“Project on Management Concept”

A PROJECT REPORT submitted to the

FACULTY OF MANAGEMENT

Masters of Management StudiesIN

(Banking and Financial Services)(Business Analytics)

SRM University-Times Pro,Kattankulathur-603203, Kancheepuram (Dt).

Submitted byShubham Godha - RA1652002010019Anirudha Mitra - RA1652003010007Karthik Sreeram .R - RA1652003010001Raveen Paul Mathew -RA1652002010001Aishwarya Pratap - RA1652002010023Veeravelan - RA1652003010019

1st Year/Semester-1

SRM UniversityNovember 2015-16

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ACKNOWLEDGEMENT

We wish to convey our heartiest thanks to Prof. Govindrajan Sir who has given us all an opportunity to work on this project. We are grateful to them for their constant guidance throughout the project. It was a fight in the beginning to gather all the information from various organizations about their cultures; however, through the constant efforts of our team members, we made this project a success. Working on this project has given us an insight about how the various organizations formulate their cultural values. We have been able to connect our theoretical knowledge with the practical working conditions of various organizations. It has been a boon working on the following project and we once again wish to thank our faculty member and the team, without whom this project would not have been a success.

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INDEXSNO CONTENT PAGE1 INDIAN 500 RS NOTE DEMONETIZATION 4 2 BACKGROUND 43 EXCHANGING OLD NOTES 6 4 PRIOR LEAKAGE OF INFORMATION 85 AFTER MATH 156 INCOME TAX RAID 177 DEMONETIZATION AND IMPACT 218 WHY BAN RS 500 AND RS 1000 NOTES 269 CONSUMER IMPACT 2710 IMPACT ON INDIAS POPULATION 3011 MEASURES TAKEN 41

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Indian 500 and 1000 rupee note demonetization

The demonetization of 500 and 1000 banknotes was a step taken by the Government of India on 8 November 2016, ceasing the usage of all 500 and 1000 banknotes of the Mahatma Gandhi Series as a form of legal tender in India from 9 November 2016.The announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live televised address to the nation at 20:15 Indian Standard Time (IST) the same day. In the announcement, Modi declared circulation of all 500 and 1000 banknotes of the Mahatma Gandhi Series as invalid and announced the issuance of new 500 and 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.The banknote denominations of 100, 50, 20, 10 and 5 of the Mahatma Gandhi Series continued to remain as legal tender and were unaffected by the policy. The demonetization was done in an effort to stop counterfeiting of the current banknotes allegedly used for funding terrorism, as well as a crackdown on black money in the country. The move is also aimed at reducing corruption, drug menace and smuggling.

Background.EconomicSimilar demonetization of banknote denominations has been taken in the past. In January 1946, banknotes of 1,000 and 10,000 rupees were withdrawn and new notes of 1000, 5000 and 10,000 rupees were introduced in 1954. The Janata Party coalition government had again demonetized banknotes of 1000, 5000 and 10000 rupees on 16 January 1978 as a means to curb counterfeit money and black money.

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In 2012, the Central Board of Direct Taxes had recommended against demonetization, saying in a report that "demonetization may not be a solution for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewelry".On 28 October 2016 the total banknotes in circulation in India was 17.77 lakh crore (US$260 billion). In terms of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to 16.42 lakh crore (US$240 billion) of which nearly 86% (around 14.18 lakh crore (US$210 billion)) was 500 and 1000 banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 90266 million banknotes were in circulation.

PoliticalIn the past, the Bharatiya Janata Party (BJP) had strongly opposed demonetization. BJP spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and the aadmis, those who are illiterate and have no access to banking facilities, will be the ones to be hit by such diversionary measures." This was before Prime Minister Narendra Modi launched Jan Dhan Yojana to include the poor into the banking system.

