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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  1. I feel he should have allowed a one time no questions asked deposit of 5 lakhs per person only to people who have paid tax last year and have the IT return to show as proof. This deposit should be locked at savings rate for 3 years before being available to the depositor again.

    This way a lot of money would have come into the system rather than being destroyed.

    Plus non tax paying accounts would not have been uses as mules.

    I think the overall thought of demonetization is good but the implementation is bad.

  2. Please come to the road and “feel ” the pain rather than sitting in front of “P.C” and writing “blogs”

    this is extreme blunder by modi

    THIS is a job of “RBI” , govt has no role in this

    please dont support modi for everything

    surendra

  3. @ Surendra,

    I doubt if you are one of many affected by PM Modi’s surprise rather shocking move.

    As far as RBI’s Role..Unless Strong Leader suppprt them, they cant do much.

  4. I agree with this move and this temporary obstacle is worth enduring I feel. But what I did not understand is that re issuance of 500 and 2000 notes will not stop from black money from re generating. Also, not all black money is held as hard cash. But as gold, real estate etc. Hard cash is held mostly by lower rung black marketers or people waiting for an investment opportunity of that black money. Can you please write a blog dealing with these points.

    Novices like me are really interested in know about the value of this action and there is too much clutter out there. It would be of help if somebody like you can at least attempt to help out separate misinformation from information.

    Thanks
    Paddy

  5. @surendra: “Extreme blunder”??? wow.
    If you are honest taxpayer, you won’t even think of which side you take. Modi’s done this at the cost of losing popularity from even his party cadre, and lot of votes in 2019. Yes, there is pain, but any sane person would learn something out of this “ordeal”, and not make the same mistake again (yes, reality is different), because honestly, I think there is much more to come from Modi, this is not the end.

    I fully support Modi, primarily because “walking the talk” at the highest level is next to impossible in our country. Like other people commented before, at least for now, I feed good about the change in the culture and mindset, with some action.

  6. Have been reading your blog for quite some time, never felt the need to post a comment. Well, till now. This post of your demonstrates your utter lack of willingness to understand what happens to people who are not in formal banking system and who depend on cash for their daily needs.

    While I am not going to comment on your political affiliations (There’s no need), please make an effort to sit and think how many people use cards to pay for their daily grocery or medicines or travel? What is the percentage? You might just reduce your blind praise. While intent is laudable, do you really think our PSUs are equipped to handle the logistics nightmare?

    Just talks are not enough! Neither is writing about it.

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