Prime Minister Narendra Modi on Tuesday announced that Rs 500 and Rs 1,000 rupee banknotes would be withdrawn from circulation at midnight to crack down on rampant corruption and counterfeit currency.

Here’s what you need to know and do in the next few days:


Why ban Rs 500 and Rs 1000 notes?

In two words: black money. Unaccounted money, often used in any form of corruption or illicit deals, usually takes the form of high-value notes, which in this case are the Rs 500 and Rs 1000 bills. In his speech, Modi specifically pointed out that these large-value notes were being used to finance corruption and fund terrorism.

The Financial Action Task Force, a global body that looks at the criminal use of the international financial system, notes that high-value bills are used in money laundering schemes, racketeering, and drug and people trafficking.

In India, the Rs 500 and Rs 1000 notes also constitute a huge percentage of the money spent by governments, political parties and candidates during general elections. A Centre for Media Studies report showed that nearly Rs 30,000 crorewas spent during the 2014 general election, while official spending only accounted for Rs 7,000-Rs 8,000 crores.

This of course only scratches the surface: major industries such as real estate have historically been conduits of black money.

The most important fact, however, is that the share of large-value notes has only been increasing over the years. While some of this is no doubt due to the natural growth expansion of our economy, it also hints at the increasing size of our  black money economy.

Modi’s decision to decommission Rs 500 and Rs 1000 notes should ideally not hurt most individuals in the long-term, although it will have a significant negative impact on the working class and small and rural businesses in the short-term. Economist Ajit Ranade’s back-of-the-envelope calculation shows that the highest face value in India should be around Rs. 250; simply put, Rs. 250 is the highest-value note that most Indian individuals should need.

On the other hand, what needs to be noted is that there’s no good estimate for how much of India’s black money is in forms other than currency/physical notes such as gold, jewellery, land or any other form of wealth. Therefore while banning 500/1000 rupee notes will tackle the black money that is in the form of hard cold cash, it won’t affect other forms of black money.  On similar lines, this move will, obviously, have little effect on black money stashed away in foreign tax havens.

How is this going to impact urban consumers, small businesses, large businesses?

Over the next month, there will undoubtedly be a significant shortage in cash supply: not just Rs 500 and Rs 1000 bill, which are being taken out of circulation, but almost every other denomination as well.

Why? Firstly ATMs will be closed on November 9 (pan-India) and November 10 (in some places). This is being done in order to remove all existing Rs 500 and Rs 1000 notes from the ATMs and replace them with lower-value bills.

Multiple experts and government officials, however, have told The Wire that this process will likely take one to two weeks in urban and semi-urban areas and up to a month in remote and rural regions. In the meantime, long queues at ATM have already started. People are withdrawing smaller notes to stock up, so there will be shortage in the days and weeks ahead.

As a consumer, if you depend on small notes (which is the great majority of India) to pay for your groceries, household items – it could be difficult over the next one week to do so.

Small businesses, both in urban and rural areas, will find this move downright crippling in the short-term. These businesses are mostly run on cash: they use hard cash to receive payments for services and to make payments for inventory and goods. It’s unclear at the moment how quickly they will be given access to the new Rs 2000 notes that will be issued.

On the other hand, as analysts have noted, India’s larger and new-age companies will have no problems in making the switch to Rs 2,000 notes.

Traditional sectors, such as real estate or cement, where are politically controversial and where there is larger incidence of corruption and high-value cash transactions, will likely go through a tremendous amount of pain, chaos and restructuring in the next few weeks.

“We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors,” JLL India Chairman Anuj Puri told The Wire.

The ripple effects of this cannot be understated.  There are major industries in India thrive on a parallel economy funded by black money. How will this affect the more legitimate and normal economy? The weeks and months ahead will tell.

How will this impact the vast sections of India’s population who depend on cash?

This move deeply impacts the working sections of society: drivers, maids, cooks, electricians, plumbers. Anybody who provides services in the informal sector and depends on monthly or bi-monthly cash payments.

Why? One obvious example: if you had planned on paying your maid or cook tomorrow and you aren’t able to beat the ATM queues or have enough smaller-value notes lying around the house, they will have to wait to be paid until you can get your hands on some cash. If ATMs are not replenished quickly and often over the next two weeks this could be a very serious problem. The severity of this impact will depend on how easily and smoothly India’s banking system and the government executes the transition.

