Rs 500 and Rs 1,000 Notes Scrapped: One Stone That Kills Several Birds

Rs 500 and Rs 1,000 notes scrapped: Government’s masterstroke to unearth black money?

(Source: BloombergQuint)
(Source: BloombergQuint)

Unprecedented. Historic. Surprising. These are only a few adjectives that are being used to describe the Modi government’s move to scrap Rs 500 and Rs 1,000 currency notes, starting midnight.

With one stroke, the government has addressed issues ranging from black money, counterfeit currency, and the prime minister’s vision of a cashless economy.

Most tax experts, lawyers and economists BloombergQuint spoke to agreed that the move was positive but there would be short-term repercussions.

Prem Rajani, managing partner at law firm Rajani Associates said that the rationale of the move is to deal with and defeat corruption, terrorism and black money – all of which is weakening the nation. It is within the government’s powers to take such steps and it had taken similar measures back in the 1970s, he added.

In the immediate future, there will be serious hardship for large section of the public (honest citizens) till such time they can exchange old notes for Rs 100 or new notes. While the move is welcome to curb black money menace and will immediately adversely hit the corrupt people who have hoarded black money in Rs 500 and Rs 1,000 notes, how will it unearth the black wealth stacked in gold, land and large amounts lying in tax haven jurisdictions? With this move, we can expect more credit/debit card transactions, increase in digital payments, mobile payments and online banking thus pushing the vision of Digital India further.
Prem Rajani, Managing Partner, Rajani Associates

Mukesh Butani, managing partner of law firm BMR Legal said that a combination of national security concerns and a wider agenda to filter out unaccounted income would have guided the government to make this move.

Figures of high denomination currency in circulation over the past five years compared to growth in the economy pointed towards indicators of unaccounted money in circulation. The timing was perfect – a month after closure of the income disclosure week, and a week after Diwali such that the impact of short-term disruption in the festive period is minimised.
Mukesh Butani, Managing Partner, BMR Legal

It will be a difficult night for people who are hoarding cash, said Amarpal Chadha, partner of people advisory services at EY.

This is a historic move. It will add to the economy and address the issue of counterfeit notes. The driver of this is black money. The government gave enough opportunity to taxpayers to come clean via schemes like Income Declaration Scheme. After that, this is the next measure.
Amarpal Chadha, Partner- People Advisory Services, EY

Anis Chakravarty, lead economist at Deloitte points out that on a sectoral basis, the commodities and agricultural sector including the market for consumer non-durables is expected to feel the heat. However, the biggest impact in the medium to long term is likely to be on the real estate sector, he added.

Besides the general elevation of uncertainty, the equity markets are likely to react negatively, though this will ease out in the medium term. On the macroeconomic front, we could see some appreciation of the domestic currency as the number of notes in circulation will decrease. This is likely to have a negative impact on trade. Counter moves by the government is expected to ease this though growth in the current quarter will likely fall. 
Anis Chakravarty, Lead Economist, Deloitte

Girish Vanvari, national leader for tax at KPMG India said this will force hoarders of black money to disclose the amounts. The Income Declaration Scheme gave immunity from penalty. The ones who didn’t make disclosures under the scheme can make their money official and the consequence will be that the tax department will ask them to pay taxes, Girish added.

In this case, the penalty is likely to be 100 percent. 
Girish Vanvari, National Leader - Tax, KPMG India

According to the Department of Economic Affairs, there are 1,650 crore notes of 500 denomination and 670 crore notes of 1,000 rupees in circulation. The total amount that will be withdrawn works out to Rs 14.95 lakh crore. The government has also announced the introduction of new Rs 500 and Rs 2,000 notes as part of the effort.