India’s ₹ 2000 Currency – Knight in the shining armour or clown in the silver foil?

On the eve of 8th Nov, the Prime minister of India announced demonetization a of the ₹  500 and  ₹  1000 denomination currency notes. The nation went into a frenzy, thinking at first it’s a joke and then scrambling to get their act right to get the cash in hand converted into valuable currencies before it loses its value. This step was primarily taken to combat black money and to check fake currency (believed to finance terrorism) and corruption.  Along with the demonetization of currency, it was stated that ₹  2000 denomination currency would be available within two days.

Now, based on the data b we can see that during 2014 – 2015, the value of Indian currency valuein circulation was 14289 crores (142.89 billion Indian rupees) and  ₹ 500 and  ₹ 1000 denomination currency contributes to 85% of the currency in circulation.  Considering the above statistics this looks like a master stroke which will achieve the objective that it set out for.  This is a welcome step considering the in-activeness of the previous government.

A lot has been written on the benefits of the action, I would like to draw attention to the other aspects , here are my two cents

  1. What does it mean to rich (and probably the political lobbyist)? Nothing much, to say the least, Wealthy individuals do not stash their ill-gotten wealth as cash but they generally have a voracious appetite for investing it in real estate, jewelry and other expensive stuff (cars, watches etc.), to offload their cash. This way either their black money gets convert to white or gets stashed abroad. A probable solution to target this group would be, first digitization of all government offices, throughout the country and linking all purchases with the PAN and Aadhar numbers of individuals, then to snoop on all the immovable assets of individuals such as plots, flats, villas, shops bought by people and try to match that with the source of individuals’ incomes and find out any mismatches and levy penalties were necessary. This will unearth the real black money and their’ sources but this is a mammoth task.
  1. What does it mean to common man or the rising middle-income group? This is the group that got affected the most. I would like to bifurcate them into three categories, First the small business owner who has a need and greed of carrying out his business in cash. Now they must declare their wealth or the stored cash will lose its charm. They also have maintained some money in bank accounts to not affect their daily life. Second, is the Salaried individual who gets his money electronically and is least affected but tremendously happy. The only inconvenience caused to them was standing in the queue at the bank and losing their productive time to get their cash in hand (if any), converted to the new ₹ 2000 notes or deposit it in the bank. Lastly, the lower income group, people who earn their wages daily or monthly but in cash (vegetable vendors, daily laborer, drivers, maids etc.). This group faced the maximum brunt and had the most crippling effect. These people would either have a few old high denomination notes with them, which they cannot use (Going to the bank and getting it changed, would mean losing a day’s wage for them), or their employers would have to procure Rs. 100 notes first, in order to pay these people. Now another situation, which is problematic is, when a vegetable vendor receives ₹  2000 notes from five different customers, who bought vegetable worth  ₹ 200 – ₹  300 each. What is he/she supposed to do? Carry all that change in ₹ 100 notes or install a card machine, neither of which is practical. All in all the lower income group was left holding the shorter end of the stick.
  1. What does it mean to the fake currency racket? Based on an analysis, it is estimated that it costs India, around ₹ 3 to print a ₹  1000 note and it costs approximately the same to print a counterfeit note.  This basically means that a note of ₹ 1000 can be printed with a cost of ₹3 and value of ₹997 can be created.  This scheme would not be valuable with lower denomination note like  ₹ 20,  ₹ 50 or even ₹ 100 as they would have to print a lot of fake currency to make it worthwhile. The Financial Action Task Force (FATF), is a global body that looks at the criminal use of the financial system, states that high-value bills are used in money laundering schemes, counterfeit racketeering, and drug and people trafficking.

If we look at the highest bank notes as derivative of the GDP per capita income c,d  we see how we compare to other countries. While different economies work differently, it does gdpgive some insight as to where we stand and what is the scope of improvement. Economist’s back-of-the-envelope calculation shows that, the highest currency denomination in India should be around ₹ 250 e. The logical way to curb the fake money racket would be to demonetize all high bank notes.

what next? Economic Affairs Secretary, Shaktikanta Das said at the Economic Editors’ Conference that, In due course, ₹1,000 notes will come back in the market with new dimensions, new design and new colour,”. The new design and feature would be added to ₹100 and ₹50 note as well. 

We would have to wait and see the impact of the demonetization strategy and of ₹ 2000 note. While I see an immediate short-term effect, long-term effects need to be closely monitored. Demonetization is only a minor solution to the major problem of black money in India. In addition to the current move, government should take steps, to extract black money stashed abroad in tax havens, which will greatly help in eradicating this problem and hopefully lower inflation.

Finally, food for thought, a conspiracy theory!!!  I came across a theory on social media which stated that there may be a connection between the launch of Reliance JIO and demonetization? Some people claim that the owners of Reliance JIO were privy to the information of demonetization and hence they invested most of their black money to create a whole new telephony system and provided it free of charge to public till Dec 30th (same day till when old high denomination notes can be exchanged) and then later, receive the returns as white money, from users as monthly usage charges.

I’m not sure if this is true. Please do leave a comment and let me know, what you think..!!

Nesha Jacob 

References

a. Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency units

b. https://data.gov.in/catalog/notes-and-coins-issued

c. http://data.worldbank.org/

d.GDP per capita – Per capita GDP is a measure of the total output of a country that takes gross domestic product (GDP) and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another.

e. https://www.quora.com/How-will-the-ban-of-1000-and-500-rupee-notes-affect-the-Indian-economy

 

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