Stepping back, however, anybody in rural India who doesn’t have access to a bank account (roughly 200-300 million people at last estimate, although the number is likely higher) and depends on high-value cash transactions will be crippled until new notes come through. One argument is that with the Jan Dhan scheme and the UPI/digital payment stack, rural India shouldn’t have too much of a problem. However, it will be a long time before rural India moves to completely cashless transactions.

In the short-term, people in rural India who have a significant amount of Rs 500 and Rs 1000 notes, but no official form of identification will have a tough time in exchanging their notes.

How many 500 and 1000 rupee notes are floating around? How much will it cost to replace them?

The numbers and calculations for this are mind-boggling. According to the RBI press conference today, there are 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1000-rupee’ notes in circulation right now.

In addition to this, RBI data shows that the share of Rs.1000 notes in the stock of currency in circulation at the end of financial year 2014-15 was  39%. Rs. 500 notes accounted for a further 45% of currency stock.

Putting it simply, at the stroke of midnight, a little over 80% of the cash in India (by value) will be worthless pieces of paper.

How much will this decision cost us? Or more importantly, why will it cost us anything at all? Firstly, because the Rs 1000 note costs the least to produce as a proportion of face value.  It costs India around Rs. 3 to print a Rs. 1000 note (0.32% of face value), while it costs 96 paise to print a Rs. 10 note (9.6% of face value).

One analysis has pointed out that the total cost of printing the value of Rs. 500 and Rs. 1000 notes issued in 2014-15 in the form of Rs. 100 notes would be around Rs. 11,900 crore. This doesn’t include the costs involved in increased replenishment and maintenance of ATMs, which would be required because of the usage of and withdrawal of smaller-value notes will be far greater.

Economic Affairs Secretary Shaktikanta Das has pointed out that the exact calculation as to how much this will cost has still not been made. Das pointed out that any economic cost would be outweighed in terms of the benefit it would bring to India and the Indian economy.

What of the new Rs. 2,000 note? Why is this being issued at all, if we want to combat black money and corruption by removing large-value notes?

The Rs. 2,000-note has apparently been in the works for sometime. A report published by The Hindu Businessline  almost 3 weeks ago (October 21st, 2016) notes that Rs. 2,000 notes would be coming soon and that the RBI had already started being printed and that their dispatch from a printing press in Mysore was underway.

This, however, brings us to the larger question: Why do we need a Rs. 2,000 note and a new Rs. 500 note if the move is to abolish large-value bills and move towards a cashless society?

One potential answer is that there is still some need, especially among India Inc and small businesses to use cash and the Rs. 2000 note will help. It does seem a little puzzling however. In the RBI and finance ministry press conference today, Economic Affairs Secretary Shaktikanta Das carefully noted that the central bank would cautiously “monitor and regulate the issuance of Rs. 2,000 notes in the future”. This means that it is unlikely that the Rs. 2,000 notes will be issued in large numbers.

The timing of when these notes will be issued has to be taken carefully into account. One market analyst pointed out to The Wire that if the new notes were released before January (December 31st being the last date by which all Rs. 500 and Rs. 1000 notes must be turned in), it would circumvent the whole point of demonetising larger-value notes!

The new notes will also reportedly come with a more secure design, making them easier to track and tougher to counterfeit. Contrary to reports, there does not appear to be a “tracker” on the Rs. 2,000 note. However, more details on this are awaited.

Does India stand alone in banning large-value notes?

The idea is certainly not unique or new: It has for the past 5 years been proposed by a number of academic institutions, think-tanks and international bodies that look to crack down on tax evasion, corruption and terrorism-financing. In February this year, European Central Bank head Mario Draghi announced that they were considering abolishing the region’s most-valuable bank note (the 500 euro bill) in order to curb tax evasion and terrorism financing.

In the same month, US treasury secretary Larry Summers recommended that the $100 bill be demonetised.

Peter Sands , a senior fellow at Harvard University’s Kennedy School of Government, in recent times, has done some interesting work regarding banning large-value notes as a means of cracking down on global crime and corruption. An introduction to this work can be found here.

Even within India, there have been some signs that this was in the offing. Two years ago for instance the RBI announced that it was phasing out and decomissioning all currency notes issued before 2005. While this was done mostly to weed out fake notes, multiple analysts point out that it was also an attempt at rooting out black money. People who didn’t come forward in the initial three-month exchange period would have to furnish tax and identification proof to exchange large numbers of pre-2005 currency.

