Banning Rs.500 and Rs.1000 currency notes from circulation in the market is no doubt being considered as an autocratic move but we must agree that, its a well planned and effective move.
We already have discussed about the cause and effect of currency demonetization, including the reasons and its short term and long term impact. Yes, I received some questions about specifying the Pros and Cons of banning Rs.500 and Rs.1000 currency notes. Here I have mentioned all the possible points I could think of, yet your comments are welcome if I missed some points.
Impacts of Demonetization
Inflation : It will cause deflation in the market as people who have earned money through illegal ways would be afraid to declare the money as they may be prosecuted by the Income tax department on the legitimacy of their income.
Reduction in Monetary Circulation: This will lead to reduction of money circulation in the economy leading to deflation. Value of money will be increasing which we have because the total money supply will be going down but the commodities and things available in the market have not gone down. It will lead to inflation slowly but not overnight.
Cash Deposits in Banks: A lot of cash which are legally earned will be deposited in the banks and now the banks with more deposits will be able to do more lending.
Easy Loans: Loans will become easier and interest rates may come down. As banks will have more money so more loans will be given out which will increase the money supply in the market and it will create inflation.
Massive decline in black money : – This decision is pain in the ass for black money holders having trucks of money undeclared and enjoying without paying any tax.
Almost end of counterfeit currency racket for now :- If implemented correctly and effectively then it will result in end of fake currency racket as most of the fake notes are of Rs500 and Rs1000 but later criminals will make fake Rs2000 note.
Obstacle for terrorism, Home Grown as well Cross Border :- Both home grown as welll Cross boarder terrorism is totally funded and supported by money in form of cash and most of it is in form of fake currencies. There has been several reports about counterfeit currency being circulated in India via Nepal and Gulf Countries in order to fuel terrorism campaign. With this step, some Big terrorists organizations must have seen a huge decline in their net worth.
Control on Arms Smuggling : Due to lack of funding there will be no arms smuggling, thus espionage and terrorist related activities will be choked due to lack of funding.
Reduce in corruption for few months :- No doubt, shameless corrupt traitors will move to another methods like Bitcoins but yes it will take some time and will be very costly to them as well.
Fair Election :- we all know how much black money is used by political parties atleast for upcoming 5 state election it will be very tough task to use trucks of money in election like EC caught in Tamilnadu.
Increase in Use of Plastic Money and E-wallets : With govt. restricting the ATM withdrawals to Rs.2000 per day, bank withdrawals to Rs.10000 a day and Rs.20000 a week, people will slowly move towards cashless/ card transactions. After the decision, a massive jump has been observed in the use of e-wallets.
Transparent Transactions : Exchange of old currency has been limited to Banks and Post Offices only that to restricted to Rs.4000 and with a valid PAN Card, AADHAR, Voter ID Card or Passport. There is no limit on the amount as long as it is legal. It will help the govt. to track the money being exchanged and circulating back to market. Financial Intelligence Unit will track all details of the transactions from the banks. So now it is really difficult to get rid of the black money.
The traditional benami transactions have already received a big blow as the new legislation has a provision for seven-year imprisonment and fine, replacing the three-year jail term, or fine, or both.
No more tax evasion – With every transaction of new currency being recorded, we can expect no more Hawala and other money laundering scams.
No dead money – It’s better to burn that buried cash or deposit it with Bank as you don’t have a third choice.With this decision, people sitting on huge cash piles have only 2 choices :
1- Go to bank, declare it, and ring the doorbell of Income Tax Department.
2- Burn it, trash it, dump it do whatever you can other than transaction and Cry as hard as possible.
Real Estate Market Correction :- A remarkable price correction, credibility and transparency in Real Estate can be expected. Real estate industry in India has always been considered as a safe heaven for black money. Now, by this stringent decision the real estate sector will bring in more transparency and will attract genuine home buyers with price correction.
Increase in Demand of Chartered Accountants : Firms and Institutions will hunt for smart chartered accountants. A lot of opportunities for them.
Stronger Economic Growth : With no or less active parallel economy, the economy will become stronger and will be back on track with robust and sound future. Economy could have grown without this move but that would have been a hollow one that could have been shattered by s slight blow.
Long term GDP growth rate will be much higher than current rate.
It will help the common man by putting an end to the artificial increase in Real Estate, Higher Education and Healthcare transactions bringing them within the reach of the common man.
It will help the government to fight Black money, corruption, terrorism and counterfeit currency with one single decision.
The major problem is that big fishes will be left out whose black money is in the form of foreign currency, gold and property and stashed in tax havens.
Inconvenience to people : Burden in exchanging notes to common people. It will be very difficult for half of the population who are not well versed with the card transactions.
Loss to common People : Many people have fake currency that it unintentional or earned by hard work and they are using it without knowing it.Now banks will refuse to take fake money it direct loss for innocent people. It will cause great inconvenience to common man who will start running to bank to exchange Rs.500 and Rs.1000 notes.
Cost of Replacing old currencies : By replacing all the Rs.500 and Rs.1000 denomination notes, as ordered by the government, could cost the RBI at least Rs.12000 cr.
Rs 500 printing costs Rs 2.5 and Rs.1000 costs Rs 3 , (approx ).Multiply it by number of notes present in India ;now government has to pay this money from taxpayers. (Rs.100 Notes = 23% and Rs.500 notes = 44%and Rs.1000 notes = 24% Notes of 100,500 and1000 Rs. account for 93% of the Total Currency Money.)
Issuing the new Rs. 2000 notes & bringing Rs 1000 back:- this will later cause increase in corruption as it will be easy to store Rs 2000 notes ;as I said initially this decision will reduce corruption but later it will help corrupts.
Deep Impact on lower middle and lower class of society : Lower middle and lower working class of society like drivers, maids, cooks, electricians, plumbers etc. Have to live on bi-montly payment, that they receive in cash.
SMUs will be affected at least in the shorter run.
Big Fish Escapes Again : Big Players of Black Money Defaulters are escaped as they do not have money as hard cash. So, the big fish will be left out who have their black money in form of foreign currency, gold and stashed away in tax havens.
Limited but possible rise in corruption – People having Black money will offer the commission to people like farmers, drivers, i.e. people who do not pay taxes so that they can deposit the money in their account and convert it into white money. In many areas they are distributing/giving loan of amount few lacs to each farmer/labour and later they will take their money back as poor man can’t fight to them..
The advantages are much dominating and it will be in the long term interest of our country comfortably outweighing the disadvantages. Government need to take all the necessary steps so as to ensure that there will be a smooth flow of currency exchanges. It would turn into chaos if government takes no necessary steps to circulate money correctly. It will make a massive change in our economy. We congratulate the entire government and those hidden brains of our democracy who brought this decision.