Demonetizing and Black money

Right now demonetizing is the biggest topic of debate in India.In a few days after announcement I was traveling abroad and didn't have money to travel to the airport.Only escape route for me was to use ola money which I had never used before.But there will be so many Indians stranded with urgent need of money but don't know how to use net banking or credit card.What happens to them is a question no body wants to answer.Government may have had the right intention in going ahead with demonetizing.But I am of the opinion it will not yield much dividend as it is being projected by some people.I will list down my points

1.Not Demonetizing:Using the word demonetizing for this exercise is wrong.The higher denomination notes like 500 & 1000 will be reissued soon.Infact 2000 Rs denomination has be added.So the whole exercise is to replace old currency with new notes and not demonetizing.Someone sarcastically said,"2000 Rs note will be great for black money hoarders,earlier they carried two suitcases of cash but now they can carry only one suitcase to buy real estate".

2.Counterfeit Notes:One argument is that this exercise will eliminate fake notes and will help in curbing terrorism.What is to be noted is that experts are of opinion that only 0.02% currency in circulation is fake.This may work out for few days but people will again start printing fake notes.It is already getting reported that new fake currency has started emerging.

3.Black money:Experts are of opinion that out of 16 lakh crore Rs in circulation only 6% money is black.So even if we were to assume that all this will be recovered by RBI still it will account to less that 2 lac crore Rs.Then it remains to be seen how this money will be put to use by the government.But this may not happen as the people with big amount of black money generally convert their money into other assets like land,gold,share markets etc.So assuming that people are sitting on pile of black money is wrong.

4.Taxation net:This move in long term will bring more people under Taxation.It will increase governments income and also reduce the burden on the regular tax payers.Less than 5% people pay tax in India.This number will go up after this.

5.Plastic economic:This move seems to be more aimed at making the economic plastic than targeting black money.We will now see the use of internet banking, debit cards and credit cards increase.It will reduce the currency in circulation and reduce the burden of printing notes.

6.Loss in trust:This kind of exercise was carried out by countries like Zimbabwe and Russia.They have not be successful with this move.It resulted in people loosing trust in banks and the countries currency.It remains to be seen what impact this move will have on Indian economy in the long run.In the short term many experts are predicting 2% fall in GDP growth due to demonetizing.

7.Fall in interest rates:More money with the banks might result in lower interest rates.So borrowing from banks will become cheaper.But also the interest earned on savings will reduce.This will have big impact on senior citizens and other savers who depend on interest from their savings for a living.Also with falling interest rate the mind set to save money will come down.We may also become a credit card economic like US.But people not saving money could be potentially dangerous in a country like India where people don't have access to free education,health care and social security.

8.Unorganized sector:This move has hit the unorganized sector of the economy the hardest.Farmers,daily wage workers and traders are suffering the most.There is a real possibility that the real culprits will mange to escape.Its like fishing with a dynamite,you manage to catch few fishes but many innocent creatures will die in the process.

Finally I would say this is a courageous move by the government but a series of other economic policy changes are needed to curb black money.We can all keep our fingers crossed and hope for the best.