The call to retire Rs. 1000 and Rs. 500 notes has also been made before within India as well by economists, think-tanks and even politicians.

Could this move have been timed better?

The timing of the announcement has been somewhat of a surprise. While the government has given a number of exemptions to stave off outright panic – Rs. 500 and Rs 1000 notes can still be used for the next 72 hours to pay at government hospitals or for train tickets for instance – it still puts quite a number of people in a pickle if supply of smaller notes are constrained in the days and weeks ahead.

The timing is also curious for other reasons: the UPI (unified payment interface) system is likely to be fully operationalised only by January 2017. Would it have not been better to wait until then, if this move was to also spur India’s shift towards a cashless economy?

On the other hand, if this had been announced in advance it could have been self-defeating in nature; allowing holders of black money to convert their cash for gold or other forms of wealth instead. The secrecy surrounding this decision – coming as it did as a shock to journalistic, policy and even most government circles – only reaffirms this.

Where can I exchange/ deposit my Rs 500 and Rs 1000 notes?

From November 10 till December 30 you can deposit the old notes at your nearest bank or post office accounts without any limit. But withdrawals from banks are capped at Rs 10,000 per day and Rs 20,000 per week. This limit will be increased in the coming days.

You can also exchange Rs 500 and Rs 1000 notes for lower denomination at banks, head post offices and sub-post offices. However, the exchange limit has been capped at Rs 4,000, and you can exchange till November 24. One must produce a valid government identity cards like PAN, Aadhaar and Election Card.

Banks will remain closed on November 9 allowing them time to cope with the new directive.

There is no restriction of any kind on non-cash payments by cheques, DDs, debit or credit cards and electronic fund transfer.

What are the restrictions on ATM withdrawals?

ATMs will not work on November 9 and in some places on November 10. But from November 11, you can withdraw money and ATMs will stop dispensing the existing Rs 500 and 1000 notes. For the first few days, these withdrawals are being restricted to Rs 2,000 per card per day, and will later be increased to Rs 4,000 per card per day.

Where can I still use my Rs 500, Rs 1000 notes?

Till November 11, the following government-authorised places and institutions will continue to accept Rs 500 and Rs 1000 notes for payment:

— hospitals

–Railway, airline, bus ticket booking counters

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

–Consumer co-operative stores

–Milk booths

–Crematoriums and burial grounds

Where can I get the new currency notes? 

RBI will issue new currency notes of Rs 500 and 2000 from November 10 onwards. These notes will have new design.

1. Keep calm: you have 50 days time to exchange / deposit your old notes in banks / post office and lower denomination notes and coins will remain legal tender.

2. Emergency requirements have been taken care of.

· Some leeway has been given by the government for use of these notes for medical emergencies etc. For first 72 hours from Nov 8 midnight i.e. till 11 Nov midnight government hospitals will accept these old notes, pharmacies in government hospitals will accept these old notes, pharmacies in government hospitals will accept these notes with Doctor’s prescription.

· Old notes will be accepted for railway ticket booking and air travel booking for the first 72 hours.

Additionally, For 72 hours old notes will be accepted at petrol , diesel and CNG stations authorised by public sector companies, milk booths, crematoriums, and government co-operative stores.

· International airports will make arrangements for arriving passengers to exchange up to Rs 5000 worth of old notes for the new legal tender.

· No restriction on electronic fund payments or transfers including credit and debit cards
Collect all the currency kept in various places: (i) Wallets (ii) In the house –drawers/safes. (iii) From your lockers in bank if any are kept there. Collecting from bank would be possible after banks open for public dealing as banks will be closed for public dealing on November 9, 2016.

4. Separate and take out the Rs 500 and Rs 1000 notes from these. Count and write down the total. Ideally make bundles of 50, 100 and a few bundles totalling to the amount that is allowed to be exc ..

5. Prepare for long queues at banks and post offices from Nov 10 onwards. From November 10 to 24 old notes upto Rs 4000 in value can be exchanged. After Nov 25 this limit will be raised. You need to take your ID cards along.

6. Old notes can be deposited in banks or post offices from Nov 10 to Dec 30 till close of banking hours.

7. Withdrawal of new notes will be limited to Rs 10,000 per day and Rs 20,000 per week initially so use your credit/debit card to shop.

8. If you don’t manage to deposit all your old notes by Dec 30 you still have a window. You can exchange old notes at designated offices of the RBI after submitting a declaration form and showing your ID card up to 31.3.2017.

