I’m not a financial expert or any sort of economist to comment on the demonetization issue. I’m a normal salaried IT employee who submits tax every year (mandatory as per the company policies). I believe 99.99% of us in this IT sector are doing so. This blog, I solemnly swear that this is my standpoint on the demonetization issue.
Since the midnight of November 9, 2016, we are going through an emotional roller coaster. There are a lot of emotions that are coming to our mind these days, we are happy, afraid, excited, frustrated, irritated to name a few. The electronic and social media has been fulsome in its praise of Prime Minister Narendra Modi’s “Surgical strike”, by which he has reportedly destroyed the base of corruption and black money in India.
Do you have ever thought what is black money? As far as I know it’s not accumulated sacks of currencies lying in the basements or attics as we have seen in the movies. The real black money comes from two activities – corruption and tax evasion. Of course, there are certain other criminal activities such as smuggling, drug peddling, arms, and ammunition etc that contributes to this but these activities only account for a minuscule fraction of what is commonly understood as the ‘black money’
If your jeweler accepts cash in payment for a high-value ornament purchase, he is not committing any illegal activity but if you’re buying it without an invoice and if he conceals this income, then and only then, it converts to black money. If you have ever evaded sales tax duty while purchasing a land or house and if you have done some high-value purchases and paid without invoices you are also part of the black money market.
And for your information, those who have accumulated substantial amounts of black money are not keeping this in their attic or basements but that will be used to purchase gold and will be kept in bank lockers. There is another category of tycoons who accumulates huge amounts of black money which they will convert to dollars and move to Saint Kitts and Nevis or Swiss banks or to other countries. Opening a foreign account is not rocket science today and it assures the anonymity it provides and is a widely preferred option for those holding black money. The black money stored as cash decreases in value with inflation while other types of assets appreciate with inflation and storing large sums of cash is much more problematic than storing in gold equivalents. Investments in gold and property are always preferred for these reasons. The main playing grounds for black money are Real Estate, Motion Picture, and Jewelry.
So when we consider demonetization in all its worthiness, I strongly believe this reform is introduced not to extort the existing black money currently running in the parallel economy but to curb the sources which generate this.The surprise demonetization of the Rs 500 and Rs 1000 notes of Indian currency dismissed about 85% of the money currently in circulation. This accounts to about 14 lakh crores which is 14 trillion. Its bit difficult for an “aam aadmi” to visualize this value but we can try this with the following illustrations:
1,000 = one thousand
1,000,000 = one million
1,000,000,000 = one billion
1,000,000,000,000 = one trillion
A million is equal to a thousand thousands (1,000 x 1,000).
A billion is equal to a thousand millions (1,000 x 1,000,000).
A trillion is equal to a thousand billions (1,000 x 1,000,000,000)
or a million millions (1,000,000 x 1,000,000)
If a person’s salary is 40,000 per year it would take:
25 years to earn 1 Million
25 Thousand years to earn 1 Billion,
25 Million years to earn 1 Trillion
1 day = 24 hours = 1440 minutes = 86400 seconds
11.57 days= 1000000 seconds – this is also represented as 1 million (1 million = 10 lakhs)
1 month = 2628000 seconds – approximately 26 million
1 year = 31536000 seconds – approximately 3 crore
31.7 years = 1000000000 seconds = approximately one billion
31709.8 years = 1000000000000 seconds = approximately one trillion
So, now you can imagine 14 trillion rupees. Its an onerous task to replenish this amount in the market. A solution for this is not to replenish and I believe this is what the government is planning. The people will be forced to switch to electronic cash transfers like NEFT, RTGS,IMPS and the shops will be forced to use point of sale terminals (POS) and/or PayTM or other virtual cash transactions. This, in turn, will make all the transactions transparent and eradicate black money. So as mentioned earlier demonetization is to curb the sources which generate black money.
There is no doubt that demonetization has pulled off a major political and publicity coup and has substantially enhanced Modi’s reputation as a muscular leader, but what’s the prize?
I strongly have my own doubts in the intention of demonetization, because there are certain contradictions which we can sense here,
Black Money – As mentioned earlier heap of cash is an insignificant component of black money. Illegitimate cash is just the tip of the iceberg and rest is still under the water.
Counterfeit currency – A study done by the Indian Statistical Institute, Kolkata, in 2015, states that, at any given point of time ₹400 crore worth of fake notes were in circulation in the economy. This is merely 0.025% o f the total budget outlay of ₹19.7 lakh crore as announced this fiscal. In comparison, just the printing cost of notes being taken out of circulation is approximately ₹12,000 crore. Is it a sensible public policy to flush ₹12,000 crore down the drain to purportedly remove about ₹400 crore of fake currency?
Leakage of demonetization – People were withdrawing cash in large amounts in smaller denominations due to rumors of demonetization of ₹1000 and ₹500 notes as per the reports by SBI in April this year. Also in April local dailies in Gujarat and elsewhere had also reported that such a move might be in the offing. There are suspicions over BJP’s West Bengal unit deposited an unusually large cash amount of Rs 1 crore just before the move’s announcement. In the absence of an upturn in economic parameters, the sudden rise in deposits just before demonetization decision is definitely fishy. All these factors indicate that information of the action may well have leaked
Lack of planning – RBI doesn’t have enough supply of smaller denomination notes and is supplying soiled 100, 50,20 notes to meet the demand. ATM calibration is required as the new ₹2000 notes are smaller in size than the old notes. So eventually, ATM’s are storing less cash and thus running out faster as they can only dispense ₹100 notes.
A more higher denomination in place – The other major pitfall of a hasty decision is that government was forced to reintroduce higher denominations as today India doesn’t have the infrastructure for a primarily cashless economy. Without being completely withdrawing these larger denominations the government has made it easier for those who want to hoard black money in cash. The new ₹2000 notes are being released without any additional security features as the hurried decision by the government didn’t allow for the provision of such features. This makes the task of counterfeiting much easier. Also since we have a higher denomination, it is more profitable to counterfeit.
Economic instability – A callow planning, the grievous under-preparedness of the RBI and the panic stricken people, have all lead the move to be an extreme pandemonium. The people are desperate for cash, so much of the workforce that should be productively working is wasting long hours in unending queues at the banks and ATM’s .The abrupt call-back of 85% of cash, has brought the informal economy to a standstill and this is the worst affected, with the most marginalized suffering the most.
Are we ready for cashless transactions? – If you simply bereave people of cash does it make an economy cashless? With only 46% banking penetration, only 22% internet connectivity, 19% of the population without electricity connection (and others with unreliable connection) and only 1.2 million of 14 million merchants having point of sale devices, India simply doesn’t have the infrastructure for a cashless economy. Another problem is the low level of digital literacy in India. Unless these real challenges are addressed, withdrawing the bulk of cash only creates chaos as we can now see.
In a long run, small scale businesses will come to an end which actually spread a lot of confusions between the people. Eventually, the people will need to suffer this changeover. This is because of improper planning of demonetization. The foresight and time required in planning to celebrate your ward’s birthday is not taken for doing this kind of activity. I have read somewhere that this is what happen in the Boston Big Dig project which was disastrous and also reminds about monetary reforms of 1991 a.k.a Pavlov reforms.
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Data courtesy : The Wire, Huffington Post, Forbes, The Diplomat and from the Facebook posts from a friend, author, entrepreneur and an engineer Ranjith