Prime Minister Narendra Modi threw a massive bomb on November 8th, 2016 when he announced that all the currency notes in Rs.500/- and Rs.1000/- denominations are no longer a legal tender. That means, you can exchange them from the post office or bank, deposit them in the bank or pay for some commodities but the currency is no longer legal for trade between two parties.
Now before I talk further, let me put this in straight perspective that I am not an economist. I am a multimedia graduate who actually does not have any idea how black money flows or how the economy works. I learn something new about the economy every day and incorporate the information in my personal and professional life.
Also, it will be better if anyone does not lecture me on “the problems of the poor”. I have “been there done that” almost everything that anyone without money face. I have been on bed rest for more than 2 years in breaks. Suffered from facial paralysis, severe chest infection, have collapsed discs in lower back and lost complete business three times. I have lived without cooking gas for more than 5 days because I had no money. I have lived on Rs.100/- for 10 days, again because there was an inflow of money. If I have a website, owns a smartphone and can speak English, that does not mean I do not have problems. I have faced a lot of difficult situations and again standing back. So DO NOT LECTURE ME in comments about the problems people are facing.
Impact of demonetization
First of all, let’s face it. By demonetizing 84% of the currency notes in circulation, the government has caused a major chaos. Our dear leaders like Kejriwal, Mamata Banerjee, Rahul Gandhi etc. are opposing the step. However, the benefits of the demonetization are way more that the short-term losses.
The impact on fake currency
It is true that the RBI didn’t have much time to work on the security features of the notes. They have made the old security features more prominent in Rs.500/- and Rs.2000/- notes. There were a lot of rumors about GPS chip etc which are wrong. Anyway, a lot of fake currency gets printed in Pakistan and finds it way in India via Bangladesh, Nepal, and UAE. The problem with the fake currency printed with the help of ruling government is that the quality of the notes is really impressive and only a RBI issued machine can detect the fake notes properly.
Most of the fake currency comes in the higher denomination as the returns are better. These notes are used to fund Maoists’, riots, illegal trade of arms and other anti-social work. Also, these notes hardly find their way to the banking system and very little percentage of these notes get caught. By demonetizing Rs.500/- and Rs.1000/- notes, the government has removed all the FICN (Fake Indian Currency Notes) from circulation in a single stroke.
The impact on black money
Now, again I am not an economic student nor I have complete knowledge about the functioning of economics. Still, as far as my knowledge says, the government issues currency notes just as a piece of paper which is a legal tender between RBI and the currency holder. Say, if I have Rs.100/- note, RBI is liable to pay to be Rs.100/- in return of the legal tender. So you can say that all the currency notes in circulation are the property of RBI which it has given us to use for some time.
Sooner or later we have to put it in circulation so that the government does not have to pump more currency in the market. The face value of currency notes that the government can pump in the market is equal to the amount it has as different commodities like foreign currency, gold etc. In no circumstances, any government can print more money that it can provide in the market.
When someone finds a way to make black money out of the issued currency notes, it results in a loss for the government as it has to print more notes to keep the country moving. Again, in order to keep the pumped amount in market equal to the amount government has in reserves, the government has to take a loan from other countries or World Bank or increase the taxes. Just because someone is taking currency out of the system, every single person in India has to pay more taxes.
By demonetizing the currency notes, the whole black money market has collapsed. Every single note that was not accounted or is now just a piece of paper. There is news that people are finding abandon notes in drains, rivers, garbage pits and what not. Every single note that was black money is now worth scrap.
Why is government not bothered?
Seriously speaking, the only loss we the genuine tax payers or less fortunate will face is a small term economic crisis which will finally fade away in a couple of weeks. The government is not much bothered about the old notes becoming a waste because; wait for it, IT CAN PRINT NEW NOTES WITH SAME FACE VALUE! The money belonged to RBI before and as the reserves are under RBI and Indian government, it can again print the notes.
All the money that was black and unaccounted for is now back to the government locker in 100%. Not 30% tax that you pay. Not 45% penalty that black money owners paid till September 2016, not 90% (tax + penalty) but complete 100%! The government can pump the currency according to the markets’ needs.
The impact on real estate price
Most of the people saying that the black money holders have their money invested in real estate. I agree, but when they want to sell the plots now in 20% white and 80% black, where will the black money come from. Indeed with time people will find a way out and start storing large denomination notes, but till then, a major chunk of BLACK MONEY in real estate has vanished. The property price will come down eventually. Same is with gold. Those who have invested black money in gold will not be able to sell it in white. They will need black money in some form which will take some time to come back in the market.
If the government makes sure that the large denomination notes are completely regulated. It reduces the chances of converting them to black, it will keep the inflation in control. You have to understand that any black money invested in commodities cannot be sold off as white. It needs black money in the market. Yes, you can sell a part of it without getting noticed but not completely.
PM Modi has more plans that will come into action from January 2017. Hopefully, we will see the rise of new India soon. Give this man a chance to work and if fails you, do not vote for him in the next elections.