De-Monetisation of Indian Rupee Notes – Thoughts of a
common man !
According to Rahul Gandhi, only six per cent of the entire black money is held in cash while 94 per cent is in real estate, gold or is parked outside country”
According to Rahul Gandhi, only six per cent of the entire black money is held in cash while 94 per cent is in real estate, gold or is parked outside country”
Rahul Gandhi is hardly the kind of political leader one
takes seriously. However, some noted economists have also sounded similar
thoughts. Prof. Suman Ghosh, a professor of economics in Florida
Atlantic University seem to agree with the
figure.
I personally think the amount would be much more, given the
fact that most of the real estate dealings involve a 30 – 40 % black money
element in it. However for the sake of argument, let us assume that only
6% of black money is held in the form of cash in India and the rest in the form
of other movable and immovable assets. A substantial amount would be stashed in
offshore accounts in tax havens like Switzerland and Mauritius, which eventually makes a "round trip" through tax havens and come back into the economy as FDI.
The question is, is 6% black money not substantial enough to go after and
counter..? Should Modi government have accepted the existence of black money just
as all other governments have done in the past and turned a blind eye to it...?
De-Monetisation is aimed at reducing black money. No one has ever believed it will eliminate black money altogether. According to a Dr. Friedrich Schneider, Professor of Economics,
Johannes Kepler University of Linz, shadow economy in India is estimated to be
around 25% of the economy.
Indian Economy is about 150 Lakh Crore and if 25% of that is black money, 37.5 Lakh crore should be the size of our shadow economy. If 6 - 10% of that is in cash, as the experts say, the total black money in cash should be around 3 Lakh crore !!! or roughly about 15% of the total currency in 500 and 1000 notes.
Indian Economy is about 150 Lakh Crore and if 25% of that is black money, 37.5 Lakh crore should be the size of our shadow economy. If 6 - 10% of that is in cash, as the experts say, the total black money in cash should be around 3 Lakh crore !!! or roughly about 15% of the total currency in 500 and 1000 notes.
If De-Monetisation can curb this 25 % of shadow economy, the
move will
- Expand the tax base from the current 2.5%, increasing government income in a more sustainable manner.
- Reduce about 3 lakh crore of black money held in cash !!!
Before demonetisation, and during Income Declaration Scheme
which ran till 30th September, 65,250 Crore of Black Money
was declared, out of which the government collected 29,362 crore in tax. The
remaining 35,888 crore of the original black money is now converted to white
money. Bottom line is that once you pay tax on your black money it becomes
white money.
Demonetisation is nothing short of war and as all wars go, it has been a painful experience for many people. Unfortunately, some of the sufferers, as it commonly happens in war, are common men who have nothing to do with the war itself. As evidenced by numerous reports on main stream media, this is true in the case of demonetisation also.
As of the 10th of December, about 12 Lakh Crores worth of demonetized 500 and 1000 rupee notes out of the 15.6 Lakh Crore that RBI has on its books have already been collected by banks and destroyed.
We will have to wait for 2 more weeks to understand the visible benefits, if any, of demonetisation and about one year to realise the impact it will have on economy in general.
It will also take about 6 months to re-calibrate all the ATM machines and to print enough notes to get circulation back to previous levels.
Along with de-monetisation, Government is also encouraging citizens to move to a less-cash economy. Less-Cash economy does not mean total elimination of cash but it is the reduction of cash transactions and migration to digital transactions where ever possible as in most developed countries.
The Cash-to-GDP ratio in India is 12.42 whereas it is 9.47 % in China, 7.46 % in US, 4% in Brazil, and 3.39% in UK.
Printing and maintaining such huge amount of cash is also an expensive affair and is estimated to cost RBI about 20,000 Crores every year. India will be able to save about 10,000 Crores if Cash-to-GDP ratio can be reduced to 6 %, much more than Brazil and UK.
Three things can happen after 31st of December.
(1) Banks will get a deposit below 15 L Crores
(2) Banks will get all the 15 L crore
(3) Banks will collect more than 15 L crore
All deposits into bank accounts before 31st December will have a combination of 4 types of cash.
(1) White money which is already taxed and legitimate that people have had with them for emergency use.
(2) Black money which was earned by illegitimate means and on which tax was not paid earlier. (This will attract 50% tax, and 25% long term interest free deposit after reconciliation)
(3) Counterfeit currency that people didn't know they were carrying and
(4) Counterfeit currency that crooks want to convert to real currency.
Scenario 1 - Banks will get a deposit less than 15.6 L Crore in circulation.
If banks get a deposit of say 14 lakh crore, about 1 lakh crore of black money will be flushed from the system straight away.
