Business, Finance, Public Issues

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.)

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22 thoughts on “India should do away with 500 and 1,000 Rupee notes

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  2. RBI should take the this post very seriously, I mean it, esp the title which sums up the action proposed by the author. What is shocking is the fact that 75% of the country, in absolute terms, does not need these notes at all. And How much of the rest really need them but my guess is the number is pretty small and can definitely live w/o them. And Plus these higher denomination notes only help in supporting terrorism and easy stashing away of black money.

    On the positive side, this Would address fake currency issue which are allegedly coming in from pakistan (resulting in damaging economy and price rise, which I feel is the biggest issue for the government right now).

  3. Abhijit says:

    Couldn’t agree more! even though I would like to think about the convenience of having to carry lesser notes (which can of course be replaced by debit/atm/credit card), there is definitely merit in the analysis and reasons presented by Ashutosh. I am really wondering why the idea of these denominations came in the first place. was it coz it is a natural process of evolution or something else?

  4. We feel RBI’s deliberation on suggesting bankers the use of “sorting machines” needs further attention to looking for “Genuine & Accurate fake note detectors” which work on data cum image based technology. Sorting machines are working just on image base technology which is limitedly compatible and useful just for fitness/quality sorting of notes and are too poor to detect super fake notes. Sorter just throws out large number of doubtful notes with comparatively large number of false alarms and carries very high possibility of passing super fake notes as genuine resulting into issuance of such notes at cash counters or at ATM centers.

    The kind of machines Indian Banks at cash counters needed are the machine which can verify not only the images but also can check the chemical and physical properties of papers, inks, resins and other materials used in production of note. The machine should be capable of not allowing any fake note to pass as genuine. It is possible only with the detectors specially developed considering the large number of intricacies concerning to Indian notes. A multi currency super fake note detector/ Currency verification & processing Systems is recently launched by an Indian company having web address http://www.paradigmcashsystems.com It is suggested therefore that all the concerned authorities form RBI, Government of India, Banks investigative agencies etc should invariably go through the crucial informations provided in the web site. It could help in curtailing the menace of fake notes prevalent in our country.

  5. In case Bankers wish to ensure that Fake Indian Currency Notes are not being handled at their counters or ATM, the Banks should sincerely deliberate on and give due consideration for deploying effective and 100 % accurate Automatic Desk Top Fake Currency Notes Detector instate of Desk Top Note Sorters which have been not compatible at Bank branches for having other than Detection functions as basic functions and detection of fake not being secondary and inaccurate.

    There have been no accurate Desk Top Sorters available on the globs which can been fitted inbuilt on the ATMs for Back office uses of filling and refilling notes for maintaining stock of notes in the ATM machine for ensuring continuity of withdrawal service to the public without issuing Fake Indian Currency Notes.

    Most of the Banks have hired private agencies for refilling genuine notes to ensure no fake note being issued from ATM. The reasons of issuance of fake notes from the ATM probably could be the involvement of human elements either from within the Banks or from the outside agencies.

    The investment in such 100 % accurate Automatic Desk Top Fake Currency Notes Detector can be recovered in terms of avoiding losses and hassles of much complicated legal formalities involving large number of legal agencies as also for avoiding situations of loosing goodwill in the eyes of general public at large on account of Fake Indian Currency Notes being handle erroneously or by human dishonesty at different level.

    Paradigm EXC 6700 –I, have emerged as 100% Accurate Automatic Desk Top Fake Currency Notes Detector. Bankers should invariably refer to http://www.paradigmcashsystems.com and they sure will get much awaited solutions for serving nation by detecting fake notes that are likely to be handled intentionally or un intentionally by involved human elements.

  6. This is to make a point that there have been no accurate Desk Top Sorters available on the glob which can be fitted inbuilt into the ATM machine from the Back side to automatically prevent refilling of Fake Indian Currency Notes in the ATMs without interference and indulgence of Bank staff. On the contrary most of the Banks have hired private agencies for refilling only genuine notes. The reasons of issuance of fake notes from the ATM probably could be the involvement of human elements whether from within the Banks or from the outside agencies.

    In deed Indian Banks should deploy Desk Top Detector instate Desk Top Sorter for removing fake notes for refilling notes in the ATM

    In real sense ATM in our country mean “Any Time Money” and not “Automatic Teller Machine” – A Bank Branch without human being that accepts the cash Deposits and issue immediate credit to the depositor who in next movement can withdraw immediately credited amount in case of emergency. These kinds of machines are installed in highly advanced countries only.

    “Automatic Teller Machine” in the advanced countries have been equipped with Currency Validator/Acceptor/ Detector rather than sorters and fitted on front face of true ATMs which return/roll back Fake/ invalid notes immediately to the depositor and accept only valid/genuine notes giving credit of valid notes only.

    ” Automatic Teller Machines” are also equipped with automatic Validator/ Acceptor/Detector on the Back Side of ATM for Back side office only open able by Bank staff from behind for refilling only Genuine Notes. It works in same fashions without interference of human elements to that of fixed on the front with some differences in mechanical structures facilitating refilling without element of human interference.

