Money for nothingWhile the world was occupied with the US presidential race between Hillary Clinton and Donald Trump, Indian Prime Minister Narendra Damodardas Modi came out with a surprise announcement that 500- and 1,000-rupee banknotes would cease to be legal tender.
While the world was occupied with the US presidential race between Hillary Clinton and Donald Trump, Indian Prime Minister Narendra Damodardas Modi came out with a surprise announcement that 500- and 1,000-rupee banknotes would cease to be legal tender. The move has not only shaken India but also many South Asian economies that are tied to the Indian economy. The Indian government is claiming that the action is a surgical strike against black money. The demonetisation of the large bills has received mixed reactions. A large section of industry and the public reacted to the decision with overwhelming support, stating that the government should have taken such action a long time ago.
However, some sections, including political leaders, are saying that it is a draconian scheme causing hardships to the people. Experts are saying that though the move is a smart step in the effort to eradicate black money, terrorist funding and arms smuggling, there was little preparation, and hence, it will create some problems in the Indian economy in the near future. Their point is that deflation is the most prominent and quick impact that is going to be seen in the Indian economy. However, this move is not only going to affect the Indian economy but also the Nepali economy, which is very closely linked to India.
The legal provision regarding Indian currency in Nepal is creating confusion among Nepali citizens. Trade in the country’s border areas has almost stopped in the last few days. This is going to create some quick inflationary impact on Indian products in the Nepali market. However, the situation is not going to last long. Meanwhile, black marketeering has spread in the border areas of Nepal. Indian banknotes of Rs500 and Rs1,000 denominations are being exchanged at par with the Nepali rupee.
If the concerned bodies in Nepal do not take appropriate action to help Nepali citizens holding Indian currency, they are going to lose a significant part of their savings.
The Nepal Rastra Bank (NRB) has reported that the formal banking system holds Rs500 and Rs1,000 Indian banknotes totalling IRs33.6 million. However, this total does not include the cash in the possession of the general public, businesspeople and Indian tourists in Nepal. Apart from that, the NRB has issued a directive to all banks, financial institutions and money transfer companies to immediately halt transactions of Indian currency of these denominations. This move has created total chaos among Indian currency holders, and is, indeed, promoting black marketeering in Nepal. Nepali citizens returning from India and those holding demonetised Indian currency notes have become victims of black marketeering. They are compelled to exchange them with black marketeers who accept them at par with the Nepali rupee or for an even lower rate.
Moreover, the demonetisation of the large bills can also have a draconian impact on the rural economies of Nepal, mostly in the mid- and far-western regions where many people work in India to feed their families. They hold more Indian currency notes than Nepali currency notes because most of these villages do not have a bank. And business transactions are mostly conducted in Indian currency.
Residents in these regions could face a huge problem. Even if they get to a bank somehow, it will not do any good because banks have stopped accepting these notes. Many people here may not even understand what it means when Rs500 and Rs1,000 notes have been cancelled. Thus, if these areas are not taken seriously, and something is not done in time about the banknotes in their possession, their savings are going to turn into ordinary paper. Moreover, asymmetric information could lead to villagers being cheated by black marketeers spreading rumours that paper currency of other denominations too have been cancelled.
Thus, the concerned bodies should launch a massive publicity campaign, particularly in rural areas that lack access to information, about the procedure for exchanging the demonetised Indian bank notes. Specifically, NRB should direct financial institutions to collect legally earned Rs500 and Rs1,000 Indian banknotes from Nepalis and talk to its Indian counterpart, the Reserve Bank of India, to take these currency notes back from Nepal. Otherwise, Modi’s surgical move to discourage black money will promote black marketeering in Nepal and spread panic among the Nepali people.
Bist teaches business research methodology at Uniglobe College, Kathmandu