Quality of money depends on how one earns it and how he or she spends it. Quality of an economy and society depends on exactly the same rules. The demonetisation is a very positive step which will do a lot of good to the country in the long term. However, it has its short-term hazards, which is worth suffering for the long-term benefits. Demonetisation is also just 'one' of the steps in the direction of cleaning up the country for a better future.

HOW AN ECONOMY WORKS?

economy

The health of the economy depends on the circulation of money, circulated obviously for exchange of goods, services and other value which improves the material quality of people's life. People being the providers of such services, goods and value in the value chain of the economy, they get benefited by creative engagement and mutual material gain of value. Unless money gets circulated efficiently in such a value chain, the economy won't be vibrant. If money flow reduces, economy will stagnate. One important point is that government also should get back a fair share of such money released by itself, so that it can spend it on further services for the public and the government machinery that runs such services. Government gets it back from the people in the form of taxes. Just like the 'people' who are 'actors' in an economy, government as an entity is also an 'important actor' in the same economy. Since Indian government does not have any other income other than the taxes people pay (many Gulf governments has oil income), it’s critical that it gets its due taxes for its spending on general welfare and development of the country. If the government does not get its due share of tax income, it's forced to sell natural and other public resources to private individuals or corporates, (privatisation) to find funds for spending on public services, defence and government machinery. 

CURRENCY IN INDIA

currency

Currency is printed in India by RBI against its reserve of gold security and government bonds. Currency printed gets circulated to the society through government services and banks. When Indian money goes out of India by way of imports or individual spending, it creates a deficit in the money/currency circulation in Indian economy, as it has literally gone out of the country. (Buying too much gold by Indians indirectly affects the economy negatively, as its mostly imported). When foreign money comes to India by way of exports or individuals (foreigners or NRIs) spending in India, we will have a surplus of money in the Indian economy. More exports and more tourists and more NRIs means we have a foreign currency surplus and money surplus in the Indian economy. 

TAXES

taxThe various forms of taxes are sales, service and income taxes. Today, only 1% of the population pay income tax. This 1% carry the weight of 99% non-tax payers. Tax in India is self-declared, which is subject to verification by Income Tax department. Tax evasion in India is massive. Anyone with an annual income above 2.50 lacs is supposed to pay tax. But a huge majority of 99% of the population evade tax whether it's income tax, sales or service tax. Government is unable to collect its due share of tax because there is a huge, unaccounted cash (currency) economy in India, operating outside the purview of the government. There is a limit to how much government can collect tax through raids. So the only option left with the government is to forcefully move from an unaccounted cash economy to a legitimate accounted digital economy. So that it can monitor effectively, collect a 'fair' share of tax from those who should be paying and thereby fine tune or reduce the heavy burden on the 'just 1% tax payers'. This can possibly lead to a fair and balanced mechanism. 

BLACK MONEY

black moneyBlack money simply means unaccounted and tax evaded money in cash, any form of assets acquired that way and any form of services or benefit taken with such money (as a liability). Which means almost every single person in the country has in one way or the other (even by way of buying something without a bill) has acquired black money. This is because of the existence of the huge unaccounted economy. While such black money is in smaller amounts with middle class or lower class people, the amount of such black money/assets is huge as you go higher up the income class of people if they have opted for unaccounted transactions and haven't paid due taxes to the government. Many 'such' super rich people have hoarded huge amounts in unaccounted cash and various assets.

IMBALANCE IN MARKET PLACE

When one person tries to do his business by the rules of accounted money and another one in the same business does his business in an unaccounted manner, that's an unfair situation for the fair businessman. 

FAKE CURRENCY

Fake Indian currency comes to India economy from within and from foreign countries. No one has a correct picture. It is estimated to be several lakh cores over the last several years. This is a key source of income for terrorist groups, drugs traffickers and greedy people in unaccounted businesses being used for illegal trade and activities. 

CORRUPTION

The existence and opportunities for unaccounted trade and commerce in the economy, which is a shortcut to make further money, and greed for more money or little extra money, is the single most important reason for corruption. Unless the economy becomes more transparent for the government and public in the form of a digital and accounted economy, it’s almost impossible to stop or even minimise corruption. 