    Any Time Money is the Indian version of ATM just can function as Cash Dispenser and not Cash Acceptor. The public are made to Deposit sealed envelop of Money and detailed Deposit Slip in the slot as that of post Box where posts are dropped in envelops. The depositor will get credit only on the next day after manual verification by cashiers of the Bank and their satisfaction about the amount mentioned in the deposit slip. The machines are highly human interfered.

    Similarly ATM centers while refilling notes practically need off line accurate fake note detector which can segregate fake notes most accurately so that only genuine notes are refilled manually by removing machine detected fake notes.

  7. @Kirit: I understand your sentiment about the detection @Banks or more specifically @ATMs. However, this would involve a significant investment from the banks’ end and without RBI interference, it is unlikely to happen. I am not too much aware of the technology aspects that you mention, but I assume that there would be relatively quick ways/machines to eliminate the fake notes from bulk currency that each bank handles …

  8. Dear Ashutosh,

    We have been pursuing the matters with RBI. RBI seems to have their own constraints for they being controlled by many other Governmental agencies and seems to have been acting as toothless lion handling general affairs of Banking industry as controller. Bankers tend to ignore RBI guidance’s easily.

    Indian Bureaucracy is very hard, slow, complicated and no individual or law enforcing agency so far has been coming forward to support us!!.

    We thought, with great National Causes we will be honoured with wholesome supports from Bankng Industry,Government Agencies and concerned ministry , instate have been sustaining nothing but embarrassments and frustrations for no right response from any responsible agency.

    Still Indian is Great !!!!

    We need voice raisers/ messanger from the general public who can carry our messages to all those concerned to detection of Fake Notes at Cash Desks and ATMs

    Very much frustrated !!!

    Thanks

  9. I think the aticle is flawed. Why the ratio of per-capita income and highest salary. Instead of per-capita income, one should take the average income of the top 50% of India and that would be very close to that of U.S. In India, per capita income is low because there are some people with no money but 1000 Rs. notes are used by people higher up on the economic ladder.

    Any comments?

    Thanx.

  10. Pratik – Thanks for the comment.

    If you look at it closely, the ratio is per-capita-income to highest currency denomination and not highest salary.

    Also, I agree that India’s income distribution is skewed. But I guess it is a little more highly skewed than one would expect. If you look at page 6 of this famous report from McKinsey (http://www.scribd.com/doc/306245/Mckinsey-The-India-consumer-story), it tells you the extent of skew. As such, even if one takes the top 50% of population by income, we would be way off than most developed countries.

  11. Sachin says:

    Just pointing out 1 mistake: 67 crores is (approx.)= 6.7% of India’s total population and not 67%, assuming we are 1 billion.

  12. Sachin says:

    I agree with Pratik in the point that we cannot reach to the conclusion(that the Rs500/1000 notes are not required) on the sole factor of per-capita income. There are lot of other factors that should be considered while deciding the highest denomination of notes. I can think of 2 for now:
    1) The skew in the income. In the developed counties the income band width is lesser than India. The %tage statistics won’t work here. We need to find the median(and not mean) of the incomes. A more fairer comparison would be when you compare the Income median Vs the highest denomination of note available in a country.
    2) Second factor could be how much hard cash(volume) gets exchanged in the country on daily/monthy basis. People in developed counties mostly use credit/debit cards for most of their transactions. This is not the case in India yet. (I do not have the statistics for this though, if someone can find and post here it would be great). Also a lot of small shops are not yet equipped to accept credit/debit cards. We have to pay in hard cash. Hence we require more cash at hand than those developed counties.

    It is not a simple question as it seems and we need a through and complete analysis before we reach to any conclusion. And what I feel is that the RBI policy makers must have definitely thought of all this before deciding the highest denomination (they are way qualified that we mortal souls :-) )

    Also regarding your other points you need concrete data to prove your point.
    for eg. When you talk of corruption, do have any statistics that say that the corruption has increased by X% after the Rs.1000 notes were introduced?

    Some of your points make sense but not to the point where we could reach to a conclusion. We also need to know the other side of the story.
    (ie. why did RBI decide in first place to have notes of these denominations 1000 and 500. what was the need? I am sure they had their reasons )

  13. @Sachin – Thanks for the detailed comment

    I agree that a lot more detailed analysis needs be done. However, some things did not make sense to me (at least as per my understanding) and so the post :)

    1. In terms of your argument about taking the median and not the mean – The median would infact be lower than the mean in India’s case (please refer to page 6 of http://www.scribd.com/doc/306245/Mckinsey-The-India-consumer-story)

    2. About credit cards, I totally am with you about the percentage of credit card transactions being very high in other countries. I do not have a view on that because of lack of data. This document on the RBI website is helpful to gain some insights http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/12CM080809.pdf about the currency circulation. We can compare this to data from other countries http://www.bis.org/publ/cpss88p2.pdf .

    In term so corruption, the Corruption Perception Index shows that India was ranked 71 in 2002 and was ranked 85 in 2008 (indicating relative increase in corruption). However, I am not saying that the currency denominations were responsible for this increase – but that doing away with the higher denominations might helping in controlling it.

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