Surgical Strike on Black Money: Govt Denotifies 500 and 1000 Rupee Notes

The existing Rs 500 and Rs 1,000 currency notes has ceased to be legal tender in India from the midnight of 8 November 2016.

Prime Minister Narendra Modi, in a sudden address to the nation announced that Rs 500 and Rs 1,000 denomination notes are being withdrawn from midnight.

The move aimed at curbing corruption, thwarting counterfeiters and dredging up what could be billions of dollars of taxable income currently stashed in the underground economy.

According to an Assocham study, Rs 500 denomination notes account for at least 46 per cent of the banknotes in circulation and Rs 1,000 notes account for around 40 per cent of the total notes in circulation.

Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization for us means that Reserve Bank of India has withdrawn the old Rs 500 and Rs 1000 notes as a official mode of payment.

demonetisation of 500 and 1000 notesMeasures Announced:

The Rs 500 and Rs 1,000 denomination notes can be deposited in banks and post offices, and also exchanged across the bank counter by showing government-issued ID proof.

Withdrawals from bank accounts will be limited to Rs 10,000 for the first few days.

Banks have also been ordered to remain shut on 9th November 2016.

ATM withdrawals will be restricted to Rs 2,000 per day till November 11, when this limit may be increased slowly.

Reserve Bank of India will launch new Rs 500 and Rs 2,000 currency notes from November 10.

For 72 hours, the following services will accept Rs 500/Rs 1,000 notes:

Government hospitals, Railway ticket booking counters, government buses and ticket counters at airports.

Petrol, diesel and gas stations authorised by public sector oil companies.

Consumer cooperative stores authorised by state or central government, milk booths authorised by state government and crematoria and burial grounds.

Why this Step?

These currency denominations are used largely by people stashing black money and for funding criminal and terrorist operations.

Millions of fake currency notes were being smuggled into India from across the border to finance the menace of terrorism, in all its forms.

Also, counterfeit currency of these denomination has been hurting our economy for long.

Paper currency not only adds to unaccounted cash, but it also increases financial strain on the RBI for printing of the currency along with its maintenance, authentication and distribution.


Though the move will cause temporary inconvenience to even the most honest people living in India – short term restrictions on ATM usage, limits on maximum amount withdrawn from ATMs, banks being closed for public transactions on Wednesday, and so on.

The potential windfall is huge. Only around 20 million individuals and families, or around 1.6% of India’s population, paid any income taxes in 2013, the most recent year for which data are available.

In India, the predominance of cash is also blamed for making it easier for businessmen to pay bribes to government officials and for political parties to buy votes during elections.

Both the merchants and the consumers will have to use cashless modes of payment at least till the time new Rs.500 and Rs.2,000 notes are circulated.

In the long run, the cashless payments might not grow as significantly. The best part being, the consumers will get to experience new modes of digital payments by that time.

There would be no parallel economy in the country for the months and and years to come. It was all done away with in one single stroke. Real estate dealers and magnates, political parties of all hues – particularly those contesting in the elections due in a few months – the bullion market and so on, would be the worst affected by the move.

Those who kept cash beneath their beds, strong rooms, customised cavities in walls and wardrobes would be getting strokes of all kinds following the crackdown.

Now it’s the beginning of a new era and the cashless industry is all set to expand at the rate of 100% in the next two years.

With the elimination of black money, there will be a sudden need to fill that gap by digital money.

A move to a cashless economy will ensure lower cost and traceability of transactions.

The rush of money flooding into banks could mean a boost to liquidity in the system. But by removing one method for making large transactions—many real-estate purchases in India, for instance, are in cash—the change might cause the wheels of the economy to seize up temporarily.

The decision to ban existing 500- and 1000-rupee notes has a certain economic logic to it. Certainly, the absence of large-denomination notes will make it harder for people to keep black money in hand. That said, there are no clear estimates as to how much black money is in actual currency notes, and how much in land or gold or other forms of wealth.