Government’s Move to Demonetize Rs 500 & Rs 1000 Notes

Opinion Article By Reshma Krishnan
Never has a government initiative or policy changed caused this much rift between people and even caused friendships to come to blows on both social media platforms as well as family dinners. Whether you agree with the Prime Minister and the RBI’s move to demonetize the Rs 500 and Rs 1000 notes, or not, you cannot argue with the massive impact, and upheaval it has caused. Stories of sacks of money being burnt across the country and snaking queues outside ATM’s are spreading like wildfire. So why has it been done?
Well there are two specific reasons. By demonetizing Rs 500 and Rs 1000 notes, the Prime Minister and the RBI have for all practical purposes, rendered all those notes useless. Now yes, you can exchange it at the banks, but that will require identification. The parallel economy exists so that transactions can be made without identification. If you render all that money worthless, the parallel economy has no fuel, because everyone needs to buy bread at the end of the day. Those who hoard cash don’t want to hoard it. They would like to have it clean but having not paid taxes on said income, they are unable to clean the money. So they clean it by spreading it around. For instance, they pay for flight tickets and jewelry. They pay their staff, drivers, maids and nannies who don’t question the cash’s origin. They donate to political parties and charities, which consequently distribute it to people. By doing so and effectively distributing the money, they operate without cause for concern. When you demonetize the notes with such immediacy, there is no route for the money to trickle down the system. You can declare it of course and pay heavy penalties if it has not been declared before. So you burn it.
The other reason the notes were demonetized was to tackle the vicious cycle of fake currency. All fake notes are also useless because banks will not accept it. But there has also been a backlash to what people call an extremely ‘bold’ move by the PM and RBI. While it will work, the immediacy of it means that poor people, and people without bank accounts, or in fact anyone who deals in cash economy, have been badly affected. Lack of information dissemination has led to people getting worried about their savings. Yes, you and I have also been affected. We don’t want to stand in queues even though we are quite happy to wait for three hours for a darshan at a temple or behind a bar to get a drink. So let’s be clear, the only people suffering here are the ones who live outside the system and don’t understand it, the women who keep their meager savings in cash to protect it from their families.
How can we help? We can quell their fears. We can open bank accounts for them. We can tell them that they have till 30th December to deposit the money, and stand in line for them and help them out, where ever they are. We can assure them that they can exchange this money with some identification at a post office. If they have no ID, then help them get an Aadhar card. This move is an extremely bold move and WILL cripple the parallel economy. Yes, there are been problems with execution and there is no doubt, the cash economy will be hurt, as will those who depend on it. Could it have been executed better? Of course, but you can only do what is in your capacity to do. So do what you can to help them. Pay their salaries directly into bank accounts; explain to them that their savings are still valuable. But also tell them to be careful of ruthless people who want to exploit them by bribing them to use their accounts. Tell them it’s not worth it. I liken this exercise to cutting a leg off when you have gangrene. Sometimes, there is no choice.

Reshma Krishnan has over eight years of experience in Treasury and Corporate Finance, primarily in M&A and Corporate Fundraising. She comes to us from Avendus Capital, where she focused on M&A and Private Equity transactions in the Infrastructure and Manufacturing space. Her domain expertise lies in origination and deal execution particularly in the areas of financial modeling and documentation.