Facts of current demonetisation

A lot has been talked and written by the demonetisation step taken by the Govt. of India and Shri Narendra Modi. I had been waiting to write this for a while now so some items may sound obvious to many readers. My attempt is to present this in a holistic frame but there is no illusion to treat this as the only truthful comprehensive analysis.

First of all, as many claim, including some of the reputed journos and politicians, this is not a demonetisation step in the strictest of the sense. Although sudden and questionable but this is no shift of currency but merely a new design of notes, rendering old design a waste. Example of demonetisation would be when EU shifted to Euro.

Refer to this definition for more. http://www.investopedia.com/terms/d/demonetization.asp

There is also no reduction in denomination of notes as per various recommendations on the topic of black money where scraping higher denomination was suggested to counter black money and money laundering as 85% of monetary value is held through 500 and 1000 notes.

If one understands these basic definitions, a lot of perspectives fall in place. This decision does hurt a lot of people holding big amounts of money as currency notes which in itself is a crime as hoarding of any currency beyond certain limits is a criminal activity as per constitution. As the case is, there is no restriction for exchange of currency amount as long as one can justify it. IT Dept. on a regular basis does a scrutiny of dubious high value transactions. The scrutiny of deposits over 2.5 lakh is thus an extension of existing law and difference may lie in the execution of this policy, putting many on the radar. So, this in my humble opinion is no step on black money and no demonetisation in the sense that prevails. This may however set out to be the first of many such steps which will be keenly watched and waited for in future.

Why would Narendra Modi then risk so much public backlash and create innumerable foes (as further evident by his speech in Goa)? According to me, Narendra Modi has aimed many birds with 1 shot in this decision. Listing down the primary motives behind this decision in their order of importance too.

1. Counter the terrorists: Money is a big motivator and many experts around the world call ISIS fighters mercenaries who kill for money. Terrorist activities in India or anywhere for that matter can not be sustained without money. Pakistan spends considerable time, energy and money in creating and circulating fake currency to undermine Indian economy and also fund its terrorist activities. All this fake currency was rendered useless overnight. A big economic blow to Pak and Kashmir issue temporally solved. Outcome, schools reopened in Kashmir :)
2. State Elections: With UP/Punjab elections few months away it is well known that sacks of money to be distributed would have reached district HQ of parties. Most of the funding for elections is also through illegal money and hence no proper accounting. With this decision, all sacks of money will be used as fire fuel in winter. Fallout of this would be much cleaner elections and perhaps big benefit to BJP. This would have hurt Mayawati the most in UP as BSP was expected to emerge as biggest beneficiary of anti incumbency. AAP would be hit badly too and Arvind Kejriwal will be in shock for couple of days. Body language experts can verify this claim.
3. Saving the banks: The NPAs of some of the banks had grown to unsustainable proportions and the humongous deposits that will follow with this decision are sure to bailout these banks. Expect many like SBI to write off high value loans without much notice. (already done by few in last few days)
4. Other factors like Drug/Human trafficking/prostitution: All illegal activities are backed strongly by fake currency and other illegal means of money exchange. Make all this money waste and you have a temporary solution to this menace. Can have specific implications in Punjab elections.

The expected recovery of blackmoney is merely 5% in the best case scenario as per the claims. However this firmly blocks all fake currency circulated in market. The fact that BJP govt. has been able to project it like a step towards black money is a PR achievement. That no political party has taken time to dissect and understand the real motives of this decision is unfortunate for us. Infact, most politicians have been personally hit by this and will find it difficult to fund their party activities.

The expectation further is that this decision will be followed with more sustained efforts. Modi Ji has set some big expectations with people. The public trusting the intent of Modi has decided to ignore the inconvenience. However, it doesn’t take much time for perceptions to change in politics. Unless some follow up decisions are taken, this will not go down very smoothly with people.

Suggested follow up measures would be:

1. Get back Swiss Money: Only then this first step will be counted as a strict cleaning black money step.
2. Action against wilful defaulters and corrupt politicians: Vijay Mallya, A Raja, and the likes have to be sent to jail.
3. Abolish Income/Personal tax: There is a very strong case built for it by Dr. Swamy and with the recent turn of events this demand should grow. Although India has one of the highest rates for indirect taxes, personal tax is often the motivation for people to hide the real value of their assets. By removing personal tax and levying a surcharge on purchases above a certain value, govt. can perhaps take a long term step for addressing the issue.
4. Simplify & reduce the indirect taxes: GST should fulfil that aim but going by the last 2 budgets, Arun Jaitley has taken the opposite approach of imposing more taxes on common man. Devil lies in details and the execution of GST will be very critical.
5. Support SMEs: It is still very difficult in India to start and run a business. Unless govt. comes up with certain measures to make the life of small business owner easy that makes him not to run to CA and lawyer for so many things, the intent of govt. can be questioned. Again, our lawyer FM seems to be on the opposite route favouring the balance sheets of lawyers and CAs.

The current step taken by the govt., if not followed well with other measures, may hurt small business owners in short to medium term and even benefit large corporate houses and MNCs at the cost of these small businesses. Until that happens there is plausible case to doubt the concealed intentions here.

Till then this is still a commendable effort in national interest despite the risk of a political fallout for Modi and BJP. Better PR handling has greatly countered that risk already and this for now is turning out to be a political master stroke too. Modi, as he is known for, has decimated all his opposition and he may continue to win people’s confidence for more time and their vote too for two reasons: his own perceived efforts and second being lack of credible opposition.

We sincerely hope that the decision was taken for right reasons and more such decisions will be taken in future with the paramount interests of nation and public as priority. Shri Narendra Modi, has seldom disappointed.

Note: Happy to answer questions from readers and also correct any of my wrong notions. Feel free to interact. :)