-- Published: Sunday, 20 November 2016 | Print | Disqus
By Manish Thatte, Nashik – As written for goldseek.com
On November 8 2016 at 8.00 pm Prime Minister Mr. Modi announced his decision to demonetize or scrap the Rs. 500 and Rs. 1000 notes. I am seeing some unjustified criticism and fear about this decision as well as unjustified praise and bonhomie (people praising this decision without understanding the full ramifications). So I decided to write this article to educate:
Facts:
I believe, that this is a huge huge move with far reaching consequences. Only time will tell if it is good or bad. But With this one master stroke, PM Modi has levelled the playing field for corrupt persons and honest people.
Due to scrapping of 500 and 1000 rs. notes, now there will be an increase in the circulation of Rs. 100 notes. I sincerely believe (and hope), that the decision to introduce the Rs. 2000 note is just a stop gap arrangement. Circulation of this note should be and will be stopped as soon as possible.
Rs. 1,00,000/- in 100 rs. notes fits in a small briefcase (10 bundles of 100 X 100), whereas in 1000 rs. denomination, it used to be a single bundle, which could easily fit into the pocket. Even huge economies such as the USA and EU have a highest denomination of 100 dollars or euros. All higher transactions in such economies are carried out using either direct bank transfers or cheques or debit / credit cards. So, all transactions of a certain higher quantum tend to leave a paper trail. The direct result of all this is the reduction in the volume of the shadow economy (untraceable money or black money in the economy).
Pros:
1) Corruption: This decision is a very direct assault on the endemic corruption in the Indian system. Firstly, you can only exchange a limited amount of cash under the table. You can’t carry 5 or 10 briefcases of 100 rs. notes to home every single evening without attracting attention. Also, the person paying the bribe cannot withdraw 5 or 10 lac rupees from the bank without attracting attention, if he keeps on doing so regularly. This will directly affect the ability to pay a bribe and to receive a bribe.
Secondly, as more and more transactions become online and traceable, there is simply no way for the corrupt official to spend that money without attracting attention.
I am not saying that this will completely eliminate corruption, but it will certainly reduce it to a very large extent. Small corruption (such as when you bribe a traffic policeman with 100 rs. For jumping the signal) and very large corruption(e.g. when you bribe a highly placed defence official with a direct wire transfer to his or her overseas bank account in a tax haven) cannot be eliminated by this step. But I maintain, that effectively, the corruption faced by commoners such as you and me will be eliminated.
2) Elections: Many times we have seen that political parties pay some money such as 100 or 500 or 1000 rs. to poor people, and ask them to vote in their favour, which the poor people are happy to do for a sum of 100, 500 or 1000 rs. Due to reduced corruption and increased physical volume of the 100 rs. note, the ability of the political parties to indulge in such practises is greatly reduced.
3) Unrest: Unrest of the kind (stone throwing and arson) that we have seen in the Kashmir valley recently, which was allegedly funded with fake currency notes of 500 and 1000 denomination has been simply eliminated. The Kashmir valley saw its first peaceful weekend in 4 months as of this writing. Also, the ability to fund morchas, dharnas, strikes etc. has been greatly reduced.
4) Crime: If you take a supari and murder or kidnap someone, you will have to accept cash in 100 rs. denomination. 100 rs. note is bulky to store and transport. Also, a gps chip fitted by the bank in a bundle of 100 rs. notes will make the bundle traceable. Also, a supari in less likely to be accepted for Rs. 1,00,000 (10 bundles of 100 rs.) instead of Rs. 10,00,000 (10 bundles of 1000 rs). So this step effectively makes it very hard to commit a premeditated crime. Though crimes of passion (such as rape) are simply very hard to prevent.
5) Shadow economy: Everywhere we see, in any deal that we make, even in fully legitimate deals, there is a cash component involved. With more and more monies becoming traceable, it is going to become very hard to indulge in shadow economics or black money generation.
6) Prices and inflation: In my opinion, once the dust is settled, after say 31st March 2017, we are going to see a reduction in the general price level, due to the elimination of the black component in every deal. Or at least, whatever the price level will be, it will be at least transparent and nothing will be under the table. Inflation will reduce greatly.
7) Banks and exchange rate: I believe, that once the black economy is curbed and the effects start filtering down, the rupee will find its most natural level against world currencies. Inherently the Indian rupee is very strong, but due to the unaccounted economy, the strength is not very apparent. But once the black economy is curbed to a large extent, the rupee will be much higher. The prices of real estate, oil and gold will come down to a very large extent.
Also, now that transparency in the economy has increased, banks are all set to reap the benefits. Interest rates WILL come down. This will positively boost consumption and investment. But this will not affect the savers, because inflation has reduced, so, effectively, the returns on savings will at least remain the same, if not increase.
8) Taxes: Less than 10 % of the general population used to pay income tax. Now that there will be more traceability of transactions, more percentage of the general populace will come under the tax net. This will bolster tax revenues such as income tax, vat, service tax etc.). In the long run, I believe, that this will reduce the burden on the existing tax payers and tax rates will definitely reduce for the honest tax payers.
Cons:
1) Existing black money hoarders: Black component in any deal is so entrenched in the Indian psyche, that many commoners too hold a certain amount of unaccounted wealth. These people are being hit. Believe me, they are not criminals and neither are they illegitimate. It’s just the way, things used to be in modern day India. And they are vast in number. My advice to them is to simply come clean with the tax authorities. Actually, they should have taken the opportunity to declare such undisclosed wealth when the Income Disclosure Scheme was in force. But even now, not too much damage has been done. I again reiterate, that just deposit all such unaccounted 500 and 1000 rs. notes into the bank and pay the relevant taxes and just come clean. I would also advice against indulging in any money laundering scheme, where, at best you will lose all your money, and at worst, have to face strict penal action under money laundering laws.
2) Resilience of the Indian economy: Some argue, that The Indian Economy is inherently resilient, due to the black component in many high value deals such as housing and real estate. I sincerely believe, that this is a false notion. What is not be gained, if there is a 30 – 50 % price reduction across the board in real estate and gold?
3) Threat to the PM’s life: This is a very serious and real threat perception, at least as per my line of thinking. The shadow economy is so entrenched, that there are bound to be many many very bad and powerful people who will have to lose their ill-gotten fortunes, with just this single step by the PM. Instead of going any further, I reiterate, that the threat to The PM’s life is very real and tangible.
Copyright 2016 - Manish Thatte, Nashik.
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-- Published: Sunday, 20 November 2016 | E-Mail | Print | Source: GoldSeek.com