Televised addressOn 8 November 2016, an announcement was made by the Prime Minister of India Narendra Modi in an unscheduled live televised address to the nation at 20:15 IST. In the announcement, Modi declared circulation of all 500 and 1000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new 500 and 2000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.After the official announcement by Prime Minister Modi, the Governor of the Reserve Bank of India, Urjit Patel, and Economic Affairs secretary, Shaktikanta Das explained in a press conference that while the supply of notes of all denominations had increased by 40% between 2011 and 2016, the 500 and 1000 banknotes increased by 76% and

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109% respectively in this period owing to forgery. This forged cash was then used to fund terrorist activities against India. As a result, the decision to eliminate the notes had been taken. Patel also informed that the decision had been made about six months ago, and the printing of new banknotes of denomination 500 and 2000 had already started. However, only the top members of the government, security agencies and the central bank were aware of the move. But media had reported in October 2016 about introduction of 2000 denomination well before the official announcement by RBI. This statement has led to much debate, because the Reserve Bank governor six months before the announcement was Raghuram Rajan, while the new banknotes have the signature of the newly appointed governor, Urjit Patel.

Exchanging old notes

People gathered at ATM of Axis Bank in Mehsana, Gujarat to withdraw cash following deposit of demonetized currency notes in bank on 15 November 2016.

The Reserve Bank of India laid down a detailed procedure for the exchange of the demonetized banknotes with new 500and 2000 banknotes of the Mahatma Gandhi New Series and 100 banknotes of the preceding Mahatma Gandhi Series. Following are the key points:

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Long queue in front of SBI ATM at Paravur near the city of Kollam in Kerala, 19th November 2016.

Citizens will have until 30 December 2016 to tender their old banknotes at any office of the RBI or any bank branch and credit the value into their respective bank accounts.

Cash withdrawals from bank accounts were restricted to 10,000 per day and 20,000 per week per account from 10 to 13 November 2016. This limit was increased to 24,000 per week from 14 November.

For immediate cash needs, the old banknotes can be exchanged for the new 500 and 2000 banknotes as well as 100 banknotes over the counter of bank branches by filling up a requisition form along with a valid ID proof. This exchange is restricted to once per person. Initially, the limit was fixed at 4000 per person from 8 to 13

November 2016. This limit was increased to 4500 per person from 14 to 17

November 2016. The limit was reduced to 2000 per person from 18 November

2016. Initially, all ATMs were dispensing banknotes of only 50 and 100

denominations and cash withdrawals from ATMs were restricted to 2000 per day. From 14 November, onwards, ATMs recalibrated to dispense new 500 and 2000 notes will allow a maximum withdrawal of 2,500 per day, while other ATMs dispensing banknotes of only 50 and 100 denominations will allow a maximum withdrawal of 2000 per day.

However, exceptions were given to petrol, CNG and gas stations, government hospitals, railway and airline booking counters, state-government recognized dairies and ration stores, and crematoriums to accept the old 500 and 1000 banknotes until 11 November 2016, which was later extended to 14 November 2016 and once again to 24 November 2016.International airports were also instructed to facilitate

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an exchange of notes amounting to a total value of 5000 for foreign tourists and out-bound passengers.

Under the revised guidelines issued on 17 November 2016, families will be able to withdraw 250,000 for weddings from one account provided it was KYC compliant. The rules were also been changed for farmers who are permitted to withdraw 25,000 per week from their accounts.

Prior leakage of informationSeveral exact details pertaining to the decision to demonetize the notes had been published on 1 April 2016 in a Gujarati newspaper called Akila, including for instance, that there would be around 2 months' time to exchange banned notes, and that new notes in the 2000 denomination would be issued. The editor of the newspaper claimed that it was only an April fool’s day prank .The story had also been published in Hindi daily Dainik Jagran, a fortnight before the official announcement, by the editor, Brajesh Dubey.A businessman reportedly admitted in an interview, that he had received prior warning of the impending demonetization from a source in the government, and that he had sufficient time to convert most of his money into smaller denominations.The chairman of the State Bank of India had also openly spoken in April 2016 about the possibility of demonetization of 500 and 1000 notes. The Communist Party of India (Marxist) (CPI ( M)) alleged that the BJP unit in West Bengal had advance knowledge about the impending announcement, and deposited money just before the announcement. Aam Aadmi Party leader Arvind Kejriwal also claimed that there had been some leakage regarding the move  Kejriwal questioned how Sanjeev Kamboj, a BJP leader in Punjab, posted about the 2000 notes days before the official announcement, and alleged that a sudden spike in bank deposits between July and September 2016 was also due to information leakage.

