India announced on November 8th that the Rs 500 and Rs 1000 notes available in the country is no longer a legal vendor from the next day onward. The significance of the decision is that it formed 86% of the value of the cash prevailing in the country. One of the biggest problem with cash transactions is that it is not easily traceable. So the pitch made by the government for scrapping of high denomination notes is to reduce corruption and black money. Lets analyse this in more detail.
For an emerging country like India where digital transactions forms only 14% of all the transactions this is a huge step. This goes well in promoting digital transactions however if you consider the fact that 60% of the population don't even have a bank account then you can imagine the work involved in making this happen. So demonetization in its true sense (scrapping of all cash) is definitely ruled out. So after removing Rs 500 and Rs 1000 notes the government in turn came up with Rs 2000 notes. So then you begin to wonder what is the use of this monumental exercise.
The dimensions of the Rs 2000 notes were altered that required re-calibration of all the existing ATM's in the country. That meant 2 lakh ATM's across the country had to be re-calibrated. Even after one month since the decision was implemented the country has to still live with rationing of cash (only 4000 per day in ATM and 24000 per week in a bank branch). The only reason for this change is the threat of fake notes. The fake notes were strikingly similar to the real ones. Only very careful observation one could make out the difference. Common man could easily be deceived by these fake notes. The magnitude of the problem can be gauged by the fact that this was seemingly being printed from other countries. So its not possible to stop the threat even after knowing where its originating from. So sooner or later this kind of move was expected from India to keep itself as a stable economy.
Obvious question emerging from this is why this was not implemented as a gradual process. Why India had to resort to scrapping of notes overnight instead of spreading it over say 6 months or 1 year. If say this was spread for 1 year then all the fake notes would have ended up in the hands of innocent people as the fake notes were so similar. This would have killed far more innocent people than 70+ that we are witnessing now. Could this have been a little slower like say 1 week or so? The answer to this is evident if you see what black money holders did in the 4 hour window when the notes were valid. They went and bought gold at exorbitant prices to hide all their black money.
Many private banks in a process to reduce manpower used to penalize people visiting branches. They disperse money as well as accept money using ATM machines. For eg. Citibank has only 2 branches in the entire city of Bangalore where it has thousands of accounts.
In the wake of demonetization drive the government restored to keeping track of the old notes that are deposited with the bank with complete ID proofs, PAN card details etc. ATM's could not be used due to the requirement of re-calibration. Also ATM could not be used to accept old notes. This made everyone throng to the bank branches in huge numbers. Also the verification requirements made the entire process painfully slow.
Is this worth all the trouble as the common man seems to be inconvenienced in the entire exercise. This is used as a ploy by the opposition to stall the proceeding of the Parliament. I am here reminded of the quote by Chanakya - the greatest strategist / politician of all times "When all the opposition is up in arms against you then you can bet that you have taken the right decision". This is because if it is indeed a bad decision then all the opposition will keep quiet and allow to make the mistake. Only if they feel its a good decision that helps the citizens and effects themselves only then will they try to stop the decision.
Lets now try to analyse whats advantages and disadvantages of this decision. Some of the easily identifiable advantages is that it will eliminate fake notes for at least an year. It will take a minimum of one year for anyone to replicate the new notes having different dimensions. Till a couple of years back all the raw materials used to print currency notes all over the world used to come from only a handful of companies. This is dangerous if a country decides to print another countries notes. This has changed now with the new notes as the government is aggressively pursuing make in India. From the security standpoint this is a huge change as it will be easy to catch and punish people involved in making fake notes assuming it wont be easy to replicate the same technology elsewhere.
Fake notes has been a problem in all the border areas. Especially the J&K used to receive a lot of fake notes and we see that after demonetization these states have suddenly become peaceful. In eastern India, lots of naxals have started surrendering. Since they lost their livelyhood luring gullible people to join them offering notes. Suddenly withdrawing the notes did effect these anti-social element badly.
