(This Blog was originally posted on 19th November 2016)

EVERY STORY HAS A BACKSTORY

While the world was busy having discourses and gearing up for what was thought to be the biggest event catching all the eyeballs as to who’ll be the new US president our very own attention grabber once again stole the show. Mr. Narendra Modi once again in his riveting, peculiar and blunt ways promulgated what can be said the most flabbergasting, for most,  nightmarish and appalling announcement of the year, at least for the Indian audience. With this declaration which felt quite cinematic where our nayak attempts to clean the dirt that’s covering the entire nation stifling the honest with the smoke of black money and corruption made clear that he is a man of action and not just words. The news of demonetizing Rs 500 and Rs 1000 notes fared mixed reactions where a myriad of hearts was broken and an uncountable hearts were won. Though the news felt impetuous and sudden but the government had it all planned about 6 months ago and to keep it surreptitious only three people were involved one being PM Modi, others include Mr. Arun Jately and The RBI Governor. Printing of Rs 2000 and the new Rs 500 notes was started 6 months ago. But it was thought that they were only a new addition to the existing currency. Now, It’s been some days since the decision came into effect and the repercussions can be seen in the form of hassle that’s been caused outside banks and ATMs. But who all need to fear this decision? and for whom it’s a moment for celebration and being proud?. Is it actually going to benefit the nation? is it really a move for the nation? or just a great political masterstroke. Let’s see the left, right and center of this story.

FIRST THING FIRST, what is demonetization?

If we go by the definition given in Investopedia, it is the act of stripping a currency of its status as legal tender. For us, it is saying goodbye to the Rs 500 and Rs 1000 notes.

WHY DID THE GOVERNMENT TAKE WHAT SOME ARE CALLING A DRACONIC MOVE? (REASONS)

According to RBI database around Rs 17,54,000 crore are currently in circulation out of which 39% share is occupied by Rs 1000 notes while Rs 500 constitute for around 45% of the total currency, big numbers!!

Although, if we go by the volume then Rs 10 and Rs 100 make up for 53% of the total currency notes. So, according to this data the government has demonetized about 86% of its currency, There have to be some strong reasons for it. Let’s see  

  • While the message has spread and is loud and lucid that the demonetization was the consequence of widespread and rising black money in the economy but that’s not the only reason. One major reason apart from the concealed income is the rise in terrorist activities. Especially, after the recent encounters and the continuous nefarious activities being carried out along the borders. As Mr. Modi mentioned in his speech, “Terrorist strikes at the innocent, who funds these terrorists?. Across the border, our enemy uses fake currency and dodgy funds to sponsor terror- this has been proven repeatedly”. It was blatant that some action was required. But an action of this stature was totally unexpected and definitely unprepared for.
  • India is a country that’s been inflicted with the virus of corruption and is looted by the people filling their pockets and killing the bucks. While tons of debates have been held and numerous promises have been made nothing significant was done towards the eradication of this menace. So, this step no matter the result is a step in the right direction, at least intention-wise. According to global agencies, the parallel economy running in India was 23% in 2007. So, an estimate of about Rs 4500 crore is undeclared money in India and it is expected that some of it will make its way to the banks.
  • The surge in fake currency is one very important reason of this demonetization. According to Indian Statistical institute, 250 out of every 10 lakh rupee note is fake. Further data shows that every year Rs 70 crore value fake notes enter the Indian market out of which only one-third is detected. In 2015, Delhi and UP accounted for 43% of the total recovered fake currency notes.

WHO ALL SHOULD BE AFRAID?

“Your money is yours. You will not loose anything. The government will ensure that.” PM Modi said in his speech. Clearly, from that statement, one could surmise who all need to be afraid of this bold decision, obviously not the ones without hidden money.  People with stashed currency are the ones who are feeling the heat.