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A BJP MLA from Rajasthan, Bhawani Singh Rajawat, claimed in a video that 'Ambani and Adani' were informed about the demonetization, and made arrangements. However, he later said that it was an off-the-record conversation, and officially denied the comments.

ReactionsSupportThe decision met with mixed reactions Several bankers like Arundhati Bhattacharya (Chairperson of State Bank of India), Chanda Kochhar (MD & CEO of ICICI Bank) and Deepak Parekh (Chairman of HDFC) appreciated the move in the sense that it would help curb black money. Businessmen Anand Mahindra (Mahindra Group), Sajjan Jindal(JSW Group), Kunal Bahl (Snapdeal and FreeCharge) also supported the move adding that it would also accelerate e-commerce. Infosys founder N. R. Narayana Murthy praised the move.Finance Minister Arun Jaitley said that demonetization would clean the complete economic system, increase the size of economy and revenue base. He mentioned the demonetization along with the upcoming Goods and Services Tax (GST) as "an attempt to change the spending habit and lifestyle.The Indian National Congress spokesperson Randeep Surjewala welcomed the move but remained skeptical on the consequences that would follow. Chief Minister of Bihar Nitish Kumar supported the move .The demonetization also got support from Chief Minister of Andhra Pradesh Nara Chandrababu Naiz  Former Chief Election Commissioner of India S. Y. Quraishi said demonetization could lead to long term electoral reforms. Indian social activist Anna Hazare hailed demonetization as a revolutionary step .The President of India Pranab Mukherjee welcomed the

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demonetization move by calling it bold step. The opinion of the masses varied both ways on micro-blogs and social media sites like Twitter. In general, the move to demonetize and try to hinder black money was appreciated, but the manner in which it was carried out by causing hardships to common people was criticized.By and large, international response was positive which saw the move as a bold crackdown on corruption. International Monetary Fund (IMF) issued a statement supporting Modi's efforts to fight corruption by the demonetization policy.Chinese state media Global Times praised the move and termed it as "fierce fight against black money and corruption." Former Prime Minister of Finland and Vice-President of European Commission Jyrki Katainen welcomed the demonetization move stressing that bringing transparency will strengthen Indian economy. BBC's South Asia Correspondent Justin Rowlatt in his article praised the move for its secrecy and success and elaborated on reason behind demonetization. Swedish Minister of Enterprise Mikael Damberg supported the move by calling it bold decision.Singapore-based paper The Independent published a laudatory article on the move titled "Modi does a Lee Kuan Yew to stamp out corruption in India." Lee Kuan Yew was the Singaporean Prime Minister and is considered the architect of modern Singapore. "From making up his mind to rolling it out, a new Lee Kuan Yew is born in India. It will be reflected in the legacy of this Prime Minister," the article said.

CriticismOn 8 November 2016, Chief Minister of West Bengal Mamata Banerjee called the new declaration "drama". A Public Interest Litigation (PIL) was filed in Madras High Court by M Seeni Ahamed, General Secretary of the Indian National League, to scrap the decision. The High Court dismissed the PIL stating that it could not interfere in monetary policies of the government. Similar PILs were also filed in the Supreme Court of India. Supreme Court of India gave judgement that Government is free to change policy, taking into consideration the

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prevalent socio-economic conditions and that the courts have only a limited role to play. Former World Bank Chief Economist, Kaushik Basu, said that the 'damage' is likely to be much greater than any possible benefits. It has also been noted in the media that black money holders keep only a small fraction of their ill-gotten wealth as cash, hence targeting this cash may not be a successful strategy.

