Currency demonetization is a bad or at best no impact idea

The recent decision by PM Modi government to take out Rs 500/1000 notes out of circulation has caught the media and the whole country into a frenzy. The policy seems to be the government antidote against the issue of black money in the economy. It particularly resonates among those who have white income and they seem to be gloating over the misery of those “others”, who had cheated the system by not paying their taxes.

The main reason behind this demonetization decision is to cut down the black economy in the country and dry up the illegal funds of those who have collected it over the years. So if you have large unaccounted cash, it is as good as piece of paper beginning November 8. Since GoI has declared that all income above 2.5 lakhs will be reported to the IT department and investigated, this essentially means that people with black money have no amnesty and their cash holdings are as good as dead.

The government is acting on the premise that there is large amounts of black money in India and it is held in cash. This gives us two scenarios in the wake of this decision-

1) There is really large amount of black money in the economy. So if you take this money out of economy, it will hit the economy hard post this decision, thus making demonetization a bad decision

or

2) There is no large amount of black money in the economy and there would be no impact on the economy. If this is the case, then it hardly makes sense to demonetize.

Having seen how an average medium sized business operates in India, one should lean towards the first scenario that economy will be hit hard by this decision. There are large number of inefficient and unseen taxes on businesses, which makes them less productive and also makes it essential for them to engage into unlawful activities to keep the business running. This is the legacy of the “License Raj” India inherited from the crooked governments of the past which gave large discretionary powers to the babus to harass the businesses. And demonetization in no way hits at the laws which generate black money in the first place.

So who might have large amounts of cash sitting at their place? Just think of any neighbourhood shop which does not give a receipt for your purchase, the owner there might have generated some amount of black money. And if the amount of black money hoarded by them is really high, expect them to fire their employees and shut shops in the wake of this decision. Since all businesses need operational capital, for day to day operations, and if black money formed a significant part of their operational capital it is not too difficult to guess how these businesses will be hit by this demonetization.

One of the sectors which is supposedly flushed with large amounts of black money is the real estate sector. The real estate sector has not done well for the past two years and it might get hit even more post this decision. And those of you who think that only those with black money have to lose in this scenario are factually incorrect. There might be many people with white money, who have invested in unfinished projects, and they would lose all their investment because the real estate company cannot complete the project now. This would create a cycle of busts in the real estate sector in the short to medium term. Since the real estate firms cannot complete the existing projects, they cannot raise money from the market for new projects, and since they cannot raise money for new projects, they cannot complete the old projects. This will create a vicious cycle with unfinished projects and depressed market.

There are many who would say- “But real estate was so expensive that anyway common man cannot afford it, so I don’t care”. Well it is true that the real estate values needed some correction but not the big jolt that they might face in the near future. And common man has to be equally worried because real estate sector provides jobs to a large number of people, so if it goes bust then all those jobs are gone. Plus the economy is inter-connected and shocks from one sector impact other sectors. So brace yourself for a slump if the amount of black money in real estate sector was really huge. Not to forget that banks are under-capitalized and under huge financial stress right now, so any shock which can lead to large number of defaults on loans will make their balance-sheet even worse. And real estate loans form a big part of bank balance sheets.

Also, the whole exercise seems a bit futile once you take into account that the government has decided to reissue new Rs 2000 notes. The rules of the game i.e. the discretionary power with the babus, have not changed and those who earlier collected Rs 500/1000 notes will now switch to hoarding money in Rs 2000 notes. So, this will have no impact on the future generation of black money. Yes, it will destroy the stock of black money today but the generation of black money will continue. Janta Party government carried out similar demonetization in 1978 and it had no impact on black money generation post 1978, so it is foolhardy to assume that it will make any dent this time- the nature of laws and babus has hardly changed since the 70s.

So, what should you make out of this policy? Brace yourself for a rude shock if you really believed that black money formed a significant part of Indian economy. And if you don’t get this rude shock, then it was just an empty noise without any substance and black money was not even an issue to begin with. Also the thinking that black money is the underlying problem and needs to be solved needs a change. Black money is a symptom of the inefficiencies and bad laws in the economy, which forces a large number of businesses to cut corners to remain viable.

Read Part II of this series.

P.S. 1- The article only dealt with the economic issues of black money and some people will point out its impact on terrorist infrastructure or future state elections. There might be some side benefits like hitting the illegal currency racket operated by Pakistan but it is still important to look at the pros and cons of a policy which is sold as an economic miracle. Also, it is essential to think if it was the best way to hit terrorists even if it might end up hurting the Indian economy in the future?

