Scrapping Rs500, Rs1000 notes a costly idea…

Scrapping Rs500 and Rs1000 notes a costly idea but it will born a new economy in India.A big-bang reform of black money in India.

Immediate Impact: Heavy Deflation

Initially there will be heavy deflation as people who have earned money through illegal means such as smuggling, corruption would be afraid to declare the money as they might be prosecuted by Govt/Income Tax Dept on the legitimacy of their income.
This will reduce the total currency circulation in the economy – leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down.Gold prices, stocks & commodities will drop.

This will also lead to Inflation (not overnight)

There will be a lot of people who have a lot of cash, legally earned, which they will deposit it in the bank.
Now the bank with more deposits can do more lending.
Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night.
Deflation and Inflation will balance out each other in the future.

Some of the benefits of this movie are: (Pros)

  • It will help the government to fight Black money, corruption, terrorism and counterfeit currency with one single decision.
  • Arms smuggling, espionage and terrorist related activities will be choked due to lack of funding.
  • Counterfeit currencies are being used for financing terrorism which is being run by the enemy in India. Now Govt has taken a bold move which enables them to fight counterfeit currency/terrorist funding activities.
  • With the new limits on ATM withdrawals being restricted to Rs 2,000 per day, withdrawals from bank accounts limited to Rs 10,000 a day and Rs 20,000 a week, it will drive the card payments across the country (In simpler words card transactions will slowly replace the cash transactions in daily activities).
  • It will be easy for the Government to track the money being exchanged as exchange can only be done by producing a valid government identity cards like PAN, Aadhaar and Election Card from 10 to 24 November with a daily limit of Rs 4000. There is no limit on the amount as long as it is legal.
  • This decision will help institutionalize the real estate sector bringing more transparency in the Indian real estate industry. This step would give the Indian real estate sector more credibility making it more attractive to the foreign as well as domestic investors.
  • Housing prices could witness downward pressure, helping revive demand in the sluggish housing segment (this will give much needed bloodline to the sector)
  • It will help the common man by putting an end to the artificial increase in Real Estate, Higher Education and Healthcare transactions bringing them within the reach of the common man.

Cons

  • Inconvenience to common people who will start running to the nearby bank to exchange the 500 and 1000 currency notes.
  • Cost of replacing the 500 and 1000 Rs notes. If all this additional money (a spectacular Rs.6.666 trillion) had to be printed using Rs.100 notes, it would cost RBI about Rs.11,900 crore, which is more than a four-fold increase. This is without taking into consideration the increased costs of operating ATMs (since they would need to be refilled more often), and of handling money in general.
  • Very difficult for more than half the population who are not well versed with the card transactions.
  • This move deeply impacts the working sections of society: drivers, maids, cooks, electricians, plumbers. Anybody who provides services in the informal sector and depends on monthly or bi-monthly cash payments.
  • How do you expect a chai wallah to leave his business and stand in a queue to deposit these notes in bank?
  • What will happen to the common man who finds out that the note he is having is a fake one? How is the Govt going to handle such situations?
  • The small businesses will be affected at least in the shorter run.
  • Jan Dhan scheme, UPI/digital payment stack and payment banks are still in the nascent stage. It will be a long time before rural India moves to completely cashless transactions. In the short-term, people in rural India who have a significant amount of Rs 500 and Rs 1000 notes, but no official form of identification will have a tough time in exchanging their notes.
  • The big fish will be left out whose black money is in the form of foreign currency, gold and stashed away in tax havens.

But the Pros which are in the long term interest of the country comfortably outweigh the cons.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s