Demonetization in India: When good things cause a major jolt!

The current demonetisation drive to weed out black money and corruption has left many a common man fuming. Present-day inconvenience aside, the move will make black money markets take bigger chances to still remain operational.

currency-946932It was a move unprecedented by any other – swift, all-encompassing, panic-inducing. The Prime Minister of the country, Mr Narendra Modi, announced on the evening of November 8, 2016, that all rupee notes of Rs 500 and Rs 1,000 would cease to become legal tender from midnight. After a day’s break, banks would begin the process of exchanging these notes for new Rs 2,000 and the old Rs 100 notes.

The announcement sparked pandemonium like no other, second only to the stampedes at the country’s big religious shrines. Within minutes of the announcement, people lined up outside ATMs to pull out their money, but many were left disheartened as more (now useless) Rs 1,000 and Rs 500 notes shot out of the machines. Since the banks reopened for business on November 10, the country has become one big queue of people waiting to deposit their money and get them changed for Rs 4,000 per person per day.

After the initial shock, anger and desperation have now set in as there are still some people who have not been able to get their money changed. Even worse is the fate of those who do not have bank accounts. An amusing fallout, however, has been that housewives across the country have been caught out hoarding money squirreled away from their savings every month – so the purge has already begun!

How does this move benefit anyone?

1) It’s a sound move to clean up the economy and eradicate black money transfers and businesses. While small businesses argue that the move has destroyed them completely – most of them deal exclusively in cash, and need cash to make bulk purchases as also supply goods to other parts of the country – the larger picture is an extremely positive one. For starters, more people and businesses will now come into the tax net, especially small companies that make a cash profit but show losses in their books every year.[1]

money-18119372) Aimed at breaking the black market economy[2] that circulates cash primarily amongst such entities as the underworld, real estate, politicians and big businessmen, demonetisation aims to bring everybody on the same playing field – whether rich or poor, now everybody has unusable currency. If a person has unaccounted wealth worth crores of rupees at home, he may certainly declare it but also pay a heavy tax on it – which is how honest taxpayers operate.

3) The new Rs 2,000 notes[3] have a host of security features that make duplication difficult – this is a direct blow to the counterfeit money racket operating out of our friendly neighbours Pakistan and Bangladesh. The demonetisation move has already crippled these underground economies to a large extent.

payment-4736854) There is no option but to declare income sources and reasons for cash withdrawal from now on. The Government has imposed limits on unexplained withdrawal of cash – not exceeding Rs 20,000 per week – so the earlier practice of withdrawing bulk amounts is abolished. This makes it more difficult for such businesses as real estate to function – a buyer would have to withdraw money over a period of months to be able to pay the ‘black’ component of the deal. Hence, the transaction will automatically become a ‘white’ one.

5) Private schools and institutions of higher learning will now be more circumspect about asking for ‘donations’ while granting admissions. Parents can simply profess helplessness at withdrawing large sums of cash, and can choose to pay by cheque – thus creating a paper trail for the payment. Bribes will not be eradicated altogether, but they will be in smaller quantities.

6) More payments will go digital. Right now, the biggest problem is that of paying for daily food and groceries with scarce cash. However, if people opt to use online platforms like Paytm and Mobikwik to pay for public transport tickets and buying vegetables, there will be no need to carry cash at all. This also means, however, that the penetration of mobile wallets and payment platforms is set to increase manifold.[4]

7) Banks will be flush with more money from now on, and lending rates are likely to drop in the coming months. Since more money will return to the economy – especially from the previously untaxed businesses dealing solely in cash – lending rates will reduce, thereby benefiting citizens.[5]

Wouldn’t you agree that it’s a clean-up that was long overdue?


Author: Zubin Daver

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