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Originally Posted by sachinpk What needs to be done (which I feel the government would do) is to ensure that there is no liquid cash available to do large transactions. The problem which existed was 85% odd money circulated in India were in Rs.500 & Rs.1000 notes. And this led to large scale hoarding. What is required would be to have large denomination of smaller notes available plenty. In India every excuse (especially the one of "ease of use") is generally given only to byepass some law or make corruption easier. |
Exactly, glad we're at a neutral stance as far as this raging countrywide debate goes. I'm all for plenty of small change available, i.e Rs.10, Rs.20, Rs.50 and Rs.100, as also plenty of Rs.10 and Rs.5 coins so that we have a range of permutations and combinations to work with, and also aren't "forced" to go digital or card unless we truly want to. Yes, DD's and cheques must be encouraged too, they are safe, secure and accountable in the end. Any move that is rushed way too fast and publicized to total-propaganda levels is an instant red-alert for me, unfortunately most cannot see it coming.
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Originally Posted by msdivy Thanks for your candid views. On Nov 8th, I was one of the folks who got excited about the announcement of note ban. I was hoping the Government would announce further measures and introduce new legislations to nip black economy. But nothing happened. All we got was new formula every day, sometimes every hour on rationing of currency notes by RBI. When they introduced the 2000 rupee note, I knew, they had blown it. The Government had not put much thought into the effort. Demonetization is a bludgeon which missed the target. So what we have now? We are trying to build a cashless economy where the majority don't have debit or credit cards. |
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Originally Posted by Chetan_Rao My question about the 2000 Rupee note was borne out of the same perplexity. Personal opinion, this was more carpet bombing than surgical strike, and the proverbial rats and cockroaches have found a way to survive, as they always do. |
I read both of your posts, took sometime to think of it and came up with some theories.. now these may be "out" there but I've tried to keep it as grounded as possible. Strictly in the financial sense, the Rs.2000 notes were introduced because :
1) Lets assume that, since up to Rs.2,50,000/- was legal to be deposited back into the bank per individual, as cash, that roughly a million people deposited that instantaneously (this is a very conservative figure as each family member can put the legal amount split from a larger amount), yet for easy calculability we'll keep it to a million who deposited and also initiated withdrawals from day 1.
This would mean 2,50,000 x 10,00,000 = 25,000 crores
The sheer amount of notes that would've been needed to be printed as replacement would've been too large (also to be elaborated in point 2), Rs.2000 notes provided 2x quicker printing to replace the old notes which had years of time to come into the market. This is probably why Rs.500 wasn't focussed upon during that time. The country has a majority cash economy and the Rs.2000/- notes kept everything afloat, covering the salaries, rations, working/operating costs, transportation, fuel etc.
2) Rs.2000 notes also might've made transporting cash easier to each location as the means of transport can carry twice as much value of currency in the same space as compared to Rs.1000/-, the same goes for ATM machines which could hold twice the value of currencies so that each person would get more per note and more left for others since the withdrawal values were limited.
3) In the business circles, rumours have been floating for long that Rs.2000/- notes will be demonetised ultimately, since they believe that note can encourage a black market yet again. I believed it, but then again there's paranoia (aka valid though not fully proven fear of wrongdoing) and there's hallucination (full blown imagination), if there is a 2nd round of demonetization then the government is purely hallucinating, because the effects of the 1st round of demonetization have been so large that the 2nd round would give fully diminished returns, specially since the Rs.2000/- notes have been withdrawn from the back account against a legal monetary holding. Yes some may have gotten their hands on more notes that others but surely the numbers would be 1/100000th of what it was 2 months back. I feel the best way is to slowly withdraw the Rs.2000's when they introduce the new Rs.1000's (as had been said before).
A black market will always exist, and in small numbers its even healthy. Realisticially, the only problem black money created was inflation in certain sectors like real-estate, luxury goods, gold jewellery etc. The next step should be targeting real-estate and rental sectors, one of the key factories of unaccounted payments. Most of the cash transactions in the country, be it uber-expensive restaurants, hotel stays, airline tickets, cabs, consumer durables etc are already heavily taxed. The government makes enough already so this is as far as they should go.
Also a slight mathematics here, I'm writing this for my own reference too. Now I don't have any loans and will never take one, but lets just assume for ease's sake that the loan interest percentage is about 10%, lets also assume that return on deposits are about 7% in FD. Suppose overnight the banks get 2.5 lacs per account for say, 1 million accounts, they have to :
- Give potential FD interest rate @ 7% for 25,000 crores = approx Rs.1200 crores after tax (about Rs.500 crore).
- Banks may be flush with funds, they can either settle losses or hand out more loans cheaper, but then again its all the same with no great benefit to anyone.
- Loans for homes and cars will go down (and they have) thus reducing banking income.
- Registration taxes for properties will slow down as purchasing power isn't optimal.
- Luxury market will go down and it has thus reducing massive tax receivables.
To me, money is money, upto a certain extent, it has no colour per se. The problem is in the holdings in excess of 7-8 digits since they are not in effective circulation and drive up values of almost anything sky-high.