On November 8, 2016, Prime Minister Narendra Modi announced that Rs. 500 and Rs. 1,000 notes would no longer be valid. This move was taken to reduce corruption and the use of black money in the country. Obviously, different people reacted differently to this decision but when you look at the numbers, it was a much needed move.

According to the Finance Ministry, there was an increase of 40% in the circulation of notes between 2011 and 2016 but the circulation of Rs. 500 and Rs. 1,000 notes increased by 76% and 109%, respectively. So where is all this money coming from? Through illegal sources, of course.

What does it mean for Indians?

The impact of this decision was seen immediately and there were long queues outside banks and ATMs to exchange notes and get the new currency. People who had marriages planned or were looking to invest in business were in a state of panic. The question is: Is it actually a thing to panic about?

It is, but only for those who resist change.

The government of India gave an option of opening free bank accounts through the Pradhan Mantri Jan Dhan Yojana but people ignored it.

They asked citizens to make Aadhar Cards time and again and even initiated the income declaration scheme in September 2016.

Not to forget, the importance of bank deposits and investments, which is underlined every now and then. Now, those who made the right investments can continue life smoothly by taking a loan against securities or property but, those who didn’t are the ones suffering.

How Big is That Number?

In 2015, India’s GDP was recorded at US$ 2073.54 billion. This accounts for 10% of the world’s average. In the same year, about 10 lakh income tax assessees declared their income to be above Rs. 1 crore, while a majority of the country’s population fell in the category of Rs. 5.5 lakhs to Rs. 9.5 lakhs.

Of these, only 47% put their savings in banks and just 24% of them used it for insurance purposes. This means that half of the country’s population prefers to keep their savings in cash.

Financial products like loan against securities can prove important during times of liquidity crunch.

Now, following demonetization, an estimated Rs. 7-8 lakh crores will be deposited in the banks, which will eventually make the banking system stronger and will strengthen the position of the Indian rupee in the international market. It also shows the importance of financial products like loan against securities, especially during times when there appears to be a liquidity crunch.

Coming back to the common man, this move is certainly a reality check for them. It raises a huge question mark over their adaptability and education. Despite India being one of the biggest smartphone using nations, why are people unable to survive on digital transactions for a few days?


Featured image source: Quartz

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Posted by The Indian Economist