PM Modi delivered a stunning surprise by scrapping Rs.1,000 and Rs.500 notes and called for a “decisive war“ against corruption, black money and terrorism. “There is a need for a decisive war against the menace of corruption, black money and terrorism...festering wounds which make the country and society hollow from within,“ the PM said in a televised address, his first, to the nation. The decision comes in the backdrop of a fierce political fight over black money with opposition parties claiming Modi has failed to deliver on his pledge to combat black money .
“From the midnight of November 8, Rs.500 and Rs.1,000 will not be legal tender...these will be just worthless pieces of paper,“ Modi said in his 40-minute speech. He said this was being done to combat graft and terror funding. The two high-value notes account for nearly one-fourth of all the notes in circulation. In value terms, however, their share was over 86% as of the end of March.
The PM also said new currency notes of Rs.2,000 and Rs.500 will be introduced but those being currently held will have to be exchanged at banks. But this is subject to restrictions and rules out the possibility of large exchanges of illegal cash stash as these will need to be explained and accounted for. Pitching the decision as a much needed antidote to stamp out the menace of corruption and terror funding, the PM said “Black money and corruption are the biggest obstacles in eradicating poverty ...Have you ever thought how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes.“
Describing illegal financial activities as the “biggest blot“, Modi said that despite several steps taken by his government over the last two-and-a-half years, India's global ranking on corruption had moved only to 76th position from 100th earlier.
According to the finance ministry , the total number of bank notes in circulation rose by 40% between 2011 and 2016, while the increase in number of notes of Rs.500 denomination was 76% and for Rs.1,000 denomination was 109%. The World Bank in July , 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007. “A parallel shadow economy corrodes and eats into the vitals of the country's economy . It generates inflation which adversely affects the poor and middle classes. It deprives government of its legitimate revenues which could have been otherwise used for development activities,“ a finance ministry statement said.
The move could have political ramifications in the forthcoming state elections as it impacts the capacity of parties to spend unaccounted cash for campaigning and various political payments.
As per Tuesday's announcement, ATM withdrawals will be restricted to Rs.2,000 per day and withdrawals from bank accounts will be limited to Rs.10,000 a day and Rs.20,000 a week. Banks will remain closed on Wednesday and ATMs will also not function for the next two days, Modi said.
Apart from depositing money in bank accounts, Rs.500 and Rs.1,000 notes can also be changed for lower denomination currency notes at designated banks and post offices on production of valid government identity cards like PAN, Aadhaar and Election Card from November 10 to November 24 with a daily limit of Rs.4,000. The demonetised currency notes will remain valid for transactions like booking of air tickets, railway and government bus journeys and hospitals till midnight of November 11and 12.