The government’s decision to remove high-denomination notes from circulation and replace them with new ones as a positive for the economy. In the short term the weakest portion of the economy – the vegetable vendor and the nomadic people, etc. will suffer and suffer badly. However, this step seems to be one more logical step in Modi’s systematic approach to remove black money from the economy. The big beneficiary is likely to be the banking system – as a big part of the black economy becomes part of the formal economy. However, steps like Tax Audit, demonetisation done in 1980 (by Morarji Desai) etc. have not had the desired impact as was claimed in the preamble to the Acts. Lets hope that Na Mo has more energy than the earlier attempts and takes it to the logical end.
It was a shocking / stunning / brilliant move from the Namo, a clear part of the plan to curb black money in the economy. In an single stroke of the pen, the Indian government announced the cancellation of the current high-denomination (Rs 500 and Rs 1,000) notes from circulation by December 30, 2016.
The government will replace the old notes with new ones (Rs 500, Rs 2,000) from November 10, 2016. The change of high-denomination notes is part of the government’s plan to
(1) reduce the role of black money in the Indian economy, (2) remove fake currency in circulation and
(3) tackle related issues of corruption and terrorism.
I am sure he will plug other loopholes – like making payments to farmers by using RTGS, forcing hospitals to admit patients against cheque payment – I have (yet to be deposited – Rs. 120,000 in HD notes just kept for a medical emergency – not all hospitals accept credit or debit cards). Other than this, I hope Modi sets up a bank where the real poor are welcomed, not tolerated. Also the public sector banks are likely to run out of staff (not joking) which will mean that the bottom of the pyramid will get neglected. I am sure that Na Mo knows all this and he will attend to this.
Frankly I do not see any major impact on general consumption as most consumers in India use small-denomination notes for small-value items. At the lowest end of the pyramid they are likely to stand in queues and exchange the HDN for smaller currencies for their transactions. Can see a negative impact on consumption of high-value items – even decorative paints, high end bathroom fittings, high end tiles (the cost of laying the tiles is more than the cost of the tiles, did you know that?) as entities and individuals with large amounts of undisclosed cash will focus on managing their finances rather than on spending. Residential real estate demand has been sluggish and the younger generation is keen on renting than on buying. It had already become quite difficult to use cash for high-value transactions in India with the requirement of disclosure of PAN (tax number) for such transactions.
HOWEVER, I do see the economy benefiting from a combination of Modi’s past and future actions – a higher GDP growth for sure with more people becoming part of the formal economy (Jan Dhan is an awesome success story), higher tax-to-GDP ratio from proper reporting of income in the future – it is going to happen slowly, but surely; sections of the unorganized industry and professionals did not report their full income; the implementation of GST will hasten the move, taxi services like Ola and Uber ensures that we pay service tax even on our taxi rides. Paytm, and Onewallet ensure that even small ‘chillar’ payments will be online. All this surely have to lead to a higher savings rate, more SIP, and lesser cash handling.
Remember even bank interest rates are now positive – with a huge curb on inflation. Na Mo’s sustained focus on eradicating the menace of black money from the economy as a big positive for the economy.
Downside? Jhan Dhan RMs will now sell a lot of ULIP at the bottom of the pyramid, making sure that the pryramid structure remains the same. The cash flow will be from the Jan Dhan to the already rich. Oops.
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