Rs 500 & Rs 1000 are demonetized! An analysis!

First of all, I appreciate Indian PM Narendra Modi for his valiant move to invalidate Rs 500 and Rs 1000 currencies to fight against corruption.

I strongly doubt if a move like this can be managed to reserve as a top government secret until the announcement. In order for the smooth exchanges and the heavy load of deposits, the Issue offices of RBI, banks, and post offices will have to be notified in advance. I doubt if the secret was kept as secret itself in the downstream.

If it was secured, then this is a great progress against corruption. This will force people to declare their funds and streamline the money. However, it would not affect people who have money deposited in the banks outside India.

But, after issuing the new Rs 500 and Rs 2000 currencies, money launderers will expect a move like this in future as well and all the black money will now be deposited in foreign banks.

This move does not fight against corruption on a long-term basis. In 1978, then PM Indira Gandhi had demonetized Rs 1000 currency. Could that prevent the corruption?

There should be a policy that tracks the deposits of all Indian citizens in all the banks in the world. This will also reduce the black money . Not always, one secures funds in the name of others. Where there is wealth, there is less trust.

Beyond tightening corruption, what can happen –

I see the below points as a part of major development in the India economy.

Immediate repercussions

1. Confusion among people.

2. This will cause a sudden deflation in the economy as there will be less circulation of currency.

3. Real estate will fall down for at least next few months as people cannot utilize the black money to buy the properties. Almost everyone purchases the property with a little bit of white money and most of it with black money.

Long term repercussions

1. We will be able to see a slow revolution in the usage of cards and electronic banking. More people will start doing the transactions online and using credit and debit cards to avoid hassles of exchanging the currencies whenever there is an announcement like this.

2. This will trigger the mobile phone revolution as well. More people might want to use the phone for online transactions.

3. The economy will not be driven only by Tier 1 and Tier 2 cities, but other cities as well because of the other points and the accountability of the funds.

4. Everyone who does not have a bank account will have a bank account.

5. Wage equality – the employers who give the wages by cash can now be forced to deposit in the bank and this will stand as a proof of the salary which can lead to wage equality.

Let’s try to answer the below questions.

How does it fight against corruption at all?

Not all illegal money resides in Swiss Banks and banks outside India. A big chunk of the illegal funds is in India itself in the physical form. It is alleged that most of this money is in the denomination of Rs 500 and Rs 1000.

After this declaration, all the black money holders might want to turn their funds into white. They need to approach the banks to deposit it and make it legal. All the bank transactions are recorded and monitored. If they deposit the money in the banks, they need to show the proof of sources of the money.

Since all this money is hoarded through hawala channels, they cannot show any proof for source of income. They will be hesitant to deposit the money.

If this happens, a huge proportion of the black money will be washed out of the economy.

Why is this a valiant move?

As we know, the politics and the election are influenced by the upper middle class and rich people to some extent. Modi’s announcement potentially will hit this segment of the people the most and will make him the bad cop. As one of my friends said, he is hitting his own vote bank. It is not quite easy to make such a move. It requires courage, determination, and selfless motivation for the long-term vision.