India should do away with 500 and 1,000 Rupee notes

These days, as soon as one steps out of the house, it is amazing how quickly a 500 or 1,000 Rupee note turns into meager change. Everybody is talking about rising prices, inflation, increased ‘essential’ expenditures etc. I think it is still prudent to talk about lowering the highest denomination notes available in India … and I would try to argue why.

The National Sample Survey says that in 2004-05, ~67 crore people had a per day per capita consumption of less than Rs. 20/- . People earning these amounts can be assumed to be living hand to mouth and as such, savings are a distant dream. The high denomination notes are useless for these people (~60% of the total population) who have to spend everything they earn the same day.

Comparing to other countries,

Country          Per-capita income(I)         Highest currency denomination(D)       Ratio(I/D)

U.S.                       ~47,000 USD                                 100 USD                                      470

U.K.                      ~24,000 GBP                                    50 GBP                                       480

Japan                  ~4,000,000 Yen                            10,000 Yen                                    400

Brazil                   ~16,000 Real                                   100 Real                                     160

China                   ~22,000 CNY                                   100 CNY                                      220

India                   ~47,000 Rupee                              1,000 Rupee                                  47

our per-capita income to highest currency denomination ratio is pretty low. Till the time our per-capita income does not increase to atleast 4-5 times of the current levels, we do not need such high denomination notes.

The recent spurt in fake currency circulation can also be checked in case RBI decides to do away with the two highest denomination notes. Most of these fake notes are of the 500 and 1,000 Rupee denominations. If the RBI asks everyone to surrender the notes and exchange them with lower denomination ones, most fake notes would be seized. It would become very uneconomical and not worth the effort for the people who circulate these fake currencies and route them through their network in different neighbouring countries. Various terrorist activities are also funded through gains from the fake currency racket and that could also be curbed.

The same argument goes for the black money in the country. One would expect all this money (i.e. that available in paper form) would be in these denominations (for the sake of convenience of the handlers). People trying to exchange huge amounts of cash for lower denomination can worry about their assets getting checked for irregularities (the government can undertake these investigations through its various vigilance arms).

The availability of high denomination notes leads to people getting the opportunity to avoid using banks, even for high value transactions. As a result, the government finds it difficult to check for money laundering and tax evasion activities. Discontinuation of the high-end notes would make it almost infeasible to transact with paper-currency for deals worth above a certain amount (say, 50 lakhs). All such deals would have to be handled through financial institutions and can be better tracked.

As Baba Ramdevji says, this would also lead to corruption coming down. Huge bribes, donations etc. that go into lakhs and crores can no longer be handled manually for as he says,  “it would require a vehicle to be filled with notes to total these amounts”.

It all seems like after the initial euphoria – getting notes exchanged, assets irregularities being checked, tax evasions getting caught etc – this would work for the better of the country. The notes would be missed in the upper middle income and high income groups, but that is a small price to pay.

(There would be arguments against the notion and I would look forward to discussing these in the comments section, if anybody brings them up.)

Tags: , , , , , ,

Leave a Reply