Prabhat Patnaik, a former professor of economics at the Jawaharlal Nehru University, Delhi called the move 'witless' and 'anti-people'. He criticized the simple way in which black money was assumed as "a hoard of cash", saying that it would have little effect in eliminating "black activities" while "causing much hardship to common people."

OppositionA Congress-led opposition, which includes 13 political parties, opposed the current government on the demonetization issue in the Winter Session of Parliament on 16 November 2016. The Chief Minister of West Bengal Mamata Banerjee also met the President Pranab Mukherjee to oppose the demonetization .The debate on demonetization is known to be initiated by Indian National Congress and Anand Sharma in Rajya Sabha on 16 November 2016,while Mamata Banerjee is known to be the first to oppose the current government on the demonetization.On 16 November 2016, Chief Minister of West Bengal Mamata Banerjee led a rainbow delegation comprising political parties of Trinamool Congress, Aam Aadmi Party, BJP ally Shiv Sena, Patidar Anamat Andolan Samiti (of Hardik Patel) and National Conference to Rashtrapati Bhawan to protest against the decision to withdraw 500 and 1000 banknotes. A memorandum was submitted to the President of India Pranab Mukherjee demanding rollback of the decision. Outside the Parliament in a rally the same day, Saugata Roy, a member of parliament from the opposition Trinamool Congress Party, commented, "People are in utter distress, especially the informal sector is totally disrupted. Poor people, daily wage earners, they're all facing difficulty"

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In the demonetization debate on the first day of the Winter Session of Parliament at the Rajya Sabha, on 16 November 2016, Pramod Tiwari from the Indian National Congress, accused Narendra Modi for the demonetization and compared Narendra Modi to Mussolini, Hitler and Qadhafi, while Prem Chand Gupta questioned a statement of Modi from the unscheduled TV broadcast on 8 November, "If it was planned 10 months ago, how did RBI Governor Urjit Patel sign on new note?". While on the other side, Praful Patel criticized the demonetization by stating "the government was not even prepared to recalibrate the ATMs while announcing the move. People's suffering unimaginable. Nobody is questioning the government's intention, but you are unprepared to execute the move". Later, the former Chief Minister of Uttar Pradesh Mayawati stated the situiation to "a financial emergency", by saying "It looks as if Bharat has shut down." Also, Sitaram Yechury from Communist Party of India, questioned the current government on the demonetization move by stating "only 6% of black money in India is in cash to drive his point that demonetization won't curb illicit wealth."On 17 November 2016, in a rally against demonetization of 500 and 1000 notes, led by the Chief Minister of Delhi Arvind Kejriwal and his West Bengal counterpart Mamata Banerjee at Azadpur Mandi, the biggest vegetable and fruits wholesale hub in the national capital, Arvind Kejriwal demanded the withdraw of demonetization in 3 days, or else there would be a rebellion, he said. Mamata Banerjee also stated "I give the government 3-day ultimatum, fix things or withdraw the demonetization scheme".

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AftermathCash rush

Queue at an ATM for 100 banknotes in Howrah, on 8 November 2016, 22:23 (IST)

People queue outside a private bank to deposit and exchange old 500 and 1000 banknotes in Kolkata on 10 November 2016.

The scarcity of cash due to demonetization led to chaos, and some people holding old banknotes, faced difficulties to exchange them as endless lines outside banks and ATMs across India, became a daily routine for millions of people waiting to deposit or exchange the 500 and 1000 banknotes since 9 November. Some ATMs were running out of cash after a few hours of being functional, and around half the ATMs in the country were reported non-functional. Sporadic violence was reported in New Delhi, but there were no reports of any grievous injury, people attacked a bank premise in kollam, and a ration shop was looted in Madhya Pradesh after the shop owner refused to exchange 500 Rs. notes. Several people were reported to have died by some sources while standing in queues to exchange their old banknotes. Some deaths were attributed to lack of medical help due to refusal of old banknotes by hospitals. However, some believe that these deaths cannot be linked to demonetization. Actions were taken against the doctors refusing the treatment. The attributed death toll was 25, till 15 November 2016.