Assuming only 30% of this 14 Lakh crore is taxable, government will collect close to 2 Lakh crore as tax !!!
Scenario 2 - Banks will get all the 15.6 L crore
Now let us assume banks get a deposit of 15.6 L Crore. This doesn’t mean that there was no black money ! It only means that all black money hoarders decided to deposit it in their account and come out clean!
In this case, and based on the same assumption as above, government will get about 2.35 lakh crore in tax.
Scenario 3 - Banks will collect more than 15.6 L crore
This will mean that either
(1) RBI has printed more cash than what is shown in their books, or
(2) A lot of counterfeit notes indistinguishable from original notes have entered the banking system.
Either way, this is an opportunity to come out clean, and this “Spring Cleaning” itself would be worth the pain.
.. And, based on the same assumption as above, government will get more than 2.5 lakh crore as tax.
Economic Fallout.
Whichever way it goes, government will collect in excess of 2 lakh core rupees in tax and fines, which will get spent on projects like Roads, Railways, smart cities etc.. etc, providing direct employment to millions of people and boosting the infrastructure of the nation.
As for economy, People's needs will not shrink, despite reduced physical cash in the system. People will defer their buying decisions until situation become stable. They will not discard their needs. Economic activity will pick up because of delayed / deferred consumption, and life will get back to "business as usual" for most normal and honest people.
People will upgrade / move to e-transactions where ever possible simply because it is convenient, and almost all the nay-sayers will join the new mainstream....as they will realise the advantages of going with the trend.
With the push towards digital economy gain momentum, and more transactions will take place through banks and on digital medium, transparency will increase, leading to better collection of tax, putting more money with government for development projects in the future.
With more money with banks, lending rates and cost of capital will fall.
Black economy will reduce and consequently real estate prices and other prices will experience a price correction. You might even witness a deflation in price and consequently an increase in demand and consumption. Eventually, as demand – supply equalise, markets will become normal again.
Price correction and reduction in interest rates will make homes more affordable for first time buyers. This will also push up more economic activity in construction industry.
The silver lining for all Modi haters..
Like Churchill who led Britain to victory in world war 2 but failed to get re-elected, and like Naidu who brought unprecedented developments to Hyderabad did not get re-elected, Modi may also not get re-elected, unless, the economic fallout are unmistakably evident for the public and BJP is able to sell it effectively.
If indeed Modi has caused unforgivable pain to people, let people not elect him in 2019.
But I am glad he did what he did.
Future
Currency, as it can change hands without leaving any trail, is the main cause of most evils in the world today from human trafficking, prostitution, drug, terrorism, extortion etc etc…
Demonetisation of high denomination currency notes must be undertaken by all major economies like US and Europe on a war footing.
Stockpiles of billions of dollars in 100 USD bills stashed by terrorist outfits will become worthless immediately which will reduce most terror operations around the world.
People with academic interest should download the article by Peter Sands “Making it Harder for the BadGuys: The Case for Eliminating HighDenomination Notes” and published by Harvard Kennery School of Business and Government” in Feb 2016.
Moving forward, once the pangs of current de-monetisation drive end, and digital transactions become more of a norm, all the recommendations of ArthaKranti Sanstha should be adopted by the next Indian Government – if it cannot be done by the current government.
This should include complete withdrawal of 1000 and 500 note, as well as abolition / standardisation of various taxes.
Abolition of taxes will make it non-attractive for people to hoard black money, while digital transactions will make economy more transparent and traceable.
I am very optimistic about future of India.
We should all become enablers in the move to become digital
Demonetisation is nothing short of war and as all wars go, it has been a painful experience for many people. Unfortunately, some of the sufferers, as it commonly happens in war, are common men who have nothing to do with the war itself. As evidenced by numerous reports on main stream media, this is true in the case of demonetisation also.
As of the 10th of December, about 12 Lakh Crores worth of demonetized 500 and 1000 rupee notes out of the 15.6 Lakh Crore that RBI has on its books have already been collected by banks and destroyed.
We will have to wait for 2 more weeks to understand the visible benefits, if any, of demonetisation and about one year to realise the impact it will have on economy in general.
It will also take about 6 months to re-calibrate all the ATM machines and to print enough notes to get circulation back to previous levels.
Along with de-monetisation, Government is also encouraging citizens to move to a less-cash economy. Less-Cash economy does not mean total elimination of cash but it is the reduction of cash transactions and migration to digital transactions where ever possible as in most developed countries.
The Cash-to-GDP ratio in India is 12.42 whereas it is 9.47 % in China, 7.46 % in US, 4% in Brazil, and 3.39% in UK.
