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Modi’s Surgical Strike on Black Money: Demonetization of Rs 500 and Rs1000 Banknotes


In order to counter the menace of black money, and counterfeit bills, on 8th November, 2016 at 8.00 PM Prime Minister Modi of India during a nation wide address through television and radio announced that from today midnight all the Rs 1000 and Rs 500 bills will be legally invalid. However, a provision was made to exchange these old bills at banks and post offices on daily basis to meet the daily requirements of public. Daily withdrawal was restricted to Rs 2000/2500 and per day exchange of old banknotes were restricted to Rs 4000/4500 and this system will be continued up to the end of December, 2016. Public utilities like hospital, petrol pumps, court fees, schools fees, airlines and train tickets etc were exempted from this and they were instructed to take old bills up to 24th November.. . 


It is mammoth exercise for a big country like India where population is more than 1.2 billions and still a large rural population does not have access to debit/credit cards as well as basic banking services. Total money in circulation was around 16.42 Lakh Crores ( approx US$240 billions). Out of this total money in circulation 86 percent of money was in form of  bank notes of Rs 500 and Rs 1000 denominations. It is estimated that 6.5 billion notes of Rs 1000 denomination and 16.5 billion notes of Rs 500 denomination were there in circulation. Changing such a huge quantity of bank notes in such a large country in a period of approximately 50 days is mammoth task and this require a lot of courage and will that could be displayed by only a leader like Modi.


This action will have some good and bad impact in short as well long term in varying degree on Indian economy; however, good impact will be more in long run. In the short run, during the transition period, cash spending will be less, and consumption is likely to go down. This is going to hit economy in short run resulting in reduced GDP. Small shopkeeper and street vendors who do not have electronic payment system will be affected more. In medium term the money supply will shrink when black money will go out of system, and this will help in reducing the inflation. It is likely that some of the black money stashed in personal vaults will shift in banking system increasing the deposits in banks and this will reduce the interest rate. Reduced cost of capital due to reduced interest rate will propel investment of internally accrued fund in economy. 


In absence of large black money and fake money, many social evils like drug, illegal arms and human trafficking etc will come under control as black and fake money is largely used in such operations. Moreover, terrorism is also funded and fostered in India mainly by counterfeit notes sent from across border. Not only that, those who have stashed a lot of black money through corruption will also desist from corruption once their huge money stashed illegally gets converted into trash of paper. This great move of PM Modi may be a game changer for Indian economy as well as curbing corruption. 


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