India’s Scramble to Switch 23 Billion Banknotes: QuickTake Q&A

16 Nov 2016

by Vrishti Beniwal, bloomberg.com:

India is withdrawing a lot of cash: all its 500-rupee ($7.40) and 1,000-rupee bills, to be precise. People have 50 days to switch the roughly 23.2 billion high-denomination notes in circulation at banks and post offices. It’s part of a move by Prime Minister Narendra Modi to crack down on corruption, unaccounted money and counterfeit currency. For now, though, the currency crush is producing long lines, public anger and the risk of an economic slowdown.

1. Why such a drastic step?

The World Bank in July 2010 estimated the size of India’s shadow economy at 20.7 percent of the GDP in 2007. Black money, or income that escapes taxes through illegal means, spurs inflation and deprives the government of revenue that can be used for welfare and development activities. Modi struck a chord in the 2014 national polls by promising to give the impoverished as much as 2 million rupees each from such funds stashed abroad. An amnesty program that ended in September resulted in the declaration of 652.5 billion rupees in unaccounted money, about 0.5 percent of GDP.

2. So, no more high-denomination bills?

No. The Reserve Bank is introducing newly designed 500-rupee and 2,000-rupee bills. The new 500-rupee bill, for instance, differs from the old one in color, size, theme and location of security features and design elements. The windowed security thread changes color from green to blue when the note is tilted.
3. What happens to high-denomination bills people hold?
Old high-denomination bills, no longer legal tender, can be deposited by individuals into their bank accounts and/or exchanged in bank branches or at some Reserve Bank branches through Dec. 30. The limit for exchange of old high-denomination notes has been raised to 4,500 rupees at banks and post offices by presenting a proof of identity.

4. How will people access cash now?

Cash withdrawal over-the-counter from a bank account has been increased to 24,000 rupees a week, while the earlier daily limit of 10,000 rupees has been scrapped. The cap on withdrawals from cash dispensing machines has been raised to 2,500 rupees a day. Hundreds of thousands of people are spending time in long queues to exchange currency rather than working.

5. How will transactions take place?

There’s no restriction on non-cash payments using cheques, demand drafts, debit or credit cards and electronic fund transfer. One can also use mobile wallets. And then there are the 5-, 10-, 20-, 50- and 100-rupee bills and 1-, 2-, 5- and 10-rupee coins. Just carry a bigger bag.

6. Who benefits the most?

The government hopes the move will force people to declare unaccounted income, boosting tax collections. There are other winners too. Payment networks such as Visa Inc. and Mastercard Inc. and mobile wallets like Paytm and Mobikwik will probably add new users and see a surge in transactions. This will ultimately help the government make India less of a cash-dependent society.

7. And the losers will be?

Those who have avoided taxes by holding their wealth in currency.

8. Will the government track the cash that’s deposited?

Tax officials will get reports on cash deposits in cases where it exceeds 250,000 rupees in a bank account. The total amount deposited between Nov. 10 and Dec. 30 will be matched against income disclosures. If there’s a mismatch, it will take action which could include payment of tax as well as a penalty of 200 percent.

9. Has any other nation done something similar?

In May the European Central Bank ended the production and issuance of 500-euro bill on concerns the banknote could facilitate illicit activities.

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