The 500 (RM33) and 1000 (RM66) rupee notes were removed from circulation from by India's Prime Minister Narendra Modi on Tuesday. The notes are no longer legal tender and citizens had no choice but to deposit their cash in banks or exchange them for other bills at banks. So why did PM Modi do this and what are the people of India doing with their defunct cash?
Why were the notes banned?
Modi was elected into office in 2014 promising to eradicated the "black money" financial transactions that use cash to avoid paying taxes. The notes were also easily counterfeited and Modi has singled out militant groups, saying they finance attacks on India using the counterfeit money.
How have Indians avoided paying tax?
It's reported that only three percent of Indians pay any income tax and evaders usually deal mainly in cash and hoard it at home to avoid declaring their income. These are the ones who will have to answer for their spike in income if they suddenly deposit it all into their bank. Temples and ashrams, where donations are laundered, are next on the list along with illegal cricket betting rings and property dealers who deal in black money.
What can they do with their stockpiles of cash?
Government flyer explaining what Indians can do with their notes. No idea why PM Modi had to be in the flyer, but there it is. Image: Indian Government
Banks in India have already released the new Rs500 and Rs2000 notes and a redesigned Rs1000 note will be introduced in the next few months. They will have from 10 November to 30 December to exchange their old notes. Exchanges are limited to Rs4000 a day with a valid ID. They can also deposit all of their old notes without limit.
How have Indians taken the news?
Understandably, panic ensued after the announcement. Lines have snaked around banks in India and people have found themselves unable to pay for basic needs. A woman in India reportedly killed herself
after the ban. She had sold a plot of land for Rs5.5 million in cash and thought that her cash was now useless.
"I'm going to India soon. What should I do?"
Well, it's business as usual for travelers to India. Common practise is for Malaysians to convert their Ringgit to to USD and exchange the notes when they arrive in India. Money changers in Malaysia have frozen the exchange of Rs500 and Rs1000 notes as well and there is no word as to what our money changers will do with their surplus cash.