
• The limit was reduced to ₹2,000 per person from 18 November 2016.
• All exchange of banknotes was abruptly stopped from 25 November 2016.
• Initially, all ATMs were dispensing banknotes of only ₹50 and ₹100 denominations and cash withdrawals from ATMs were restricted to ₹2000 per day. From 14 November onwards, ATMs recalibrated to dispense new ₹500 and ₹2000 notes will allow a maximum withdrawal of ₹2,500 per day, while other ATMs dispensing banknotes of only ₹50 and ₹100 denominations will allow a maximum withdrawal of ₹2000 per day.

However, exceptions were given to petrol, CNG and gas stations, government hospitals, railway and airline booking counters, state-government recognised dairies and ration stores, and crematoriums to accept the old ₹500 and ₹1,000 banknotes until 11 November 2016, which was later extended to 14 November 2016 and once again to 24 November 2016.International airports were also instructed to facilitate an exchange of notes amounting to a total value of ₹5,000 for foreign tourists and out-bound passengers.Under the revised guidelines issued on 17 November 2016, families were allowed to withdraw ₹250,000 for wedding expenses from one account provided it was KYC compliant. The rules were also changed for farmers who are permitted to withdraw ₹25,000 per week from their accounts against crop loan.

Cash rush

The scarcity of cash due to demonetisation led to chaos, and most people holding old banknotes faced difficulties exchanging them due to endless lines outside banks and ATMs across India, which became a daily routine for millions of people waiting to deposit or exchange the ₹500 and ₹1000 banknotes since 9 November. ATMs were running out of cash after a few hours of being functional, and around half the ATMs in the country were non-functional.Sporadic violence was reported in New Delhi, but there were no reports of any grievous injury, people attacked bank premises and ATMs,and a ration shop was looted in Madhya Pradesh after the shop owner refused to accept ₹500 banknotes.


Several people were reported to have died from standing in queues for hours to exchange their old banknotes. Deaths were also attributed to lack of medical help due to refusal of old banknotes by hospitals. As of 15 November 2016, the attributed death toll was 25. In an interview, Chief Minister of Delhi Arvind Kejriwal lashed out at a BBC reporter who asked him to justify his 19 November claim that 55 deaths were linked to demonetisation. While, the CMD of Punjab National Bank said that panic after demonetisation started fading on 19 November 2016. As of 8 December 2016, there were still long queues at banks and ATMs.

Stock market crash

As a combined effect of demonetisation and US presidential election, the stock market indices dropped to an around six-month low in the week following the announcement. The day after the demonetisation announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index was below 8100 intraday.

Banking

In the first four days after the announcement of the step, about ₹3 trillion (US$45 billion) in the form of old ₹500 and ₹1,000 banknotes had been deposited in the banking system and about ₹500 billion (US$7.4 billion) had been dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters. Within these four days, the banking system has handled about 180 million transactions. The State Bank of India reported to have received more than ₹300 billion (US$4.5 billion) in bank deposit in first two days after demonetisation. A spike in the usage of debit card and credit card post demonetisation was also reported.

Between November 10 and November 27, banks reported exchange and deposits of demonetised banknotes worth ₹8.45 trillion (US$130 billion) (exchange of ₹339.48 billion (US$5.0 billion) and deposits of ₹8.11 trillion (US$120 billion)). During this period, an amount of ₹2.16 lakh crore (US$32 billion) had been withdrawn by people from their accounts.


In Malda, a district believed to be a transit-point for fake Indian currencies,a large sum of cash deposits in dormant accounts were also reported. According to The Economic Times, more than 80 percent of fake currency in India originates from Malda district in West Bengal.