9. Keep a list of the serial numbers of the notes submitted /exchanged at banks as the RBI has announced that the accepting bank/post offices will keep track of these. Quite clearly the income tax department will be taking a look at who is submitting how much so exchange only the amount you are willing to explain to the tax department.

Industry overwhelmingly welcomed the government’s move to ban Rs 500 and Rs 1,000 rupee notes. Stalwarts of the industry are optimistic that this move by the Modi government will curb unaccounted-for cash in the economy.

Here are some of the reactions:

SBI Chairman Arundhati Bhattacharya:”We have just now been advised of the Govt move to demonetise current series of Rs 1000 and Rs 500. We have handled demonetisation earlier and will do so again. Tomorrow Banks will remain closed in order to withdraw these notes from counters and ATMs. We will strive to restock ATMs at the earliest and make them operational. Govt has given enough exemptions to ensure urgent needs are met. We will work round the clock to ensure that customers have a smooth experience”

Kunal Bahl, Co-founder & CEO, Snapdeal: “We welcome the Government’s bold and courageous move to weed out black money, which will have significant long term benefits for the economy. With this, the quantum of India’s economy moving through the digital pipes will witness massive growth. Both Snapdeal and FreeCharge are committed to supporting all such initiatives.

Naveen Surya – Chairman, Payment Council of India and Managing Director, ItzCash “We welcome this extremely bold and much needed step by Prime Minister Modi and the government to cure us from disease of cash in our society. I along with Payment Council and India and ItzCash greatly admire this move and provide our full support.”

Anuj Puri, Chairman & Country Head, JLL India:“The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far-reaching and immediate, and shake up the sector in no uncertain way. Stricter measures against black money have for long been required to help bring about greater transparency, give the Indian real estate sector more credibility and make it more attractive for foreign investors. Black money deals are more common on the unorganized market, but this practice has, in fact, been on the decrease with greater awareness on the part of buyers. Before too long, the caricatured version of black money driving Indian real estate is no longer applicable.”

Dr Naushad Forbes, President, CII:”Demonetizing high denomination notes can be an effective means of checking accumulation of wealth in cash. The government has taken a measure aimed at the heart of the black cash economy. CII congratulates the Prime Minister and the government for this step. Not only is the measure important but it requires extensive preparation for effective execution.”

Amit Sachdev, Co-Founder and CEO, CoinTribe: “Modi’s move is a watershed moment in India’s fight against the ubiquitous black money issue executed with the finesse and secrecy this issue deserves. While this will have several significant benefits for the economy in the long term, there is likely to be a negative impact on sectors with high cash economy in the immediate term. Sectors like Real estate, construction material, unorganized trade and services will see significant pain in the near term. With liquidity drying up, both NPA and demand for working capital credit are likely to go up. In view of bank’s ongoing NPA issues, how fast will banks react to this situation will be interesting to watch. With limited tax arbitrage between organized and unorganized segments, India will see much sharper move from unorganized to organized segment.

“In the long-term, though, this is likely to drive several benefits for the economy. India has made the first move from cash economy to a digital economy. Larger amount of savings and cash will find a way into the mainstream economy and be deployed for physical and financial asset creation. Use of digital currency and payment systems driven by UPI, wallets and cards will create enormous transparency and paves way for faster evolution of Fintech companies in India especially in transactions and Online lending space. Modi has made the right investment for the next generation. This move should improve India’s position on transparency and corruption in the global league table enabling higher capital flow (FDI/FII) into India. It would be good step for government to think of another VDS scheme with 70-80% penalty rate to bridge fiscal deficits,”

Naveen Surya – Chairman, Payment Council of India and Managing Director, ItzCash: “We welcome this extremely bold and much needed step by Prime Minister Modi and the government to cure us from disease of cash in our society. I along with Payment Council and India and ItzCash greatly admire this move and provide our full support.”

Archit Gupta, Founder & CEO, Cleartax:”This is a historic moment in India. No more black money.
More people will be paying taxes, filing taxes and joining the mainstream economy.There will be deep pain to Indian citizens & economy in the short term. We are a country with large ambition and we will succeed. ClearTax will help citizens and businesses day and night to deal with the impact.

Getamber Anand, President – CREDAI National: “Effectively the primary market will not be very disturbed as the inventory was sold to end users who avail home loans. Moreover the organised part of the RE industry has always been compliant and it is only the unorganised fly by night players who will be affected. This move will help industry to fight more effectively for removal of section 43CA of the IT act as now there is no reason to charge tax on so called deemed income to both the buyer and seller post this move.”