Stock marketsAs a combined effect of demonetization and US presidential election, the share market indices dropped to an around six-month low in the

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week following the announcement. The day after the demonetization announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index was below 8100 intraday.

TransportationMajor highway toll junctions on the Gujarat and Delhi-Mumbai highways also saw long queues as toll plaza operators refused the old banknotes. Nitin Gadkari, the Minister of Transport, subsequently announced a suspension of toll collections on all national highways across India until midnight of 11 November, later extended until 14 November and again until midnight of 18 November.

Bank transactionsIn the first four days after the announcement of the step, about 3 trillion rupees in the form of old 500 and 1000 banknotes had been deposited in the banking system and about 500 billion rupees had been dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters. Within these four days, the banking system has handled about 180 million transactions. The State Bank of India reported to have received more than 300 billion in bank deposit in first two days after demonetization. A spike in the usage of debit card and credit card post demonetization was also reported.In Malda, a district believed to be a transit-point for fake Indian currencies, a large sum of cash deposits in dormant accounts were also reported. According to The Economic Times, more than 80 percent of fake currency in India originates from Malda district in West Bengal.

Income tax raids and cash seizuresThe Finance Ministry instructed all revenue intelligence agencies to join the crackdown on forex traders, hawala operators and jewelers besides tracking movement of demonetized currency notes.

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Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai, Chandigarh, Ludhiana and other cities that traded with demonetized currency. The Enforcement Directorate issued several FEMA notices to forex and gold traders It also raided several forex establishments making back dated entries. Large sum of cash was seized in different parts of the country. In Chhattisgarh liquid cash worth of 4.4 million was seized.

Effect on illegal activitiesThe move also reportedly crippled Communist guerrilla groups (Naxalites) financing through money laundering. On 10 November the police arrested a petrol pump owner at Ranchi when he reportedly tried to deposit 2.5 million, belonging to a person affiliated with the banned Communist Party of India According to Chhattisgarh Police demonetization has affected the Naxalite activities. It is reported that insurgents have stashed more than 70 billion in the Bastar region. Mumbai Police reported a setback to Hawala operations. Hawala dealers in Kerala were also affected the Jammu and Kashmir Police reported the effect of demonetization on hawala transactions of separatists.

Evasion

A jewelry store in a shopping mall with a notice "We accept 500 and 1000 notes", even after they were no longer valid banknotes.

Gold purchases

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In Gujarat, Delhi and many other major cities, sales of gold increased on 9 November, with an increased 20 to 30% premium surging the price as much as 45,000 from the ruling price of 31,900 per 10 grams (0.35 oz).

DumpingA bag of burnt notes was found in Uttar Pradesh following demonetization. Old 500 and 1000 notes were also found floating in the Ganga river near Mirzapur.

DonationsAuthorities of Sri Jalakanteswarar temple at Vellore discovered cash worth 4.4 million from the temple Hundi.

Multiple bank transactionsThere have also been reports of people circumventing the restrictions imposed on exchange transactions and also attempting to convert black money into white by making multiple transactions at different bank branches. People were also getting rid of large amounts of banned currency by sending people in groups to exchange their money at banks. In response, the government announced that it would start marking customers with indelible ink. This was in addition to other measures proposed to ensure that the exchange transactions are carried out only once by each person.  On 17 November, the government reduced the exchange amount to 2000 to discourage attempts to convert black money into legitimate money.

