Demonetization in Venezuela Vs India

 

The Latin American country, Venezuela, has tried to ape India’s nation-wide note ban decision, but it had backfired badly following which President Nicolas Maduro was forced to postpone the entire decision until January 2 next month. The Venezuelan government took the decision last week on December 12, following which 100-bolivar note was ceased to be a legal tender.

But the sudden decision was bound to have violent repercussion in one of the world’s most violent countries. It led to massive protest across the streets of Caracas and other cities messed up further by violent protests and complete chaos. The decision was abruptly taken leaving the entire nation of around 32-million people in a state of complete shock, anger and despair. However, the government had now postponed the decision as of now to prevent further law and order mess in the country.

The Venezuelan President confirmed that 100-Bolivar bills will remain a legal tender as of now. However, the international borders with neighboring Columbia and Brazil would stay closed to prevent hoarding of Venezuelan cash by black money hoarders.

Maduro further alleged that these mafias are in touch with the US to destabilize the country. Currently, Venezuela has the world’s highest inflation rate of around 475% according to the IMF. The 100-bolivar demonetization was planned to curb the high prevailing level of inflation in the nation.

The people of Venezuela stood in long lines at banks for hours together to meet a Friday deadline to exchange their 100-Bolivar currency notes. Even when the deadline was extended, people still queued up at Banks out of fear psychosis and to get rid away from the demonetized currency at the earliest. According to government estimates, a lot of shops and shopping malls were looted and several people injured in violent clashes after the Venezuelan government’s sudden demonetization move.

Demonetization in India & Venezuela: A Comparison Study

Interestingly, in the context of India, common people stood by the government’s decision and demonstrated overwhelming support for Indian Prime Minister Narendra Modi.

  • In India, 500 & 1000 INR notes constitute around 86% of the currency in circulation, but in Venezuela 100-Bolivar note forms just 48 % of the total currency in circulation.
  • The Indian government gave around 50-day time limit to people to get their 500 & 1000 rupees note exchanged at the banks and post office with the amount of same values at different denominations, but Venezuela gave just 10 days for the people to deposit their demonetized 100-Bolivar notes at Banks. However, the entire decision was postponed later.
  • India demonetized notes of higher denomination of 500 & 1000 INR to tackle the problems of corruption and terror funding in Jammu and Kashmir by Pakistan, but Venezuela took the decision to curb the rising problems of international gangs and drug racketeers who hoard Venezuelan currency notes abroad to sell the same at subsidized rates in Columbia and neighboring areas.
  • The Venezuelan government was forced to postpone the decision since people went on a rampage across streets inciting violence, In India, Modi government didn’t backtrack albeit with considerable inconvenience to people. However, the level of violence in India is far lesser as compared to Venezuela after demonetization move.
  • In India, opposition parties and some of the people termed the move as a good decision coupled with bad execution, but in Venezuela, people are extremely furious with so little deadline given to them to get their demonetized notes exchanged at banks.

Is 2000 INR New Note Usable in Today’s Crunched Economy

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Following the Indian government’s bold step to demonetize the old notes of 500 and 1000 INR, it was expected that the government and concerned authority must have some ready solution to tackle the cash chaos. But even after three weeks of the decision, the situation is still problematic as people still stand in queues and thronging from one ATM to another in search of liquid cash.

Some get succeeded to withdraw money from the machine while some don’t. Amidst the prevailing nationwide cash crunch, the RBI has introduced the new purple colored 2000 INR note on November 10 this year. But people find it extremely difficult to use it for transaction purposes.

Honestly speaking, unless the situation comes to normalcy it’s almost impossible to use the new note at one go. Obviously, the way people are running here and there to withdraw smaller denomination notes like the 100s, 50s, 10s from banks, certainly, there is no taker of Rs. 2000 INR notes now. Even if some of the people accept it they do so with a certain degree of restraint and reluctance.

The basic reason why people don’t want to take such notes of the big denomination is the wide gap in the value of notes of 500 and 2000. The common man might feel it is easier to transact four currency notes of new 500 notes than a single 2000 rupee note in the current chaotic economy. It will surely take time when people will start accepting such notes for their day-to-day transactions.