  • According to a recent study, India’s black market economy has been pegged at Rs 30 lakh or 20% of the total GDP which is bigger than the GDP of countries like Thailand and Argentina, massive!.
  • People wanting to inflict pain by funding terrorism with fake currency can sulk as their attempts have been foiled. According to a report by Washington think tank global financial integrity India lost $344 billion in fake currency outflows between 2002 and 2011. With this one move by the Indian government, all the fake currency will be flushed out and be of no use.
  • Our netas also have reasons to denounce the decision as now they’ll also have a tough time using the illegal money for elections.

THE WORD OF MOUTH-

The audience is divided between supporters and those who oppose the decision. It definitely is not a unanimously loved decision as it surely has impacted the routine life of people where some are facing minor to major inconvenience. But let’s see what some of the experts think about demonetization. Starting with one of my favorites, Mr. Raghuram Rajan.

THEY KNOW THE ECONOMICS OF IT

  • Sources say that Rajan was not in favor of demonetizing the currency. He also in 2014 gave a speech where he said that “ In the past demonetization has been thought as a way of getting black money out of circulation. It is often cited as a solution. Unfortunately, my sense is that clever people find ways around it.
  • According to Chanda Kochhar (MD and CEO) of ICICI Bank, the move will bring about a transition from cash to no cash or low cash transaction.
  • Harish Salve one of the leading lawyers on taxation laws believes a parallel black economy will collapse.
  • Narayana Murthy, founder of Infosys also welcomed the move saying that “the dishonest will suffer, absolutely that is the right thing.”

THEY KNOW THE POLITICS OF IT

  • MDMK general secretary Vaiko welcomed the move stating it to be bold. But said it should have been implemented without affecting the common man and the middle class.
  • Sri Sri Ravi Shankar congratulated PM Narendra Modi saying it will curb corruption, black money, and terrorism.
  • Arvind Kejriwal as always is against the move saying that, “in the name of fighting black money, a scam has been implemented”
  • Rahul Gandhi tweeted, “ Once again Mr. Modi shows how little he cares about ordinary people of this country- farmers, small shopkeepers, housewives have been thrown into utter chaos.”
  • P. Chidambaram also opposed the decision saying that it would only affect common people.

THEY KNOW THE HEADLINES FOR IT

  • The Washington Post, “Panic, anger and a scramble to stash cash amid India’s ‘black money’ squeeze.
  • Sydney Morning Herald, “India scraps Rs 500 and Rs 1000 rupee notes overnight.”
  • The Independent, “Modi does a Lee Kuan Yew to stamp out corruption in India.”
  • The New York Times, “ Crowds line up at India’s Banks to exchange banned rupee notes.”
  • Wall Street Journal, “India’s Black-money experiment shines bright for bonds.”

IT’S CONTROVERSIAL

The whole scene has been projected as being a very secretive and that only three people had knowledge about it. But there are certain uncanny coincidences which can’t be easily overlooked.

  • A prominent newspaper named ‘Akila owned by PM’s friend Kirit Ganatra published from Saurashtra in Gujarat in April mentioned about the demonetization in one of its reports which later was declared to be an April fools prank.
  • Crores deposited in 2 BJP accounts in 1000’s on 8/11 as per a news published in Bengali daily.
  • With an astronomical sum of bad loans which being close to around Rs 600,000 crore giving banks a hard time, it seemed like the perfect time to implement the decision as it is believed to infuse money in banks.
  • Andhra Pradesh’s CM N Chandrababu Naidu on October 12 arranged a press conference where he said that Rs 500 and Rs 1000 notes should be banned to curb corruption. His words were, “Politics has become a shelter for corrupt people and black money earners. Some people who are in politics are misusing the people’s mandate. I am writing to PM today asking that Rs 1000 and Rs 500 notes be abolished and total bank transactions be encouraged.”
  • With the government being firm on its words that only a few people had the knowledge of this decision question arises that how then a reporter from Dainik Jagran on oct 27 published a story where he mentioned that Rs 2000 notes would be issued as a replacement.
  • Times of India reported that Rs 3 crores were deposited in banks by the West Bengal BJP Government in nationalized banks 8 days before PM Modi’s announcement. The last transaction which was of Rs 40 lakhs took place minutes before PM’s speech

THE IMPACT

Now let’s see what impact would the demonetization of currency have on our economy,  on various industries, and the common man.