Railway bookingsAs soon as the demonetization was announced, it was observed by the Indian Railways authorities that large number of people started booking tickets particularly in classes 1A and 2A for the longest distance possible, to get rid of unaccounted cash. A senior official said, "On November 13, 42.7 million passengers were nationally booked across all

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classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is a sharp dip from the number of passengers booked on November 9, when 27,237 passengers had booked tickets in 1A and 69,950 in 2A.The Railways Ministry and the Railway Board responded swiftly and decided that: cancellation and refund of tickets of value 10,000 and above will not be allowed by any means involving cash. The payment can only be through cheque/electronic payment. Tickets above 10,000 can be refunded by filing ticket deposit receipt only on surrendering the original ticket. A copy of the PAN card must be submitted for any cash transaction above 50,000. The official claimed that since the Railway Board on 10 November imposed a number of restrictions to book and cancel tickets, the number of people booking 1A and 2A tickets came down.

Municipal and local taxesThe use of the demonetized notes had been allowed by the government for the payment of municipal and local body taxes. This led to people using the banned 500 and 1000 notes to pay large amounts of outstanding taxes, and also advance taxes. As a result, revenue collections of the local authorities have jumped due to the demonetization.

Cash on delivery ordersE-commerce companies saw up to a 30% decline in cash on delivery (COD) orders after the announcement on 8 November. Several e-commerce companies hailed the demonetization decision as an impetus to an increase in digital payments. They believe that it would lead to a decline in COD returns which is expected to cut down their costs.

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The move by the government to demonetize Rs.500 and Rs.1000 notes by replacing them with new Rs.500 and Rs.2000 notes has taken the country with surprise. The move by the government is to tackle the menace of black money, corruption, terror funding and fake currency. From a market perspective, we think that this is a very welcome move by the government and which has taken the black money hoarders with surprise. The total value of old Rs.500 and Rs.1000 notes in the circulation is to the tune of Rs.14.2 trillion, which is about 85% of the total value of currency in circulation. This means that the total cash has to know pass though the formal banking channels to get legitimacy. The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the Gross Domestic Product (GDP) in 1999 and rising to 23.2% in 2007. Assuming that this figure has not risen since then (quite unlikely though) and that the cash component of the shadow economy is also proportional (it could be higher), the estimated unaccounted value of the currency could be to the tune of Rs.3.3 trillion. Now, post the announcement of demonetization by the government this money would have to either accounted for by paying the relevant tax and penalties or would get extinguished. There are higher chances of larger proportion of this unaccounted currency getting extinguished as the tax rate and subsequent legal issues could be prohibitively high for such money.

The positive macro benefits of this move by the government

This move by the government is likely to have long term benefits for the economy. The extinguishing of the major proportion of unaccounted currency would reduce from the liabilities of the government and would add to its finances. This can have very strong implication as the government would get money to spend without borrowing from the market. This would mean that while interest rates can be low, the

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government spending on large infrastructure (we assume that the government would use large proportion for infra spending) projects would kick start capex cycle and push economic growth higher in the medium term. The move is also likely to have a habit changing impact in the Indian populous and there could be increased belief of keeping cash in the banks rather than stashed at home and use formal banking channels for their spending needs. With a large part of the cash moving through the banking channels, the banking sector is likely to be flush with funds in the near term and this would help them reduce cost of funds for such period. Also with more money being kept in the banking channel, some of these low-cost deposits may be sticky and improve the medium to long term Current Account and Savings Account (CASA) ratio of the banks. Another element of the demonetization would be reduction in cash transactions in real estate. This is likely to reduce to real estate prices and make it affordable to some extent. This may be visible more in the rural belt, where many non-farming entities purchase fertile farmland, not for farming but for money parking purpose. The demonetization and consequent reduction in shadow economy would bring the demand for such farm lands down. This move is likely to lead to better tax compliance, raise the Tax to GDP ratio and improved tax collection. This could lead to lower borrowing and better fiscal management. Also with lower cash transactions in the near term, inflation may see downtrend in the near term. Also with higher tax to GDP ratio, the government may also get enough headroom to reduce the income tax rates, which can lead to higher disposable income with people and can improve consumption demand in the medium to long term.

What Raghuram Rajan Thinks Of Currency Demonetization…

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The government's currency swap plan to withdraw Rs 500 and Rs 1,000 bank notes from circulation as a way to demonetize is being hailed by many banks and experts as the ultimate weapon against black money. However, demonetization, as a strategy, isn't new and has been tried before with limited success.