P.S. 2- There is 3rd scenario not mentioned above, if you believe in super powers of black money hoarders- they have large amounts of money but they find a way to fool Modi government. In this case, black money would be large but since they can save their money by fooling govt., economy would not be hit!!

Read the below thread for more insights:

  • Vivek Jaiswal

    This scheme will not end but discourage hoarding. Writer doesn’t seem to understand that.

    • MadIndian1

      Yes, people will now have no means of hoarding gold, USD, land etc because modi has waved a magic wand. In fact,this move was so scary that govt bureaucrats(biggest black money holders) have now stopped taking bribes immediately.

      Seriously, did you learn economics from Mugabe?😂

      • Vivek Jaiswal

        Buddy, hoarding gold and USD is not so much harmful for our economy; i.e. their effects are very limited. Land can be taxed or confiscated in case of corruption, making land hoarding moot point; which might be one of the plans that Modi is probably going to take later.
        Gold is real money and cannot be faked like paper, hence it will be limited. That’s why you don’t see elections being funded by gold or USD or land. Have you ever seen politicians bribing voters with gold, USD or land?
        Actually currency notes should be demonetized every 10-15 years to cut down terrorism and corruption.
        I would like to remind you, now there is no news of stone pelting in Kashmir. Have you wondered why? Truth is fake currency was the main source of funding for pukistani sympathizers in Kashmir, and as it stopped, terror funding stopped.
        Hope you got it now.

        • MadIndian1

          Dude, what you are saying has absolutely nothing to do with economy. Terrorism, use of money in politics, hawala networks- these are not economic issue but rather political ones. The article already says that it might benefit in cutting down on political/internal security issues . So you have not actually made any argument on why this is good for the economy.

          And hoarding is not exactly bad for the economy unless of course you follow left lunatic version of it. How exactly will capital br generated without hoarding? You need money accumulation for generating capital. Also, black money isn’t inherently wrong. Black economy still produces tangible services to the public and tangible employment just like white economy. It just isn’t taxed. So bringing down black economy is really bringing down economy as a whole . Its not a achievement. It is like burning your nose to spite your face.

          People are actually pretty mad at govt, even the ones who initially liked it. Unlike what most modi bhakths and Mugabe lovers think, not all indians have access to atms,plastic money(cards) and 100% of indian people have black money. The only people who think this is great are the very minuscule minority which uses credit ca4d for everything and isn’t actually inconvenienced much by this move.

          Sales are already down and the economic activity is actually slowing down. Local media , which was all praises for this move initially are now full of stories on how angry people are. And this is only the beginning of this. You are yet to see the full effect of this issue. So get out of your echo chamber and start interacting with common indians.

          BTW, no economist/none/nada has said this is a great move for economy. May be you should try listening to the other side of the argument instead of blindly trusting the govt and it’s Mugabe like policies

          • Vivek Jaiswal

            Every positive step have some pain attached to it. You have exaggerated those things while minimised highlighting positive things. You also twisted some logic and created faulty logic for many of your arguments here.

            1. You said this is not going to have any impact on economy.
            A. You are very wrong. My brother used paytm to pay money to a street vendor. If pushed around more and more Indians will use electronic money which will raise revenue and taxes for government. Is this also political. We have limited space and hence one cannot write a novel to explain every tiny detail to you. Even if it is a solid deterrence for security policies, it’s extremely good for the country. If you google it, you will find good aspects of demonetization. Key is not coming to a debate with a hidden agenda, otherwise you can argue anything.

            2. You said: – Hoarding is not bad and how will capital be generated without hoarding.
            A. I think you have dabbled in basic economics without understanding the basics. You are confusing savings with hoarding. Savings bring investments. You need to understand the difference between hoarding and savings before addressing this issue.

            3. You said: – bringing down black economy is really bringing down economy as a whole .
            A. That’s why people make fun of Akhilesh Yadav. So you say that when real estate developers pay 1-2 $ an hour to people as laborers, that should be encouraged. Don’t you think this will encourage exploitation and gunda power. People who have crores as cash are usually involved with many illegal things. So what if a few die of drug problem, or it encourages exploitation similar to slave labor, or a few soldiers die because of terrorism, it good for the economy. Right? Man, I hope you don’t handle my country’s economy with these ideas.

