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Nov 13, 2016 - Comments - Economics

Notes on demonetisation

Here are our thoughts on this dramatic and far reaching announcement by PM Narendra Modi on 8th Nov

  • The move targets cash in circulation that has escaped the tax net. Or counterfeit currency.
  • Regardless what anyone may say of “black money these days is in real estate, gold, overseas bla bla blah” the fact is 86% of money in circulation – i.e., Rs.14 lakh crores (that is 142 followed by 11 zeroes!) comprises of such notes! That’s US$210b approx.
  • Looking at it as pieces of currency note, that’s 2200 crore pieces! So every Indian has 18 pieces! Ignoring children, prisoners, Indians overseas etc. etc. the average goes up even more! Remember, in rural areas many have not even seen a ₹1000 note in their lifetimes let alone possess one!
  • It is anyone’s guess how much of it is genuine and how much is undisclosed ill gotten wealth kept in cash. Genuine money could range from cash withdrawn from bank, income earned in cash recently, money in piggy bank (although rarely it is of such denomination), Cash receipts by traders from numerous small customers etc. etc.
  • We will know quite soon because if the money is genuine, sooner or later, before 30th December, the money will get back into the banking system. People that have small amounts or big amounts but have good explanation, will bank it in. They have nothing to fear.
  • Those that have lots of cash but don’t have a good story will also bank it in hoping the tax burden will be better than throwing it away. Or perhaps the amount is small (less than ₹200-300k taxman will not be bothered perhaps)
  • A small percentage of such “black money” will get flushed into white using friends, relatives, workers etc. helping to break it into smaller lots. This cannot be avoided. But someone having, say, ₹10 crore cannot do this unless they look for 500 such friends. That’s impractical. Next time you hear a media idiot mouthing off nonsense about much of the black wealth escaping, wake them up with such common sense facts.
  • The rest – i.e., money that hoarders cannot deposit because they KNOW they will face much worse than tax bill (politicians, big contractors, goondas, corrupt officials), perhaps JAIL TIME will quietly burn that money and rue their fate. That is already happening!
  • The government will have pretty good idea of that number, because whatever comes back will be counted as it comes thru the banking channels.
  • Total as of 8th Nov is also known. The difference is the “bounty” to the economy. How much is it going to be? Your guess is as good as mine.
  • From that bounty, reduce the cost of printing new notes etc (which anyway is done periodically for various other reasons)

Why new notes again?

This “clever” question has been asked by anarchist politicians like Kejriwal who love to spin conspiracy theories and mouth off preposterous allegations without any proof.

Point is, high value currency notes are NOT BAD per se. It is only when they become vehicles for illegal wealth, they become problem. Law abiding citizens should have the convenience of using larger bills.

Once the bad cash is flushed out of the system, a “reset” button has been pressed. Now big notes can be let out safely. Of course, after another 10+ years they may also be used for black money. But that will not only take a while but also be less of a problem because of this shock therapy.

Fringe benefits

Yet another benefit is the spread of e-money will accelerate.

This not only means more convenience for all but e-money, BY DEFINITION, cannot be black! It requires bank account on the part of the giver and receiver! Bank accounts = Audit trail, records.

A trader getting paid electronically has to also pay his supplier by cheque. And so on. Which means it is accounted for.

This also means the entire system gets cleaned up, drastically reducing chances of tax evasion.

Why should ordinary Indians support it?

Simple. Because we are paying a price for the black money, day in and day out. How?

  1. Because lots of people don’t pay tax, to get same amount of revenue, government is forced to use higher tax rate.
  2. Businessmen doing honest business with receipts get squeezed because they cannot earn the profit that cheaters earn. Which means they cannot pay their staff, advertise, reduce rates etc.
  3. Because there are ways to earn and spend black, corruption is easier to conceal, harder to trace.
  4. A genuine aam-aadmi is always the loser. Imagine you are paying off someone in cash without receipt or evidence. This happens practically everyday. Your legitimate, tax paid money goes into the black economy, never again to benefit anyone other than a cheat! So we end up attacking our own children’s future.
  5. CII is estimating that $20b or Rs.3 lakh crore may come to government as a gift from corrupt hoarders as a result of this move! (see ref 2)

So if you are queuing up and getting frustrated, please think for a few minutes. No country dramatically becomes clean or rich without such blood,sweat and toil. Don’t be swayed by lies spread by anarchist megalomaniac politicians and corrupt dynastic maharajas.


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