Demonetization of Rs 500 and Rs 1000: Is This a Silent Approach to Facilitate Digital Transactions?
Tuesday evening Indian Prime Minister Narendra Modi announced that Indian currency denomination Rs 500 and Rs 1000 will cease to be a legal tender from the midnight of 8 November. The announcement came like a bolt from the blue. The government decision received mixed reactions ranging from stupefaction to scorn. Many criticized the decision and many welcomed it as a much-awaited gesture to control black money. From what we know, it seems to introduce this change was a well-calculated government strategy.
Black Money is one of India’s biggest nemesis. According to sources, India amounts as much as $460 billion black money a year. The figure is probably bigger than the GDP of Argentina. The worst thing is, all this money lies beyond the reach of the tax authorities, creditors, and anti-corruption investigators.
— Narendra Modi (@narendramodi) November 8, 2016
The Reason behind Surprising Move
The primary reason to introduce such radical change is to thwart illegal activities related to Fake Indian Currency Notes. According to one of the revelations made by Indian Minister of the State for Finance, Mr. Arjun Ram Maghwal, the value of circulating FICN is about 400 crores which remained constant for about the last four years.
In order to stop the menace of FICN various government agencies such as Ministry of Finance, Ministry of Home Affairs, Reserve Bank of India, security and intelligence agencies of the Centre and states were working in tandem. The shocking truth — about 50% of the total FICN value was constituted by Rs. 1000 note denominations prompting the government to take major steps and stop the further extent of this menace.
The worst-case scenario, funding terrorism, funding for human trafficking’s, drug dealings, and funding other nefarious activities like cattle and arms smuggling are the major objective of FICN. The increased circulation of fake notes crippled the Indian economy as it suffered from deteriorating currency value. It is expected that current inflation will be reduced dramatically after ceasing the legal tender status of two major currency denominations, as conspicuous consumption will come down.
Scrapping Rs. 500 and Rs. 1000 Currency Denominations was a Strategic Approach
Prime Minister Mr. Modi, for the last two years, has undertaken and introduced several policies to rule out the black money entry into the market. Setting up a Special Investigative Team (SIT), introducing a law for voluntarily disclosing foreign income and assets, amendment of the Double Taxation Avoidance Agreement with Mauritius and Cyprus. Taking a step further, the government even reached an understanding with Switzerland to reveal the information and names of Indians hold an account in HSBC bank and Amending Benami Transactions Act.
Recently Mr. Modi played a crucial role in constituting a multi-agency group with Central Board of Direct Taxes that would facilitate the speedy and coordinated investigation of the alleged Indians whose names appeared in Panama Paper Leaks and those who supposedly have undisclosed foreign assets and property. The development and implementation of Income Declaration Scheme 2016 finally came forward as a structural strategy that offered a last chance to black money holders for revealing their income. Indeed, today we can say that all these steps were merely a preparatory stage for the final strike made on November 8, 2016.
Is it Modi’s Initiative towards Cashless Digital Economy?
According to MasterCard, with the cash-to-GDP ratio of 12 percent, India is one of the topmost cash-intensive economies in the world. The Cash-to-GDP ratio of India is almost four times that of Brazil, Mexico, and South Africa. The scrapping of Rs. 500 and Rs. 1000 notes can also be seen as an initiative to facilitate cashless or digital transactions. It seems effective to rely on online transactions or virtual wallets instead of carrying a wallet full of Rs.100 currency notes.
Nevertheless, the other announcement calming reappearance of Rs.500 currency notes after a total makeover and introduction of Rs. 2000 currency notes do not justify government pushing towards cashless or digital transactions. The move surely is an eye-opener for those who were able to but stayed away from digital transactions.
Many small businesses and consumers in India prefer cash transactions, as they want to escape sales tax and avoid higher transaction costs of up to 3% on electronic payments. The Indian government is already in the process of offering tax concessions that would increase the use of and reduce the cost of credit, debit, and online payments. In addition to that, the income tax ministry is in the process of checking the liability of offering consumers certain tax rebate if they are engaged in digital transactions for a specific portion of their expenses.
Already the Modi government has rolled plans to provide bank accounts to every household. Moreover, the government has made it clear that state subsidy payments must be deposited in the people’s bank accounts only. A few months back, PM, Modi in one of his radio speeches urged listeners to stop using cash wherever possible; instead, he appealed them to start using digital transactions.
Until and unless, the Indian private sector that is quite nimble, initiates and gets involved in the cashless transactions, the evolution of going cashless or digital transactions will not gain momentum. The best thing is along with the RBI Indian government is already laying a concrete ground that will allow the private sector to lead India towards a cashless future. The “Unified Payment Interface” rolled out by RBI Governor; Raghuram Rajan has made it seamless for Indian consumers to transfer money using their mobile phones. A major boost in cashless or digital transactions is expected after such reformatory changes.
Many reasons supposedly point towards how easily and speedily India adopts to digital transactions compared to other countries. Despite government efforts and reform strategies, many poor and migrants in India struggle for chronically accessing the inefficient banking system in India making Modi’s dream of digital transactions a great possibility of leapfrogging. If we succeed in offering a seamless, convenient and a frictionless method of money transfer, India will surely embrace digital transactions in the same way it has embraced mobile phones leaving behind fixed-line telephony. The faster integration of smartphones and rapidly increasing internet user base in India is the foundation of future digital transactions. Let Us Make It Happen.
Digital Transaction is The Annexation of Sphinx Solutions and this is Where We Come into Play
Sphinx Solutions believing in ethics and vision of Indian PM Narendra Modi support cashless transactions. In fact, we are using our infrastructure and strength to promote digitization that will ultimately lead the Indians to embrace digital transactions. We help enterprises and consumers to digitize their processes we provide solutions that bring about reformatory change in an organization and we develop mobile applications that make it easier for a business entity to initiate digital transactions.
Fondly called as Prime Minister Modi’s Surgical Strike against Black Money, this decision is the beginning of new corruption-free, black money free and a healthy Indian economy. PMs Vision to bring Real Estate Prices, Higher Education, Healthcare and other facilities within the reach of common people. We at Sphinx Solutions are doing our best to follow the vision of our Prime Minister, Creating a Digital India.
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