Currency Demonetisation: Facts and Fiction

Posted on: 12-11-2016 | Category: Socio-Political

A lot has been written, spoken and experienced by many of us about the scrapping of old currency notes by our government. Supporters of one political party have welcomed this step while supporters of other criticised it. Not many bothered to sit and think about it as socio-economic change and its far-reaching effects. Here are few points to put things in perspective -

1. It is not demonetisation: Old currency notes are being exchanged for new currency notes. This is an exchange not removal of currency notes.

2. Attack on existing black money: Black money in form of cash will either come out or get destroyed completely. In present scheme of things, there is no guarantee on generation of black money using newly issued currency notes in coming years. In fact, Rs 2000 currency notes will make it easier to carry and hide large sum.

3. Super rich remain unaffected: Super rich residing in metros keep their black money invested in Swiss accounts, sophisticated market instruments and real estate. That part of black money which possibly be huge, will not be recovered under this exercise.

4. Who will lose their black money? Small to mid-level businessmen, traders and professionals belonging to upper middle class will be affected most. They have traditionally been BJP’s supporters. Local politicians especially in poll bound states will lose their cash too. A rough guess will be people who belongs to above mentioned categories and with wealth ranging from few crores to few hundred crores are being affected most. Once you cross few hundred crores, sophisticated ways to park black money becomes accessible.

5. Effect on deficit: ‘I promise to pay the bearer a sum of Rs 1000’ written on your currency note shows the liability side of RBI’s balance sheet. With many people burning and destroying their notes due to fear of punishment, less notes will be exchanged for new currency notes or get deposited in the accounts. RBI will thus have to issue less notes and hence it will have less liability thereby improving its books.

6. Effect on inflation: General Price levels should come down due to erosion of black money available in cash. General economic activity from consumption to production will see reduction for at least 4-6 months. Real estate can see correction by as high as 35% . Bank interest rates will probably come down too although after a period of 4-6 months as more money would have flown into banking system from black markets by then. Money multiplier will take place and banks will lend more.

7. Organised Vs Unorganised sector: This is a direct attack on unorganised sector but not aimed at poor. Local ‘Seths’ in towns are the target. Organised sector with its strong compliance following practices will get a boost. This is not good vs bad but a significant step towards systemisation and centralisation. Local big guys influence local politics with their black money, super rich owner of corporations influence national politics with their monies. A section of unorganised sector runs as parallel economy, hence credit must given to the Prime Minister and the Union government to attack it.

8. Who knew it before hand? It all came down to the time that some people get to convert their black money to white. So now the question is who all knew about this scheme beforehand. Not that we doubt anyone in particular but there is always a possibility of information leak when a number of people are working on a project of this scale, either by accident or by design. Is there even a minuscule possibility of one particular political party safeguarding its interest due to its position in power? Intention here is not to create a controversy but to develop a spirit of inquiry as responsible citizens.

9. Taxes that we pay: We all agree that everyone should pay taxes and it is good for the society as a whole. So it is a welcome step from government as it will increase overall tax collection. At the same time, we as citizen of a democracy should actively take interest in the manner in which this tax money is being used. Is the money being used to improve roads, electricity, medical and other facilities or is it being used to provide palaces and royal life style to the esteemed elected leaders of our country.

10. Promises made during election: Honorable Prime minister came to power promising bringing black money stashed in Swiss accounts by super rich back to India and giving Rs 15 Lacs to each citizen, a Robin Hood kind of act. Let’s hope for that to happen in near future.

(This article was originally published by me on Paperstalk here)