Demystifying Demonetisation

As Indians, each one of us has a point of view on Modi’s demonetisation initiative. As the nation of a billion people warmed to the news of the demonetisation, reactions ran wild. While two distinct groups of those in favour and those opposed have emerged, there are a few others who are perched like cats on the wall – perhaps because of a lack of understanding. Here’s my attempt to demystify the demonetisation.

PM Modi led a number of initiatives as a run-up to this big-bang “surgical strike on black money”, while the planning and implementation of demonetisation was still under wraps. A prominent move in this regard was the Jan Dhan Yogana, an attempt to promote financial inclusion, urging opening of “zero-balance” bank accounts with an identity proof. While this may be the first step to encourage savings among the poor, it was a big leap in establishing identity and collecting data of millions of Indians who are currently outside the organized sector. Another unconventional yet successful move was the ‘Voluntary Disclosure of Income Scheme’, encouraging individuals and organizations to declare undisclosed income at the prevailing tax rates without attracting a penalty. This underscores my belief that if given an opportunity to do good, people will do good to turn their lives around.

So, what’s all that’s right about the demonetisation move?

1. The move directly impacts those who hoarded black money in cash. They could deposit the cash into the bank accounts, drawing the attention of Income Tax department. The IT would then use a formula to calculate if the amounts deposited is commensurate with incomes declared. If not, it would attract not just a tax, but an additional penalty. Therefore, people could lost up to 90% of the amount deposited and manage to hold on to 10% of it. Or they could simply do nothing.

2. As more deposits flow in, the monetary base would expand. As bank deposits rise, the bank can lend more money on loans. As access to money becomes higher (money supply increases), lending rates are expected to fall. This would boost investments, fueling economics growth.

3. The informal financial sector, comprising of money-lenders charging exorbitant interest rates, would be adversely affected – not only because a lot of their holdings is black money in the form of cash, but also because it pushes more people to the banks. In the long run, if accompanied by the right structural reforms fostering microfinance, it may encourage the rural poor to avail banking facilities. In an ideal world, there would be no more farmer suicides!

4. With a chunk of the black money previously hoarded in cash making its way into the formal economy, the government seeks to gain via increased tax collections. This could ease the fiscal deficit that India has been facing. In the long run, if there is a substantial increase in tax collections as more and more citizens become, it could lead to a rationalization of the tax brackets and tax rates.

5. And of course, there is the obvious effect of clamping down on counterfeit notes and preventing funding of terrorist activities.

What is a simple yet brilliant process innovation in this move?
The government set an upper limit on the amount of money one can exchange in a day. Some people tried to outsmart the government by trying to exchange currency at multiple banks on the same day. However, the identity proofs and transactions across banks are linked. So if someone has exchanged old currency up to their daily limit at one bank say SBI, and tried to exchange another set of old currency at another bank say IOB, the system prompts that the person has already exchanged at another bank.

So, why are people sceptical about this move?
One simple reason – this move only addresses black money held in the form of cash. A majority of the black money has already been invested in realty projects, gold, converted to foreign currency or safely treasured in the Swiss banks of the world.
Here’s my take on it – well, the government had to start somewhere and this is a great place to start. It is a strong signal to let the world know that the government is committed to putting an end to black money. I believe the government is already in talks with the governments abroad for greater information sharing between banks.

How are the black money hoarders responding?
The responses have been mixed. On one side, many of them are coming forward and depositing large sums running into crores in the banks. On the contrary, many others are trying to safeguard as much as of their wealth as possible. Most are turning to gold. There have been reports of jewelry stores selling 10 grams of gold worth ~35,000 up to ~55,000 and giving bills dated 8th November to be able to exchange the cash for new currency. Other sources are money lenders who keep commissions ranging from 40% – 60% to exchange demonetised notes for 100-rupee notes. That is, if you handed them a 1000 rupee note, you’d get back 4 or 6 hundred rupee notes!

What’s the national media doing?
Making things worse! Instead of being the mass medium of communication to help people in times of need, they are fueling negative reactions by publicising stories of how long the queues are! Shame on you, Indian media!

Who are the real super heroes?
The bankers, obviously! Every singly employee of the banks ranging from security guards who are organising the queues by tokens, to cashiers who are working overtime, to managers who are fire-fighting, is a hero. Let’s thank them all, who worked through the weekend to make our lives a tad easier!

What’s the closing note?
This is just the beginning. While it may throw a lot of common people in temporary inconvenience, it is an unintended consequence. You’d rather lose a few battles to win the war, right? Here’s to a making India a country of billion honest and hard-working citizens.

Wandering soul searcher who lets life pass by, one memory at a time.

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