Printing and maintaining such huge amount of cash is also an expensive affair and is estimated to cost RBI about 20,000 Crores every year. India will be able to save about 10,000 Crores if Cash-to-GDP ratio can be reduced to 6 %, much more than Brazil and UK.
Three things can happen after 31st of December.
(1) Banks will get a deposit below 15 L Crores
(2) Banks will get all the 15 L crore
(3) Banks will collect more than 15 L crore
All deposits into bank accounts before 31st December will have a combination of 4 types of cash.
(1) White money which is already taxed and legitimate that people have had with them for emergency use.
(2) Black money which was earned by illegitimate means and on which tax was not paid earlier. (This will attract 50% tax, and 25% long term interest free deposit after reconciliation)
(3) Counterfeit currency that people didn't know they were carrying and
(4) Counterfeit currency that crooks want to convert to real currency.
Scenario 1 - Banks will get a deposit less than 15.6 L Crore in circulation.
If banks get a deposit of say 14 lakh crore, about 1 lakh crore of black money will be flushed from the system straight away.
Assuming only 30% of this 14 Lakh crore is taxable, government will collect close to 2 Lakh crore as tax !!!
Scenario 2 - Banks will get all the 15.6 L crore
Now let us assume banks get a deposit of 15.6 L Crore. This doesn’t mean that there was no black money ! It only means that all black money hoarders decided to deposit it in their account and come out clean!
In this case, and based on the same assumption as above, government will get about 2.35 lakh crore in tax.
Scenario 3 - Banks will collect more than 15.6 L crore
This will mean that either
(1) RBI has printed more cash than what is shown in their books, or
(2) A lot of counterfeit notes indistinguishable from original notes have entered the banking system.
Either way, this is an opportunity to come out clean, and this “Spring Cleaning” itself would be worth the pain.
.. And, based on the same assumption as above, government will get more than 2.5 lakh crore as tax.
Economic Fallout.
Whichever way it goes, government will collect in excess of 2 lakh core rupees in tax and fines, which will get spent on projects like Roads, Railways, smart cities etc.. etc, providing direct employment to millions of people and boosting the infrastructure of the nation.
As for economy, People's needs will not shrink, despite reduced physical cash in the system. People will defer their buying decisions until situation become stable. They will not discard their needs. Economic activity will pick up because of delayed / deferred consumption, and life will get back to "business as usual" for most normal and honest people.
People will upgrade / move to e-transactions where ever possible simply because it is convenient, and almost all the nay-sayers will join the new mainstream....as they will realise the advantages of going with the trend.
With the push towards digital economy gain momentum, and more transactions will take place through banks and on digital medium, transparency will increase, leading to better collection of tax, putting more money with government for development projects in the future.
With more money with banks, lending rates and cost of capital will fall.
Black economy will reduce and consequently real estate prices and other prices will experience a price correction. You might even witness a deflation in price and consequently an increase in demand and consumption. Eventually, as demand – supply equalise, markets will become normal again.
Price correction and reduction in interest rates will make homes more affordable for first time buyers. This will also push up more economic activity in construction industry.
The silver lining for all Modi haters..
Like Churchill who led Britain to victory in world war 2 but failed to get re-elected, and like Naidu who brought unprecedented developments to Hyderabad did not get re-elected, Modi may also not get re-elected, unless, the economic fallout are unmistakably evident for the public and BJP is able to sell it effectively.
If indeed Modi has caused unforgivable pain to people, let people not elect him in 2019.
But I am glad he did what he did.
Future
Currency, as it can change hands without leaving any trail, is the main cause of most evils in the world today from human trafficking, prostitution, drug, terrorism, extortion etc etc…
Demonetisation of high denomination currency notes must be undertaken by all major economies like US and Europe on a war footing.
Stockpiles of billions of dollars in 100 USD bills stashed by terrorist outfits will become worthless immediately which will reduce most terror operations around the world.
People with academic interest should download the article by Peter Sands “Making it Harder for the BadGuys: The Case for Eliminating HighDenomination Notes” and published by Harvard Kennery School of Business and Government” in Feb 2016.
Moving forward, once the pangs of current de-monetisation drive end, and digital transactions become more of a norm, all the recommendations of ArthaKranti Sanstha should be adopted by the next Indian Government – if it cannot be done by the current government.
This should include complete withdrawal of 1000 and 500 note, as well as abolition / standardisation of various taxes.
Abolition of taxes will make it non-attractive for people to hoard black money, while digital transactions will make economy more transparent and traceable.
I am very optimistic about future of India.
We should all become enablers in the move to become digital