BANK'S LOANS, NPA (NON-PERFORMING ASSETS) AND WRITTEN OFF LOANS

bank

Just because a company has taken a huge loan (say 1,00,000 crores) from a bank over a period of time, that doesn't mean that the company is corrupt or the bank is corrupt. It's always funded with either a collateral security or due guaranties or with a potential scope of profits for that business. Rarely, these judgements do misfire, as a business can run into a loss due to inefficiency or other market conditions. If such loans are not collectable for a long time from the guarantees provided or because the net worth of the company has gone down, the only option is to move the case in its balance sheet under non-performing asset (NPA). If it doesn't do that, by showing it as a loan (collectable) the bank will be showing a false picture about itself to its shareholders and to the government. After due efforts and legal procedures as per law, if the bank is still not able to collect a loan (or a loan marked as NPA) even after due legal procedures, the only choice left with it is to write off the amount as a loss, as any business will do, for its bad debts. Like in any business, a bank also is bound to make some mistakes and end up losing money as bad debts, due to constrained business situations. (Please note that half of the lists of write offs that is being circulated in WhatsApp is not true. They are either in the loan status or in NPA status. Even if it's in write off status, it's likely to be after due legal procedures to recover the money).

EFFECTS OF BLACK MONEY AND UNACCOUNTED ECONOMY

  • Government loses due income from taxes and therefore affects development of the country.
  • Black money hoarding by hardcore black money players, especially in real estate, drug trade and other illegal activities.
  • Heavy inflation making life difficult for middle and lower class of people.  

money

PURPOSE OF DEMONETISATION

  • Remove or devalue and partly get back the unaccounted money of hard core 'black money hoarders', (real estate, drug dealers, gangsters, political parties and many large illegal traders), bring back the black money from small-level black money hoarders and ordinary people to get it back into a legitimate accounted economy.
  • When part of the black money does not come back, government is able to print equal value of new notes (as already the reserve for that value is there with RBI). This will be an instant surplus for the government which can be used for development and other public services, by which that money will get back into circulation with more eligible people.
  • Start moving towards a transparent accounted digital economy which will benefit everyone.
  • Extinguish fake money. 

 

LONG-TERM BENEFITS OF DEMONETISATION

  • Rs 15 lakh crore is the estimated value of 500 and 1000 notes. Only 10% has returned so far as on 22nd Nov. It's estimated that at least 5 lakhs crore worth of old currency may not come back as it's hoarded by hardcore 'black money' players. This is an instant surplus for the government which can be used for welfare if the society.
  • This exercise will correct the land prices to fair levels where ordinary people will benefit.
  • Inflation and prices of essential goods will come down benefiting the poor.
  • When the economy becomes more transparent, more people will come under the tax bracket. Government will be able to fine tune tax rates to affordable levels, benefiting all.
  • More tax income means more welfare and development activities.
  • Interest rates of banks will come down, helping poor and ordinary people. It will also help entrepreneurs (small and big) with more money available to them, which will in turn dramatically enhance trade and therefore a healthy transparent accounted economy.
  • Improved accounted economy means a healthier economy.
  • More people (especially the poorer) will switch to banking habits, which will make them more credit worthy for loans and they will develop better savings habit. 

queue

SHORT-TERM DRAWBACKS

  • People are confused and slightly scared. Instead of keeping only necessary cash with them, they are holding on to more than necessary and still queuing up at banks for more denying opportunity for others to get new currency.
  • People are not spending due to fear and lack of knowledge of several digital options for money transactions and trade.
  • Traders are not actively converting to digital options.
  • All these factors are affecting the trade and slowing down the money flow and economy.
  • Since businesses are down by 50 to 70%, they will incur operating losses and this will affect their profits. 6) This will in turn affect their disposable income for salaries to staff, thus creating a crisis in the society, which is not good for anyone.
  • The fact is while this crisis is partly by the temporary shortage of currency, its majorly due to the lack of preparedness and fear created by unnecessary, mindless and unaware negative propaganda by people. 

 

DID THE GOVERNMENT GIVE ENOUGH TIME? 

  • The Government clearly announced when it took charge that it will fight black money and corruption.
  • It declared its desire to move forward to a digital India.
  • It facilitated banking services to a massive number of poor people in villages and cities.
  • It instituted several digital money transaction facilities like mobile wallets, IMPS, UPI besides NEFT, RTGS and conducted several awareness campaigns about them.
  • Government had announced income declaration scheme with a deadline of Sep 30 2016, which far too many people ignored (Although Rs 65000 crore of unaccounted income were declared.)

Rs 500

COULD THE GOVERNMENT DO THIS IN A BETTER WAY? 

Not really. If they had printed alternate currency in large numbers and given more lead time, people would have come to know and they would have found ways to convert black money in cash to black money in other form of assets.

HOW TO DEAL WITH THIS SHORT-TERM CRISIS: 

  • Build confidence in people by explaining the true facts and scope of moving to an accounted and transparent economy.
  • Build awareness equally among general public through one to one discussions and with traders to switch to digital money.
  • Urge people to carry on with their normal life as much as possible without the currency and through digital money. 

Because, for our material wellbeing, we need a healthy economy. The better if the economy's money is more evenly distributed and circulated among its people by way of hard, smart and creative work and honesty in everyone's commercial transactions and trade; and giving the due share to your government in the form of taxes.