Anis Chakravarty, Lead Economist, Deloitte India: “The government has passed arguably the largest reform to counter the black money and parallel economy threat. While this action is expected to be a big blow to the black economy its repercussions are also imminent in the general macroeconomic environment and the organised economy. Most of the impact will be felt in the short term though there are larger implications in the medium to long term.

“As generally expected, there is likely to be a disruption in the liquidity situation as households will get affected by the note exchange terms as laid by the government. Commodity transactions and the general cash market transactions are likely to feel an immediate impact. Besides the general elevation of uncertainty, the equity markets are likely to react negatively this morning though this will ease out in the medium term. On the macroeconomic front, we could see some appreciation of the domestic currency as the 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.

“On a sectoral basis, the commodities and agricultural sector including the market for consumer non-durables is expected to feel the heat. However, the largest impact in the medium to long term is likely to be the real estate sector which possibly will have the largest negative impact. on a positive note, there will be a reset of expectations as this represents in the long term a big push to the cashless economy and businesses in the fin tech sector are expected to see gains. Lastly, this move also shows the intent of the government to come up with game changing ideas and will represent a threat to all future operations in the black economy and hoarding of cash.

K V Karthik, Partner, Deloitte Forensic India: “By phasing out RS 500 and RS 1000 notes the government has taken the fight against domestic black money to the next level. In the backdrop of other developments such as the Black Money Act, voluntary disclosure scheme and the introduction of Benami Transactions (Prohibition) Bill, this is a significant change, as people will have to provide an ID while exchanging the notes going forward. This way the government will be able to identify undisclosed income and can be considered akin to a forced disclosure scheme.

“By phasing out 500 and 1000 Rupee notes, the government is sending a strong message to those hoarding cash and transacting in it. From a business perspective, this move may impact small businesses as several such businesses deal in cash. However this move is likely to lead to a rise in online transactions going forward, propelling the move towards paperless currency. As a result of this every rupee in circulation can be accounted for and local black money can be unearthed. With FIU of India getting information about large cash transactions from banks and sharing of information on these deposits with the Income Tax department will ensure not only unearthing of black money, but also result in greater tax compliance going forward.

“Increased currency in circulation is a burning issue India faces. Increased scrutiny during the period of exchange of currency will help the government in identifying cash hoarded as black money. By mandating the requirement of identification details to exchange old notes coupled with the existing mandate for furnishing PAN details to deposit more than Rs 50,000 in cash, will help the government effectively identify unaccounted money.

Sathvik Vishwanath, CEO and Co-Founder, Unocoin: “The intentions are good but very difficult to achieve. If going cashless is the only way forward, certainly the bitcoin which is borderless trustless and transparent currency makes more sense”.

Divya Baweja, Partner, Deloitte Haskins & Sells LLP: “The government’s move to ban the 500 and 1000 rupee notes comes as a surprise – this clearly is a step in the direction to unearth the domestic black money and this moves comes in a time after the IDS timeline for disclosure comes to an end. the recourse available is to deposit these notes with the bank, but this will need explaining the source to the Revenue authorities considering that all such deposits would need to be explained. any unexplained deposit would attract the exposure of interest, penalty and possible prosecution under the Income tax Act. the impact of this move especially on the stock market and real estate would need to be seen”.

Manavjeet Singh, CEO & Founder, Rubique: “This is a promising move made by the government towards cashless economy. This will boost innovation in the nascent electronic payment industry. Without doubt, this will bring down frauds and thefts and costs of printing cash. A great blow to black money. If executed well, the costs of doing transactions between buyers and sellers will lower significantly by 2019.”

Satyam Kumar, Co-Founder, Loantap:”Biggest gamble by Mr . Modi , banning Rs 500 n Rs 1000 notes. What happens to Bharat with 46% unbanked population? Is #rbi geared for this, will it derail manufacturing recovery which is in early stage? Is #indianbanking prepared? Will #namo bite the dust this time?”

Ranjit Punja, CEO & Co-Founder, Creditmantri:”Sweeping step taken by the PM, but this should have a positive impact in curtailing black money and reducing corruption. Likely to cause some temporary hardship, and with the introduction of the Rs. 2,000 note, along with the security and tracking features, currency will be used as intended.”