On Tuesday, the Indian Prime Minister, Narendra Modi, decided to ban the 500-rupee and 1,000-rupee bills. These bills can be deposited in banks and post offices until December 30th, and they are allowing up to 4,000 of the bills to be exchanged. The two banknotes currently represent 86% of the cash in circulation. The government stated that the main reason for the ban is to "curb financing of terrorism through the proceeds of fake Indian currency notes and uses of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contraband into India." In addition to this, they would like to reduce the amount of black money. The article defines black money as "money that has been earned, either through legal activities or corruption, without any tax being paid on it." The new bank notes will be inserted into circulation in the next three to four weeks.
With this ban, the real estate, luxury goods and retail markets are likely to be hit hard since the majority of transactions in these areas are done with cash. However, prices are expected to fall, making real estate more affordable and increasing the demand for houses. Many are worried that the currency ban will cause many problems in the short term. Some people are converting their black money into gold as the government hoped would happen. It is unknown exactly what effect this ban will have on the economy, but the government will need to do more to completely flush out the black money from circulation.
http://www.bbc.com/news/world-asia-india-37933231
http://www.nytimes.com/2016/11/11/world/asia/india-rupee-ban-narendra-modi.html?_r=0
I found it to be very interesting that these two notes made up 86% of the cash in circulation; so no wonder the government is trying to take control of this situation. I agree that in the short run this could cause a few problems, but I don't think it will last more than a few weeks.
ReplyDeleteAnalysts said that Indians holding currency derived from legitimate sources and on which they had paid income taxes would have no difficulties but Indians who were sitting on piles of cash from illegitimate activities, including as the result of corruption, would be caught out. It’s good that the government has taken people by surprise. If they’d given warning, people would have found loopholes. The poor are usually less informed than the urban middle class and they will lose the most if they don’t transfer into the notes at the right time.
ReplyDeleteI agree with the above comment. It makes sense as to why the government is making an effort to change the current situation in India. Consequently, transactions could potentially come down dramatically in the short term, especially since cash is used so frequently in India. However, as a positive from this, low-skilled and unskilled jobs are expected to be created if prices fall as expected and make real estate more affordable. The article mentions that the country badly needs these jobs. But as already discussed, this will not be enough to reduce all of the black money and the government will need to do more.
ReplyDeleteIt's good to see the current government making attempts to fulfill the promises they made during the election period. Corruption is one of the biggest problems of India that needs to be curbed. Hopefully, the new policy will be able to reduce corruption and help our economy to grow.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteIt is really interesting to see the government combating corruption and 'black money' through the banning of the 500 and 1000 rupee notes. Yes, they did it by surprise since people would have found ways to invest their black money in stocks, bonds, or even the bank and generate interest. Nevertheless, these notes make up 86% of the money in circulation, and introducing the 2000 rupee note would affect transactions that require smaller bills in the short run.
ReplyDelete