After
finishing almost half the term, the Modi government has taken two
strong decisions back to back, both of which I loved. The first was the
surgical strike on Pakistan Occupied Kashmir. The second is the surgical
Black Money stashed in the houses of corrupts.
Within
10 minutes, all the Lakhs and Crores of cash of corrupt politicians,
corrupt government officers, hidden in secret places, have been turned
in mere paper. A waste. Probably it might help them staying warm as Winter is coming.
Let’s discuss this one by one.
A. How is this a viable step to curb black money?
#1:
Till end of the year, people will exchange or deposit existing 500 and
1000 notes at banks and post office. However, you need to show a valid
government ID proof and the banks and post offices will have to maintain
proper transaction records for the same.
For
smaller amounts, there should be no issue. But if someone comes and
deposits 1L in cash, it might be highlighted and escalated to the
government. Modi government might have advised banks and post offices to
escalate all transactions above a certain threshold.
All
of these folks will have their background checks done and can expect a
tax audit next year if their tax returns, income details etc do not
justify the amount they have in black.
#2: Political parties can no longer disburse cash to poor people in exchange for votes.
#3: People in the real estate market will be hurt the most.
I
recently saw a hoarding advertising the price of a new flat for
possession at Rs 1.2 Cr. However, the hoarding said, “Rs 1.1 Cr if you
pay cash”.
The maths is simple. In the first
arrangement, you pay 1.2 Cr, of which some 30L goes to government as
tax, and 90L goes to the builder. In the second, you pay 1.1 Cr (saving
yourself a sweet 10L) and all of it goes to the builder (who nets 20L
more). All of it at the loss of the government.
Brokers
too can no longer ask people to pay in cash. I, as recently as Feb, had
to pay 35,000 as the brokerage. All in cash, as the broker would simply
not accept an online transfer.
#4: All
currency hoarded with terrorists and corrupt folks is now simply
useless. “A terrorist walked into the bank branch with a briefcase full
of cash and a fake ID…” just doesn’t sound funny.
#5:
All counterfeit currency production comes to a grinding halt.
Counterfeiting Rs 100 and below currency notes does not make sense as it
is economically unprofitable. So almost all fake currency is in the
form of 500 and 1000 notes and no one is going to accept them now, so
they are cut off from the money market.
Going
forward, it would be harder to counterfeit the new 500 and 2000 currency
notes as they come with a whole set of new security features.
#6: Forces people to resort to the banking system.
Majority
of the Indian populace isn’t corrupt. They don’t hoard money at home
because they want to chat on their taxes. They just do it because they
do not trust “online banking” or the banking system. Now these people
will be forced to let go of their unfounded fears, slowly moving the
nation on the path of becoming a cashless economy.
The
more people transact online, the easier it would be for the government
to keep track of all money movement and catch hold of those who abuse
the system.
B. Why was such an extreme step taken suddenly?
Firstly it wasn’t sudden.
Yes, it did catch everyone by surprise, but in hindsight we should have seen it coming.
Immediately
after coming to power in 2014, the PM announced the Jan Dhan Yojana,
aimed at financial inclusion and integrating everyone into the banking
system.
He then followed it up with the “black
money declaration” scheme wherein he warned of dire consequences of
missing / skipping the deadline.
Finally, the
GST approval was a lucky happenstance. GST would make tax computation
easier and will increase accountability in the system. What it means is
that it will be easier to figure out who exactly is the perpetrator of a
tax fraud across the consumer value chain.
This is the final nail in the coffin.
It had to be done suddenly so that the corrupt do not have time to figure a way out of it.
C. What will be the cost of the whole process?
A rough ballpark estimate: INR 5000 crore
Above
is the cost of printing specific currency notes. Let’s assume that the
cost of printing the new INR 500 note remains the same as the old one
(INR 2.5) and let’s extrapolate for the INR 2000 note (at ~INR 4).
Now, the total amount of currency in circulation as of Mar 2016 was:
Basically, there are currently 15.7 billion Rs 500 notes, and 6.3 billion Rs 1000 notes in circulation.
Assuming
all of these are returned. Old 500 notes are replaced by new 500 ones,
and old 1000 notes by new 2000 ones (just an assumption to simplify
calculations).
Cost of printing 15.7 billion Rs 500 notes = 15.7 billion * Rs 2.5 = Rs 39 billion
Cost of printing 3.1 billion Rs 2000 notes (one 2000 note printed for every two 1000 notes) = 3.1 billion * Rs 4 = Rs 12 billion
Total cost would be approximately Rs 50 billion, or Rs 5000 crore, or 0.4% of India’s GDP.
D. How would those who have huge amount of cash deposit so much cash in the bank like all the billionaires?
The
b(m)illionaires are b(m)illionaires because they do not keep such
ludicrous sums at home. Their money is mostly in banks, investment
portfolios, real estate etc.
Anyone is free to
deposit any amount, but surely someone trying to deposit Rs 25L of cash
will surely be flagged in the system and have to explain the source of
the money and the need to store such a huge amount as hard cash.
E. How will the people who never watch news realize this?
In
less than 5 hours, most people I know are talking about it. By
tomorrow, anyone with a TV or a mobile will know of it. In a few days,
even the folks in the remotest villages will know about it, mostly via
word of mouth. I am sure the government would have memo-ed the
panchayats of rural areas to put up notices to the effect.
Unless you are living under a rock or in a pineapple under the sea, you are going to hear about this.
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