  • It is believed that the decision will help tackle the black money menace. According to ICICI Securities Primary Dealership, the decision would help uncover Rs 4.6 lakh crore worth of black money. But not all agree to this, the other side is that now not many people keep their black money hidden under their couch, bed and wherever they did some years ago. Now, it’s mostly kept in the form of Benami properties, offshore bank accounts, and foreign currency.
  • It will help obstruct the activities of terror organizations running on fake currency.
  • Political parties might suffer as in elections they’ll have a tough time garnering donations which form a large part of election management.

HOW WILL IT AFFECT COMMON PEOPLE?

  • INCONVENIENCE, probably the worst way in which the commoner has been affected is in the form of inconvenience that people are having in exchanging their money, withdrawing money from ATMs, carrying out petty expenses. Not everybody uses and accepts digital mode of payment which has led to a temporary plunge in their business and also chafed the people as they are not able to use the service.
  • People without bank accounts and easy access to banks will have a harder time to deal with the situation.
  • Low-income people who are paid in cash might get affected as their payment can get delayed.

HOW WILL IT IMPACT OUR ECONOMY?

  • A rise in deposit rates will lead to a plunge in lending rates as now the banks would have a higher CASA (current a/c, saving a/c) deposits so a reduction in the lending rates can be expected.
  • With an efficient economy and improved monetary transmission, it is expected that RBI will also ease its monetary policy rates.
  • Currency will become stronger
  • Inflation will come down
  • Fiscal deficit will fall
  • Business will get cheaper loan
  • Tax rates might reduce as the collection of tax will increase

HOW WILL IT AFFECT BUSINESS?

  • Real Estate – “The real estate sector is the biggest receiver of black money, so it will take a massive hit,” says Ajay Jain, ED, Investment Banking and head Real Estate group, Centrum Capital. With Real-Estate seeing a slowdown it is expected that the prices of property will go down.
  • Gold – “This move has reinforced Indians belief in gold as the safe haven asset,” says Sharma of Sanctum Wealth Management. The prices have already seen a fillip and with expected demand, it sure has a bright tomorrow to its name.
  • Non-Banking Finance companies – They might get affected in the short run as they largely deal in cash transactions of small and medium-sized borrowers.
  • E-MARKET – It might prove to be a beneficial step for most of the online businesses. Especially businesses dealing in payment gateway and mobile wallets. It might also fillip business for online retail, E-marketplace and Net and payment banks.
  • RETAIL – The traditional retail might suffer in the short run as they largely deal in cash transactions.
  • Agriculture – Small farmers and villagers might feel the heat as they also mostly deal in cash transactions and to make things worse many of them do not even have a bank account.

THE CURRENT SCENARIO

It’s almost two weeks since the decision’s implementation and people are going hysteric about the whole scenario on how things are unfurling. So here are a few details which might be of use.

  • The usage of Rs 500 and Rs 1000 notes have been extended by the government on select transactions such as government hospitals, private medical shops, government-run cooperative shops, to buy railway, metro tickets, and air tickets from ticket counters and at milk booths, petrol pumps, court fees, international airports etc till 24 November.
  • The weekly cash withdrawal limit has also been increased from Rs 20,000 to Rs 24000.
  • For business entities, the weekly limit has been kept at Rs 50,000 if they have a current account functioning for the past 3 months or more.
  • If you have a wedding at home, you can withdraw up to Rs 2,50,000 after providing your PAN details. The money can only be withdrawn by the parents or the person getting married.
  • Parking charges at airports are also exempt but only until 21st November.
  • A large number of micro ATMs are also being deployed to calm the situation.

 

SOURCE – ET Now, Business Standard, Quora, Your Story, The Saisat daily, Indian Express, Huffington post, Media Reports, The Logical Indian, Factly.