RBI All Set to Withdraw Pre 2005 Currency Notes ..Black Money Finding Hideouts in Glitters and Gold

RBI announced to phase out pre-2005 currency notes in January 2014 with the objectives to remove soiled and old notes; eliminate counterfeit currency; and to surface the underground black money. These pre-2005 notes can be exchanged through banks till Jan 2015; earlier the deadline was June 30, 2014. Thus public whether, customer or non-customer can freely avail the exchange facility in all the banks till Jan 01, 2015.

How to Identify Pre-2005 notes

Well, examining the notes is not rocket science as the notes issued prior to 2005 did not have the year of printing mentioned anywhere on the note, whereas the notes issued after 2005 had the year mentioned on the reverse side in the middle of the bottom row.

Some Facts – Black & White

· It is estimated that size of India’s black economy is around 30% of the total GDP

· A large segment of population exists who have stocks of bundles of notes in their lockers and underneath their mattresses – businessmen dealing primarily and majorly in cash, the corrupt bureaucrats, industrialists, politicians and real estate agents are to name a few.

· The possibility to approach agents who agree to replace old notes with new ones in lieu of hefty commissions cannot be dispelled.

· Pressure on undeclared currency would result in diversion of black money into other commodities like gold, silver, diamond, platinum or real estate etc and ultimately raising the prices of these assets.

· As per the geographical spread of India, around 70% of our population resides in rural and semi-urban areas and the poor and illiterate might fall prey to the intermediaries who may deceive them into believing that the notes are worthless and start charging heavy commissions for the exchange process.

· People engaging in the cash transactions like small shopkeepers, auto drivers may not be willing to accept pre-2005 notes to be on safe side.

· Removing fake notes from the system completely is not possible because as per the information given by National Investigation Agency (NIA), “post-2005 notes have already been counterfeited and have started circulating.” Most of the fake currencies are not printed in India but in the neighboring countries.

· Probably the wedding invites of the forthcoming weddings would have these words written “No pre-2005 notes please” instead of “no gifts please”.

Thumbs up to the Decision – the Positive Side

· Notes that are soiled and spoilt by daily use would be replaced with new ones

· Elimination of a portion of counterfeit (fake) currency notes.

· Any transaction of Rs. 50,000 or above requires submitting an authenticated copy of PAN card which the bank will forward to the IT department which may decide to investigate.

· Thus, the tax authorities might be able to unearth black money. However the possibility of exchanging less than Rs. 50,000 from one bank and the remaining from others is still to be put under scanner.

Some Suggestions:

· The problem of exchanging less than Rs. 50,000 from one bank and the remaining from others can be reduced by limiting the amount to Rs. 25,000 and every transaction may also be recorded by the banks which should be available to all the banks just as credit ratings.

· The major investments or accelerated investments in gold, real estate or any other precious metal or assets should be put under scanner and scrutiny.

· RBI should ensure that each bank has adequate stock of newly printed currency to facilitate the exchange process as well as for ATMs.

· RBI should also advise banks to stop issuing pre-2005 notes across counters or through ATMs forthwith.

· The idea of making monetary wealth virtual is very much appropriate here. RBI may encourage digital transactions to reduce cash transactions as much as possible since that will lessen the chances of circulation of counterfeited notes. This can be done by providing discounts, offers, schemes, plans, benefits to the digital market customers directly.

· RBI may start with the system of plastic notes instead of paper notes because of two reasons. First, these eco-friendly notes will last longer than paper notes. Secondly, counterfeiting of these notes is difficult because of the technology involved in making them.

· RBI needs to devise a promotion strategy to communicate this message across the rural and remotest areas of the country. RBI may start awareness campaigns through mass media like TV and radio to spread this news.

· The government should take the help of local communities, NGOs, gram panchayats, block officers to spread the awareness. Street plays and local demonstrations may also be adopted as effective tools in the rural, local and semi-urban areas of the country among the illiterate or less literate or less aware masses.

Conclusion

The step taken by RBI is a welcome decision, however it should ensure that the desired results are achieved since the rural poor may continue to hold such a currency due to lack of awareness. Also there is a great possibility of such black currency being invested into real estate, gold and other financial assets. Although, the intention of RBI was limited to follow clean note policy and reducing counterfeit notes from circulation, this move can probably flush out a portion of unaccounted money, thus killing two birds with one stone.

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