Why People Don’t Accepting the New 2000 INR Notes

  • The current situation doesn’t let a person withdraw more than Rs. 2000/- per day from ATMs per card. They find it more convenient to withdraw money in 100 rupees notes than a single 2000 rupees note.
  • Grocery and vegetable sellers carry their day to day business with very limited cash. It’s definitely impossible to imagine that a vegetable seller will exchange your Rs. 2000 note for a limited purchase worth Rs. 100 or 200.
  • Many people won’t accept the new 2000 note for the single reason that it will be highly difficult for them to get the same exchanged when they need.
  • The current psyche of the people is to hold as much cash as possible in hand. So they won’t take your Rs. 2000 note until the restriction limit on cash withdrawal is revoked.
  • To meet our daily small transactions such as medicine bills, vegetable and fruit expenses and conveyance by way of rikshaw or bus, what we really need are the smaller notes of 100s, 50s and 10s and not the 2000 INR note.
  • If more and more people get enlightened about the new digital payment systems such as e-wallets, paytm, Bank transfer, chque payment and NEFT, then sooner or later the quantum of cash transactions with denominations of 2000 and 500 will reduce to a large extent.

In order to instill faith of the people in transacting with the new 2000 rupees note, there is an urgent need for the government to enhance the supply of paper currency of smaller denominations such 500/100/50. Meanwhile, also people need to give away their habit of cash holding practice in smaller denominations or preference to hold cash for liquidity purposes.

However, people can still use the new 2000 notes where sizable expenditure is required such as the medical charges for surgery or to buy costly house appliances or IT products. Another way to use such notes is when you pay a big sum of money to your landlord as rent.

Is India’s GDP expected to fall Post Demonetization Scheme?

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Before proceeding with the discussion on the short term and long term ramification of Prime Minister Modi’s demonitisation move to ban 500 and 1000 INR currency notes, we need to understand that India is still a developing economy with most of the transactions take place through liquid cash.

Not all people in India are included in the banking system. Probably that’s the reason why “Jan Dhan Yojna” initiated by the central government saw a whooping participating of such a huge chunk of people.  The government can definitely take a credit for the same, but it also brings India’s stark reality of development to the fore. Even after 69 years of the nation’s independence, India couldn’t successfully ensure cent percent financial inclusion of all its citizens.

Now coming back to the aftereffect of demonetization, we need to realize that a country’s economy can’t run by whims and fancies. A rationale must be there before taking any serious decisions such as the demonetization. It followed with a nation-wide liquidity chaos and even after two weeks the crisis won’t seem to go away so easily.

If the current state of cash crunch continues for a few weeks more then there’s no doubt that the nation’s economy is set to plummet further in the following months. Indian economy has definitely come to a standstill at this point in time. Common people and SMEs (Small and Medium Enterprises) are definitely bearing the brunt.

The Decision Was Right but Implementation went wrong!

Nobody doubts the intent of the government but they are questioning the modus operandi of the banks to tackle the current problem. The government’s decision to demonetize 500 and 1000 INR notes was announced on November 8 to curb the rising black money and fake currency menace throughout the country.

Initially, it was believed that situation would become normal within a few days. But the problem still persists and people are clueless even now. Empty ATMs and long queues inside and outside the banks are a daily occurrence now. At least, ATM machines should have been recalibrated beforehand to prevent the current nation-wide cash chaos.

The current crisis will surely leave its negative impact on the overall economy of the nation. The GDP growth of 2017 and 2018 is set to be heavily hit due to the decision. However, in the long term everything will return to normalcy and boost the nation’s economy as well – it will take time.

The Effect of Cash Crunch on India’s GDP Growth

Some economists are of the view that around 2% of the nation’s economy will decelerate in FY 2018. At present, India’s projected GDP growth rate is around 7.3% but after this demonetization, it is expected to stay somewhat around 6 per cent.

According to a report, the ongoing cash crisis has affected around 40% of the nation’s daily transaction. Currently, 86% of the total money in circulation consists of 500 & 1000 INR currency notes. Obviously, when the entire 86% of the money in circulation would cease to remain legal tender – its impact was bound to be severe.

India is basically a cash-based economy with most transactions take place through cash. Especially, in day-to-day businesses like grocery, vegetable and medicines – retailers usually prefer cash than cheque or electronic mode of payment. Cash has continued to remain a preferred mode of a transaction because it’s prompt and conventional.

However, the demonetization move of the government has its own advantages too. Prime Minister Modi has simultaneously tried to solve three persistent problems of Indian economy i.e. a parallel economy backed up by black money, hard-to-recognise counterfeit currency notes of 500 & 1000 INR and also the terror financing. The decision will certainly prevent hoarding of unaccounted cash, tax evasion and investment of black money in realty sectors in future.