On demonetisation

Reproducing my facebook post on the blog

Prime Minister Narendra Modi announced in a televised address to the nation that from the midnight of November 8, Rs500 and Rs1,000 rupee notes would cease to be legal tender. My take on the issue.

A man displaying Rupee one thousand notes (via Indian Express)
A man displaying Rupee one thousand notes (via Indian Express)

1. There are no clear estimates about the scale of Indian black money and how it is distributed. Many experts say that bulk of the money is stashed abroad or parked in assets (real estate, jewellery etc). Plus, demonetisation does not cut black money from source. So this decision is likely to have a small impact on black money per se. It will definitely curb the black money in form of unaccounted cash circulating in Indian economy. Once the exchange period ends, the notes collected by the government will tell us the amount of cash in black economy (taking the difference between total amount and the one that is collected).

2. The move will primarily help to tackle the problem of fake currency notes which are in circulation. Note that 85 per cent of the cash in circulation is in the old Rs 500/1000 notes. That also means that “we will have an 85 per cent reduction in money supply for the informal economy for some days. Money is the means of transacting in the informal economy — payments will be held up and purchases will be postponed.” Ref: https://goo.gl/RGDqKV

3. Interesting that when UPA was in power, BJP had a different view. RBI, in 2014, announced “the withdrawal of currency notes that had been printed before 2005, after the finance ministry recommended it. The then-RBI Governor Raghuram Rajan had been careful to insist that it was not an attempt at demonetisation, and instead only an effort to withdraw older notes that had fewer security features. But the BJP wasn’t convinced. Spokesperson Meenakshi Lekhi held a press conference saying the effort would do nothing to bring back black money – while having a terrible impact on the lives of ordinary people.” This is exactly what many people are saying today but party President Amit Shah has said that politicians who are criticising the government’s surprise demonetisation move were joining the ranks of “black marketers and drug dealers” Ref: https://goo.gl/DN8JMG, BJP press release (https://goo.gl/6ZdoDZ)

4. Until yesterday, I was under the impression that this move was super secret. That is incorrect. Here is a Business Line story from October 21 hinting towards this move. (https://goo.gl/3Acnso)

5. There is chaos and panic on the ground. ATMs not working, not having cash, long queues outside banks. Read ground reports. The challenge is not just announcing the policy; it is about smoothly administering this transition phase. Our public administration system is not known for its efficiency and this is a humongous task. Yet to read reports from remote locations to understand how things are faring there. Hope that the government has concrete plans.

6. And this: “In the prototype Rs.2,000 note to come, displayed on television, we can see the denomination written in the Devanagari numeral. It is a first. India’s founding fathers had avoided privileging any one language. This principle, so vital to the prospects of this great country, is set to be breached. The demonetisation has also proved to be a cultural opportunity.” (https://goo.gl/p6K3i5) More details in this piece: https://goo.gl/QmcRDJ

7. Please read stories in newspapers if you have any doubts. And make sure people around you know facts. WhatsApp forwards are creating confusion and rumours are being spread.

 

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