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How Rs 500, Rs 1000 Notes Ban Will Impact The Economy

In a bold move to curb black money, Prime Minister Narendra Modi announced a ban on Rs 500 and Rs 1000 currency notes effective Tuesday midnight. Although there will be some inconvenience for a couple of days but people are welcoming this move for its long-term gains. But will this move really bring any good to our economy? Will it help in dealing with black money menace? Read on to find out what impact will withdrawal of Rs 500, Rs 1000 notes will have on various sectors of the Indian economy.

Rs 500, Rs 1000 Notes Ban


Black Money

There is no denying that demonetization of Rs 500, Rs 1000 notes will help eradicate the black money menace. With a ban on Rs 500 and Rs 1000 bank notes, the hoarders of black money will either have to come forward and declare their income or just keep the notes rotting. If the hoarders decide to come forward and declare their income, they will be probed as to how they earned the amount. Furthermore, deposits over Rs. 2.50 lakh will be taxed.

Increase In Tax

If you deposit a huge amount in your bank amount which does not match your declared income, then it will be considered as a tax evasion case. In such a case, you will have to pay the tax amount as well as a penalty of 200% of the tax payable as per the section 270(A) of the income tax act. With this, government’s tax revenue collections will be increased.

Counterfeit Currency

This move will also cease the spread of counterfeit currency. The fake OHD notes are used to promote terrorism. Various terrorism operations are being run using counterfeit currency. Black money and counterfeit currency are both used by terrorists to fund their arms and weapons. But once the OHD notes are withdrawn from the circulation, it will certainly help fight terrorism.

Cashless Economy

The recent announcement by Prime Minister Narendra Modi is a major step towards a cashless economy. Since the announcement of demonetization of Rs 500 and Rs 1000 notes, online payment portals like Paytm and Freecharge have witnessed a huge number of active customers. E-commerce websites like Amazon India and Flipkart have also stopped COD (cash on delivery) option and are encouraging people to make payments with their debit/credit cards or other electronic banking methods.

You can use various digital payment platforms to pay your for your electricity bills, mobile, landline bills, buy groceries and much more. Although new notes of Rs 500 and Rs 2000 have started rolling out, but there is a limit on the withdrawal amount, which will again force people to make cashless payments using digital wallets and credit/debit cards. Surprisingly, a huge number of people who never bothered about digital wallets are also now making use of the same.

Rural Economy

Prime Minister Narendra Modi has always encouraged people to get their bank accounts opened. There are still a huge number of people in villages who do not have a bank account. A major section of urban economy has already started making cashless transactions, but rural economy still relies on hard cash for making transactions. Those people who still do not have a bank account or a valid identity card, will definitely face troubles in getting their cash exchanged.

Increase In Bank Deposits

Old currency notes in the denominations of Rs 500 and Rs 1000 can only be exchanged through banks and post offices. Starting November 10, 2016, the OHD notes can be exchanged for value at any of the 19 offices of the Reserve Bank of India or at any bank branch or at any Head Post Office or Sub-Post Office. You can get up to Rs 4000 per person per day in cash irrespective of the old currency deposited till November 24. Anything over and above that will credited to your bank accounts and will result in increased bank deposits. This will also spike the lending activity of banks.

Deflation In The Economy

Deflation is expected to be witnessed in the coming months. The hoarders of black money may decide to stash their money instead of declaring it. This will result in deflation due to reduction of total currency circulation in the economy. The total money in circulation will be decreased and as a result of deflation, the value of money will be increased.

Spike In Jewelry Industry

It is expected that the jewelry industry will also be heavily impacted with Narendra Modi-led government’s recent decision. A major chunk of people is likely to invest in gold and other precious metals, as people have more faith in precious metals than currency notes.

Real Estate

The real estate industry is likely to be adversely affected by this decision. There might be a downward pressure on on the real estate prices. Most people make real estate transactions with black money. Only a few buyers use white money to buy property. With a few buyers in the market, the demand for the land is likely to go down while also driving down its price.

Our Take

Demonetization of Rs 500, Rs 1000 notes may have come as a shock for most of the citizens, it may have created some short term inconvenience, but it will prove to be a boon in the long run by ceasing the activities of corruption, money hoarding, money laundering etc. and we can expect a humongous  amount of money coming into banks because of this ban.

Also Read: 6 Tips For Secure Banking Transactions

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