Here's what former Reserve Bank of India governor Raghuram Rajan once said during a lecture on the topic of demonetization and if it worked.

Rajan: I am not quite sure if what you meant is demonetize the old notes and introduce new notes instead. In the past demonetization, has been thought off as a way of getting black money out of circulation. Because people then have to come and say "how do I have these ten crores in cash sitting in my safe" and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is the clever find ways around it.They find ways to divide up their hoard in to many smaller pieces. You do find that people who haven't thought of a way to convert black to white, throw it into the Hundi in some temples. I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes.

Aimed at combating corruption and black money, this move will also cause short-term pain and chaos for the working class, small businesses and nearly anybody who deals with cash on a daily basis.

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Representational photo. Credit: PTI

New Delhi: “This has come as a surprise to everybody. The citizens, the nation and even within most of the government!” economic affairs secretary Shaktikanta Das said at a late-night press conference on Tuesday, an hour after Prime Minister Narendra Modi announced that Rs 500 and Rs 1000 notes would cease to be legal tender at the stroke of midnight.

Why was this decision taken? What effect will it have on customers, banks and India Inc? The Wire breaks it down.

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,

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which in this case are the Rs 500 and Rs 1,000 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 1,000 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 crore was spent during the 2014 general election, while official spending only accounted for Rs.7,000-Rs 8,000 crore.

This of course only scratches the surface: major industries such as real estate has 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 1,000 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

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currency/physical notes such as gold, jewelry, land or any other form of wealth. Therefore, while banning Rs 500 and Rs 1,000 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 1,000 bills, 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 1,000 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.

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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 2,000 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, which 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

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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 1,000 notes, but no official form of identification, will have a tough time in exchanging their notes.

How many Rs 500 and Rs 1,000 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.

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In addition to this, RBI data shows that the share of Rs 1,000 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 1,000 note costs the least to produce as a proportion of face value.  It costs India around Rs 3 to print a Rs 1,000 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 1,000 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.

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 some time. A report published by The Hindu Business line almost three weeks ago (October 21, 2016) notes that Rs 2,000 notes would be coming soon and

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that the RBI said they 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 2,000 note will help. It does seem a little puzzling however. In the RBI and finance ministry press conference today, 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 31 being the last date by which all Rs 500 and Rs 1,000 notes must be turned in), it would circumvent the whole point of demonetizing 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 five 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-

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valuable bank note (the 500-euro bill) in order to curb tax evasion and terrorism financing.

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

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 decommissioning 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 1,000 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 1,000 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 operationalized only by January

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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.

Rs. 43,000 Crore In Black Money Recovered In 2 Years: Revenue Secretary

Revenue Secretary Hasmukh Adhia also said there are close to 5.4 crore taxpayers, of which 1,50,000 have annual income of over Rs. 50 lakhs.

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NEW DELHI:  The Income Tax Department has unearthed undisclosed income of Rs. 43,000 crores through investigations in the last two fiscal years, Union Revenue Secretary Hasmukh Adhia said today.

"While Rs. 21,000 crore have been found from department's searches, the balance of Rs. 22,000 crores have been disclosed from various surveys," Mr Adhia told reporters here.

He did not specify whether the money belonged to individuals or corporates.

"The department is currently busy calculating the tax to be imposed on this undisclosed amount," he added.

Talking about the penalty to be imposed on the Rs. 13,000 crores of black money discovered in foreign accounts of Indians so far, he said this money will be taxed at the rate of 120 per cent.

Mr Adhia also said there are close to 5.4 crore taxpayers, of which 1,50,000 have annual income of over Rs. 50 lakhs. As many as 1.8 crore are TDS taxpayers.

On new taxpayers, he said, "Out of our projected target of having a new taxpayer base of 1.3 crore, 90 lakhs have already come within our fold and we have already garnered an additional revenue of Rs. 10,000 crores from them during the past two years."