However, did it affect the people having black money. The moot point as mentioned by the PM. This may be questionable since even after 3 months only about 4000 crores of black money has been recovered by having raids across the country. This is only a fraction of what is expected to exist in the form of black money.
For an emerging country like India where digital transactions forms only 14% of all the transactions this is a huge step. This goes well in promoting digital transactions however if you consider the fact that 60% of the population don't even have a bank account then you can imagine the work involved in making this happen. So demonetization in its true sense (scrapping of all cash) is definitely ruled out. So after removing Rs 500 and Rs 1000 notes the government in turn came up with Rs 2000 notes. So then you begin to wonder what is the use of this monumental exercise.
The dimensions of the Rs 2000 notes were altered that required re-calibration of all the existing ATM's in the country. That meant 2 lakh ATM's across the country had to be re-calibrated. Even after one month since the decision was implemented the country has to still live with rationing of cash (only 4000 per day in ATM and 24000 per week in a bank branch). The only reason for this change is the threat of fake notes. The fake notes were strikingly similar to the real ones. Only very careful observation one could make out the difference. Common man could easily be deceived by these fake notes. The magnitude of the problem can be gauged by the fact that this was seemingly being printed from other countries. So its not possible to stop the threat even after knowing where its originating from. So sooner or later this kind of move was expected from India to keep itself as a stable economy.
Obvious question emerging from this is why this was not implemented as a gradual process. Why India had to resort to scrapping of notes overnight instead of spreading it over say 6 months or 1 year. If say this was spread for 1 year then all the fake notes would have ended up in the hands of innocent people as the fake notes were so similar. This would have killed far more innocent people than 70+ that we are witnessing now. Could this have been a little slower like say 1 week or so? The answer to this is evident if you see what black money holders did in the 4 hour window when the notes were valid. They went and bought gold at exorbitant prices to hide all their black money.
Many private banks in a process to reduce manpower used to penalize people visiting branches. They disperse money as well as accept money using ATM machines. For eg. Citibank has only 2 branches in the entire city of Bangalore where it has thousands of accounts.
In the wake of demonetization drive the government restored to keeping track of the old notes that are deposited with the bank with complete ID proofs, PAN card details etc. ATM's could not be used due to the requirement of re-calibration. Also ATM could not be used to accept old notes. This made everyone throng to the bank branches in huge numbers. Also the verification requirements made the entire process painfully slow.
Is this worth all the trouble as the common man seems to be inconvenienced in the entire exercise. This is used as a ploy by the opposition to stall the proceeding of the Parliament. I am here reminded of the quote by Chanakya - the greatest strategist / politician of all times "When all the opposition is up in arms against you then you can bet that you have taken the right decision". This is because if it is indeed a bad decision then all the opposition will keep quiet and allow to make the mistake. Only if they feel its a good decision that helps the citizens and effects themselves only then will they try to stop the decision.
Lets now try to analyse whats advantages and disadvantages of this decision. Some of the easily identifiable advantages is that it will eliminate fake notes for at least an year. It will take a minimum of one year for anyone to replicate the new notes having different dimensions. Till a couple of years back all the raw materials used to print currency notes all over the world used to come from only a handful of companies. This is dangerous if a country decides to print another countries notes. This has changed now with the new notes as the government is aggressively pursuing make in India. From the security standpoint this is a huge change as it will be easy to catch and punish people involved in making fake notes assuming it wont be easy to replicate the same technology elsewhere.
Fake notes has been a problem in all the border areas. Especially the J&K used to receive a lot of fake notes and we see that after demonetization these states have suddenly become peaceful. In eastern India, lots of naxals have started surrendering. Since they lost their livelyhood luring gullible people to join them offering notes. Suddenly withdrawing the notes did effect these anti-social element badly.
However, did it affect the people having black money. The moot point as mentioned by the PM. This may be questionable since even after 3 months only about 4000 crores of black money has been recovered by having raids across the country. This is only a fraction of what is expected to exist in the form of black money.