            4. You said:- “Unlike what most modi bhakths and Mugabe lovers think, not all indians have access to atms,plastic money(cards) and 100% of indian people have black money.”
            A. That’s the real point. You seem to be a congress or anti-BJP person who thought I am promoting Modi blindly, that’s why started arguing, since argument can be made against any policy. Talking and pointing blame is the easiest thing to do.
            Every good idea is risky. The issues need to be handled, but it doesn’t mean that demonetization is bad. Actually Mugabe promoted inflation, while demonetization is having a deflationary effect. But you had to pair Modi with Mugabe because that’s what going to highlight your statements more. What else can be the reason.

            5. You said:- “Sales are already down and the economic activity is actually slowing down.”
            A. That is correct, but our GDP is not going to go into recession even after this move which is actually deflationary. Growth rate was 7.5% last year, this year it going to be between 6 and 7, and within 2 quarters it’s effects will be gone. Tax base is increasing permanently with these kind of moves, even though this seems a one time move. You just have to do research with unbiased mind.

            6. You said:- “BTW, no economist/none/nada has said this is a great move for economy.”
            A. Just to check, I turned to google, and this is what I found:- “http://timesofindia.indiatimes.com/city/kolkata/Ive-been-a-professor-of-economics-and-I-support-demonetization-Buddhadeb-Dasgupta/articleshow/55415768.cms”

            I’m sure one can find more if they are really doing some research.
            Now the question arises why are you making blanket statements which are not true. Assuming that your intention is not to lie, I feel that you are extremely biased on one side and are ready to do anything to denounce the voice of reason on the other side.

            I think you should open your mind to realities of the situation instead of blindly finding excuses to abuse people just because they are Modi supporters.

            Best wishes

          • MadIndian1

            1. 75% of the country doesnt have internet and u want cashless economy. This kind of thinking far removed from reality remained the staple of commies for a long time and now bhakths seems to have been infected with it. Or may its just the way RSS bhakths have always been- commie+cow as Sita ram goel observed way back in 1970s

            2. Again, stop being a typical commie. Nobody except brain dead turds hoard money as such. Most of them invest it back as gold, real estate etc. The hoarders are a much smaller part of the economy than what the bhakths think. Also, who gave u the right to determine who shouldn’t hoard.

            3. typical commie tactic, side stepping the point entirely and arguing with a strawman. Listen retard, my point was black economy is still economy and destroying it will still destroy the economy. U just sidestepped that entirely by wanking about exploitations. Also another display of ur commie thinking typical of the RSS turds.People going out of work is far more devastating to their life than ur imagined exploitative wages. There is no such thing as exploitative wages in a democratic country. And it is sad to see a socialist like akhil esh yadav making more economic sense than the supposedly bania/right wing turds in power.

            4. Wow. Adhominem. Calling me a congi doesn’t change the fact that this move is a move whih is usually done by tin pot dictators with no understanding of economics like mughabe. Thanks for agreeing that rss turds have the brain power of mughabes of the world. I think has to do with drinking cow piss. may be i Should have listened to coNgis when they said that cow piss connoisseury of RSS would be bad for the economy and shld not have voted for these giant turds. But alas, my concern for hindu identity and community along with the snake oil this feku turd sold me on development, minimal government etc made me vote for him. Never again. This bastard has done nothing for Hindus and has actually pretty much destroyed economic growth. Atleast GDP would not have hit a giant turds with congis

            5. deflation is worse for the economy than inflation moron. Deflation will result in reduced wages, which creates reduces consumption, which reduces production which further reduces wages/jobs creating a vicious cycle. Why do u think Americans printed money to keep inflation high to boost economy and bring it out of 2008 recession? And u turds want to voluntarily create a recession under ur delusion that since inflation is bad, deflation is good? Seriously, i don’t know what my people did in their past life that they had to suffer tinpot retards and oppressive filth to rule over them for the past 1000 years, first under sullahs, then under Xtian filth and now under retards like RSS/Congi/commie chutiyas

            6. The article u cited isn’t actually saying it will lead to growth, just that it will increase tax collection. Huge difference between two, which I am pretty sure cow piss connoisseurs like u would not get. Tell me one qualified economist who has said this will lead to economic growth? The only bastards who even supported this idea were the commies at Hindu , way back in 2013. Which if anything only proves that u cow piss drinking trash are just good for nothing commies masquerading as Hindus. Do the universe a favor and rid the universe of urselves

  • Sailee Kale

    Guys, in case if your maid or any other domestic helper is struggling with demonetization problems, then kindly step forward and help them in securing their hard earned money. Here is how you can help them out – http://blog.helper4u.in/how-to-help-our-helpers-during-demonetization/

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