Prime Minister Narendra Modi shocked India when he announced the withdrawal of 500 and 1000 rupee notes on 8th November. What ensued was panic and utter chaos prompting the government to come up with supplementary notifications to ease the pain. Following the demonetisation of the higher denomination currency, Indians have exchanged and deposited over £54.40 billion worth of scrapped Rs 500 and 1000 notes at different banks till November 18.
Analysts estimate that the shock of the currency ban will shove 0.5 to one percentage points of India's domestic product growth in the current financial year assuming significantly more cash is pumped into the economy by the end of next month. Another report said that growth will collapse to 0.5 per cent in the second half of the current financial year from 6.4 per cent in the first half. According to another economist, it would take two to three months before the cash in circulation gets back more or less to the level it was before. Until that time, there will be stress and not necessarily from guys who were hoarding ill-gotten wealth but for normal transactions.
Following the demonetisation, people are no longer able to make cash purchases of expensive products without the risk that they will be called by the income tax department inquiring where they got so much cash from, an owner of a retail chain said.
The Reserve Bank of India released a statement saying banks also disbursed £10.33 billion over the counter and via ATMs between November 10 and 18. Following the announcement of withdrawal of legal tender status of banknotes of Rs 500 and 1,000, RBI has made arrangements for exchange and/or deposit of such notes.
"Banks have since reported that such exchanged/deposits effected from November 10, 2016 up to November 18, 2016 amounted to £544.57 billion. They have also reported that the public have withdrawn, during this period, £10.33 billion from their accounts either over the counter or through ATMs," the statement read. Long queues were seen the day on which banks opened after the announcement of demonetisation. The government made several exceptions to calm the frantic mass, allowing people to use invalid currency notes to buy petrol/diesel, rail and air tickets, payment of public utilities, taxes and government hospitals.
Just last week, the Indian Banks' Association said total deposit mobilisation by banks crossed £40 billion on November 14. SBI Chairman Arundhati Bhattacharya said a large part of the deposits would be withdrawn as depositors get back to spending. But 10-15 per cent of the money that citizens have been forced to deposit in banks should stay back, she said. She said that SBI has done 110 million transactions since demonetisation and has collected deposits of £13.4 billion. Bhattacharya said the mechanism for exchange of notes was being misused and even though there have been issues with supply of ink, the talk of using indelible ink helped a lot. "I think about 75 per cent of the people were not doing their own stuff. They were being used by others to change money," she said. "The empty ATMs were associated with a cash shortage. They did not realise that there are logistic issues and there's need to recalibrate the machines," she added.
The Reserve Bank of India, in the mean time, revealed that the amount exchanged and deposited is less than 10 per cent of what has been rendered illegal by the government. In the same period people deposited the money, banks pumped £10.33 billion into the system through withdrawals by account-holders and, another £3.30 billion in exchanging old notes. While new notes have come in and are already in circulation, they are only a seventh of the estimated requirement. What has helped the shortage of currency is the growth of electronic transactions that are currently at three times the usual amount. If the banks keep pumping in new notes as they are now, it would still take seven more weeks to meet the requirement of £100 billion.
Economist Saumittra Chaudhuri said the November 8 decision helped impound about £165.8 million Rs 500 notes and £66.80 million 1000 notes, which is a total of 23.26 billion pieces of currency notes worth £150 billion. He added that the timeline to replace the existing stock of the Rs 500 notes will run into May 2017.
Despite the difficulties, many economists and even ordinary Indians believe Mr Modi’s shock therapy will yield long-term benefits. Mahesh Rewaria, who sells phone accessories from a tiny stall, says his sales fell 60 per cent after the ban and yet to recover fully. Yet he supports Modi’s move. “It’s only those who were not paying taxes and stealing from the government that have to worry. I am included in that,” he told the Financial Times. “I would have always wanted to pay my taxes fairly, but then I would think why should I, when other people are so corrupt."
Withdrawal limit for marriages hiked
The government has announced relaxation in the withdrawal limit for farmers and families celebrating weddings. In a statement, the Economic Affairs Secretary Shaktikanta Das said, for wedding ceremonies, up to Rs 250,000 (approx £3000) can be withdrawn from the bank account which are Know your customer (KYC) compliant. This comes as a breather for many families during this peak wedding season as those organising weddings were in a fix while paying the various vendors involved in the ceremonies.
