Narender Modi recently announced currency demonetisation - This means that all legal tenders of Rs.500 and Rs. 1000 became invalid w.e.f 9th November.
What it means for the country is still unknown, but what it means for all political parties we all know!! People say this move is a surgical strike on black money, maybe it is, maybe it is not. Who knows! (These days we are over using the word Surgical Strike.)
Let me suggest a simpler move to curb black money- Show all your donations to yourself and how these political parties fund their elections and rallies. (Just like AAP did ,JUST SAYING) We all know it ain't because of their content in speeches.
Let's move on and discuss the Pro's and Con's of this decision. (Without Bias)
PRO's
- Let's start with the basic. All Black money held in denominations of Rs.500 and Rs.1000 will get declared. Whether people will pay tax on it is an entirely different issue!
- The capital of banks will increase massively. People will deposit huge sums of money and withdraw a lesser amount. If anybody knows Investment Multiplier , we all know economy can't get a bigger boost than this. (Also see Point 2 in Con's)
- A move towards a Less-cash economy, Not cashless. A move I am a huge fan of. (Also see point no.3 in Con's)
- Huge gains for RBI. People who are not willing to pay 200% penalty will burn money. This burning of money will create a Surplus of around Rs.6000 Crore.(Not my figure)
- Democracy will get a boost . With funding of most political parties getting a hit bribes will slow down for some period along with rallies.
- Underground economy will take a huge hit with this move meaning more collections for all states and centre. A move which will be further strengthened by introduction of GST.
CON's
- Let us start with the obvious. People who do not a lot of black money (i.e. regular people ) have to stand in long queues to get money exchanged and deposited.
- Now with huge sums of money getting in banks, it is upon government to change the spending pattern, consumption behavior and increase capacity of industrial units by making capital goods more competitive.( More money does not mean more goods). Capacity of Industrial units has directly been linked to Development of Industrial Sector and Increasing stock prices.
- Experts have been questioning the move to introduce Rs. 2000 note. If the move is in-fact targeted towards curbing black money one cannot but wonder why a bill of such high denomination has been introduced.
- Major players in black money area do not store currency in a volatile rupee. They store it in Dollars or Euros or they invest in properties or gold outside India which is not shown in any of the Returns of Income. This move has very little focus on that area.
- The timing of this move has to be questioned. The effect on poor farmers will be on such a huge scale that even the whole economy can suffer from Stagflation because this is the time of the year for sowing of Kharid crops. Farmers need heavy finance for that, and if made unavailable can make huge problems for winter crops.
Of course, new black money will start generating soon, so government should take steps to curb that.
So whether the move was due to impending elections in some states or to really help Indian Economy and over-stressed banking sector or to remove black money, decision is upto you!
CAclubindia
