India’s Bold Demonetisation Move: Will You Be Affected?

06 Dec India’s Bold Demonetisation Move: Will You Be Affected?

The recent move by the Indian government to demonetise or ban 500 and 1000 currency notes as been hailed as a great attempt to combat tax fraud, kill the circulation of counterfeit money and eliminate corruption, as eliminating large denominations makes it harder to hide large amounts of cash.

The announcement has attracted immense praise and criticism from corporates, economic commentators, foreign investors and the general public. While some have opined that the move will change the face of the Indian economy, others have been skeptical of its effectiveness in wiping out unaccounted wealth labeling it as a short-term fix rather than a long-term solution for a clean economy.

Demonetisation in India: A Recurring Policy

Demonetisation, the process of stripping legal tender status from existing currency or old notes and introducing new currency or new notes, has been implemented in India on multiple occasions throughout its history. While the 2016 demonetisation event is the most recent and widely known, there have been five instances of demonetisation in total:

• 1946: This targeted high-value denominations of Rs. 1000 and Rs. 10,000 aimed to curb black money circulation after partition.
• 1978: The Janata Party government demonetised Rs 1000 notes, Rs. 5,000 and Rs. 10,000 notes to combat tax evasion and counterfeit currency.
• 2016: The most prominent demonetisation exercise in India, it targeted Rs. 500 and Rs. 1000 notes to address black money, corruption, and fake currency notes.
• 2014 (Limited Demonetisation): The Reserve Bank of India (RBI) withdrew some series of currency notes to counter counterfeiting. This limited exercise is not always included when discussing major demonetisation events.
• 2023: The RBI announced the withdrawal of Rs 2000 note, aiming to further discourage cash hoarding and promote digital transactions.

Reasons for Demonetisation in India (2016)

On 8th November 2016, the Indian government undertook a bold economic move by demonetising Rs. 500 and Rs. 1,000 bank notes, which accounted for a significant portion of cash in circulation. This unexpected policy shift was met with mixed reactions, and its effectiveness continues to be debated. However, the stated goals of the Indian government for this demonetisation exercise were multifaceted:

• Curbing Black Money (Undeclared Income): Black money, also known as undeclared income, is a major concern in India. It refers to earnings that escape taxation, often stashed away in physical cash. The government believed that demonetisation would render this black money unusable, forcing holders to declare it to the authorities when exchanging it for new notes.
• Reducing Counterfeit Currency Circulation: Counterfeit notes/currency, or fake notes, can destabilize an economy. The government argued that by demonetising existing notes, they could disrupt the circulation of counterfeit currency and make it more difficult for counterfeiters to operate.
• Encouraging Cashless Transactions: India has a large cash-based economy. The government hoped that demonetisation would push people towards digital payments like debit cards, credit cards, and mobile wallets. This shift would  potentially increase transparency and streamline financial transactions.
• Promoting Financial Inclusion: Financial inclusion refers to providing access to financial services for all sections of society. The government believed that demonetisation would encourage people, particularly those in rural areas who might not have used banks before, to open a bank account and participate in the formal financial system.

How Demonetisation In India Might Affect Uae Businesses

• Trade and Investment: India is one of the UAE’s largest trading partners, with bilateral trade valued at over $59 billion in 2019-2020. The temporary cash crunch and economic slowdown in India following demonetisation could have affected the demand for goods and services from UAE businesses exporting to India. Businesses involved in import-export activities may have experienced disruptions in their operations and cash flows.
• Indian Diaspora: The UAE is home to a significant Indian diaspora, with over 3.4 million (34 crore) non-resident Indians (NRIs) residing in the country. Many of these NRIs have business interests or investments in India. The demonetisation move may have impacted their ability to remit funds or manage their investments in India, which could have indirectly affected their spending patterns and business activities in the UAE.
• Tourism: India is a major source of tourists for the UAE, with over 1.6 million Indian visitors in 2019. The cash crunch and economic uncertainty in India following demonetisation may have temporarily dampened the spending power of Indian tourists, affecting businesses in the UAE’s hospitality, retail, and tourism sectors.
• Real Estate: Indian investors have been a significant driver of the UAE’s real estate market. The demonetisation move may have influenced the investment decisions of Indian buyers, potentially impacting the UAE’s real estate sector, particularly in areas with a high concentration of Indian investors.
• Financial Services: UAE-based banks and financial institutions with operations or exposure to the Indian market may have faced challenges in managing their liquidity and risk due to the economic disruptions caused by demonetisation.

Global Impact

1. Experts have hailed this move as a landmark event in the digital currency era as the note reform seems to have sparked interest in bitcoin among India’s consumers. Queries for bitcoins are reported to have risen by 20 to 30 percent since the announcement.
2. The demonization is expected to have a deflationary impact specifically on India’s property prices, making homes affordable and thereby paving the way for an indirect advantage to honest tax payers. Helping to revive demand in the sluggish housing segment, the reform is expected to drive greater transparency in the Indian real estate industry, making it more attractive to foreign as well as local investors.
3. If you are visiting India during this time, you can purchase foreign exchange currency at the airport exchange counters on producing a proof of purchasing the Old High Denomination notes.

While the debate for and against this crackdown on corruption and black money continues to dominate headlines, the next steps that the Narendra Modi or central government will take need to be seen. And with that, its impact on the global economy too.

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