Pros and Cons of Scrapping Rs. 500 and Rs. 1000 Currency Notes

A good move. A big blow to Fake currency. We have been listening about fake currency notes of Rs. 500 right from our childhood, no one easily trusted Rs. 1000 bills. This step will suddenly curb down the fake currency market and terrorism. Much of the black money and fake currency that was used to fund terrorism would be halted since the validity of these two big currency notes has come to an end.

A rational approach would be taking into account the ways by which it will curb the black money and what are the loopholes in doing so. The pan account for those who deposit more than Rs. 50,000. Would be required. This may help the income tax department to track people and collect more taxes but no way has been defined to sack black money holders if they come and deposit their money into banks.

The loopholes of the system may include the following:

1.   The black money holders may deposit the money through different channels. Through tens of different accounts of their family members, friends and other channels. The biggest channels for domestic money laundering would be the sectors that enjoy exemption from taxes. For example: charity and religion. The babas, mandirs and Masjids are not taxed. What if the black money holders give their black money (Rs. 500/ 1000 notes) as charity to these entities (that are exempted from tax) and then get the money back from them in the form of new currency notes when the new currency notes are in circulation. They can do this in return of small amount to money?

2. The agriculture sector is also exempted from tax. In 2014-15 alone more than 400,000 tax payers claimed exemption from tax for their agricultural income. The small and big farmers do not have to pay income tax over their agriculture income. Not only the farmers but big multinational corporations like Monsanto, Kaveri seed company limited, Sri Ram fertilizers, Agricultural units of Aditya Birla group are also exempted from income tax. Not only these but the rich Farmers of states like Punjab, Haryana etc. who earn in crores are also exempted from taxes. The black money holders can deposit the money with the help of these channels as well.

3. There can always be transactions of 500/ 1000 notes for the first 50 days in sectors like jewelry business where the small black money holders can buy gold for their black money. This is because the jewelers can deposit the money in the banks and say that it is the money that they received 2 months back. This can be done safely at a nominal rate.

There can be other channels as well of which I am unable to think now.

Does the government have ways to check these channels as well?

Other factors:

It may be painful for Mamta bannerji, because in states having corrupt governance it would be a tough time for many politicians who have huge amount of black money in cash. But I was wondering when I saw Baba Ramdev appreciating the news. He was the one who was totally against the big notes/ bills during the tenure of UPA II. 

Other than this RBI officials will have to think that those who earn less than 2000 per month and other Khudra market will require more than enough bills of Rs. 50 and 100 because 2000 is too big to handle. 

"So RBI will end up spending more for printing more currency notes of Rs. 100, 50 and 500 and 2000. According to a report more than 85% of the money was circulated in the form of Rs. 500 and Rs. 1000 currency notes. So it will cost too much for the exchequer to print the new and scrap the old currency notes.

[If all this additional money (a total of Rs.6.666 trillion) has to be printed in Rs. 100 currency notes it would cost RBI about Rs.11,900 crore, which is more than a four-fold increase. This is without taking into consideration the increased costs of operating ATMs (since they would need to be refilled more often), and of handling money in general.

In other words, there is a significant cost to stopping issuance of Rs.1,000 and Rs.500 notes, as advocated by Ranade, and these costs should be weighed against what misuse of high-value notes costs the economy, before we make a decision. (Source: http://www.livemint.com/Politics/fhNlITluEPxCOHef3GSA6H/Scrapping-Rs500-Rs1000-notes-a-costly-idea.html)]

Now with new currency notes of Rs. 2000, wouldn’t it be more easy for black money transaction in future?

New note of Rs. 500