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About the Income Declaration Scheme of 2016 which kicked in on June 1 and will close on September 30, he said tax officials have already held 294 awareness meetings across 118 cities.

Mr Adhia made it clear that the declaration window will not be extended beyond September 30. Last week, Prime Minister Narendra Modi had also said there would not be any extension.

NEW DELHI: More than 26 lakh fake notes of the denomination of Rs 500 and Rs 1000, with a face value of approx. Rs 167 crore, have been either recovered or seized by the Reserve Bank of India (RBI) and law enforcement agencies in India from 2011 till 2015 as per data on the Lok Sabha website. 

The data as stated above has been released by the Lok Sabha, which has sourced it from the National Crime Records Bureau (NCRB). This data was presented in response to questions raised at Lok Sabha. 

Among the fake notes recovered from 2011 till 2015, the highest are of the denomination of Rs 500. Furthermore, the number of fake notes of denominations of Rs 1000 and Rs 500 are greater than those of Rs 100 and Rs 50. 

The Economic Times earlier today reported that the government’s decision to demonetize Rs.500 notes was mainly prompted by confidential reports of security agencies revealing the rampant use of notes of this denomination in the fake currency network. 

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Union Finance Minister Arun Jaitley in an interview to media today also stated that the RBI had initially recommended to demonetize only Rs 1000 notes. But later the government also decided to ban Rs 500 notes in a bid to root out black money and Fake Indian Currency Notes (FICN). 

FICN seized The data reveals that 99,050 and 3 lakh fake notes of the denomination of Rs 1000 and Rs 500 were seized in 2011 alone. The numbers increased over the years. 

A total of 7.64 lakh counterfeit notes of denomination of Rs 1000, having a face value of Rs 76.47 crore were recovered. A total of 18.20 lakh fake notes of the 500 denomination, having a face value of Rs 91 crore were recovered. 

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in reply to a question in the Rajya Sabha said the face value of FICN in circulation was found to be about Rs 400 crore. The data was revealed in a study undertaken by the Statistical Institute (ISI), Kolkata. 

Pakistan conspiracy Sources to ET explained that the quality of the FICN indicates that they can be made in currency making machines, which are only available with sovereign states. 

According to today’s Economic Times report, in more than 95 per cent cases, fake Rs 500 notes were traced to Pakistan. 

The then Minister of State for Home Affairs Haribhai Parathibhai Chaudhary on December 8 last year in reply to a question in the Lok Sabha had said, "As per the inputs available, high quality fake Indian currency notes (FICN) are printed in sophisticated presses located in Pakistan. High quality fake Indian currency notes seized in India and abroad, originate only from Pakistan which has created a self-sustaining criminal network in the South and South-East Asian Region for infusing FICN into India." 

The smuggling of FICN into India occurs from neighbouring countries, including Bangladesh, Nepal and Pakistan. 

Terror funding The FICN being pumped into India is also used in terror funding. "Out of the 11 cases being investigated by the NIA involving production, circulation and smuggling of high quality counterfeit currency, in one case, evidence has come on record indicating that fake currency was being used to fund terrorism. During the investigation of the case pertaining to the activities of David Coleman Headley and others, it was

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revealed that Fake Indian Currency Notes were given to him for use in India," Chaudhary had said in reply to another question in the Lok Sabha in March last year. 

Measures-taken A special FICN coordination (FCORD) group has been formed in the Ministry of Home Affairs (MHA) to share intelligence amongst the different security agencies to stop the circulation of fake currency notes in India. 

The government has also constituted a Terror Funding & Fake Currency Cell (TFFC) in the National Investigation Agency (NIA) to probe terror funding and fake currency cases. 

A Memorandum of Understanding has been signed between India and Bangladesh to prevent the smuggling and circulation of fake currency notes. 

The government has also constituted a Combating Financing of Terrorism Cell (CFT Cell) in the MHA to coordinate with the Financial Action Task Force (FATF), an inter-governmental International Body dealing with anti-money laundering and CFT issues.

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