Demon: Too soon to write it off

A lot has been said to discredit demonetization post the release of RBI’s annual letter which indicated that 99.3% of demonetized currency returned back to the system. Eventually many of the so called ‘political’ analysts stamped it a failure that has brought down the economy. However, what one fails to understand is demonetization has built a strong culture in the economy which will last for the years to come. The nation was beset by short-term woes but does it mean the step doesn’t have any long term benefits?

The first point to be noted is black money is not just cash its just a starting point. With demonetization, the Government received the plethora of data regarding cash status of every person in the economy. As per regulation, any individual with more than INR 50 lakh income needs to report his balance sheet. Now with individuals’ cash flow, adhaar linked bank accounts, income tax returns, a certain level of data crunching should do wonders. This data can act as the new oil for government’s battle tank against corruption.

The other major component of black money lies in Real Estate/gold. People who are living in major cities can witness the major price correction that has happened in the market. Prior to demonetization, many real estate transactions used to happen by cash. The cash which never came back to the system and only had inflationary impact. To put it in common man’s perspective, when a working professional who pays his taxes regularly approaches a seller for buying a house, he gets outbid by a business man who is willing to pay a premium for conducting a cash transaction. This only has led to inflationary spiral in the economy. Everyone talks about how demonetization could have impacted the annual real GDP growth by a percentage point. However, very few highlight the long-term inflationary correction that happened with demonetization.

Cash currency has always been bad to the economy in many other ways as well. Exchange of money is what contributes to GDP. But because of parallel economy, most of the monetary transactions don’t get accounted and therefore not taxed to the extent it should be. In addition, the current currency circulation in the economy is at around 17-18lakh crores. If it hadn’t been demonetization, It would have been in the range of 22-23lakh crores by end of 2018. As discussed earlier, less cash implies more accounted economy, subdued inflationary effects. Bang on! Your ‘Real’ GDP grows. 

Another noteworthy factor is security features of the new currency notes. The counterfeit notes of the previous currency were omnipresent in the economy. Some of them were heavily used for terror-financing in Kashmir and other parts of India. We might never know what could have befallen upon the country if it hadn’t been demonetization ( Please remember fake notes also create real assets and money multiplier is infinite, for example, 1000 Cr worth of fake currency would have created a trillion worth of real estate and gold). With a single blow, all the fake notes became void. With the new security features, it has been extremely difficult to come up new fake notes. Again, less of parallel economy of fake notes till the new ones can be copied. I am not really sure what makes the authorities believe that there were only 15.8 Lac Cr of genuine HDN in the system (how can we be sure that corruption did not happen at the printing press or someone really printed the genuine notes). Anyone who is capable of printing currency would have printed lac of crs over the years and not few 1000 cr. Any way for now that fake press is closed. Those who had large fake currency would have scanned it and destroy it themselves. Eventually, not a lot of fake money had come back in large scale … remember news of currency fund in rivers etc…. 

And the success on the digital side of the finance can be entirely attributed to the demonetization. India has become one of those countries, where an individual can conduct his/her daily activities seamlessly without holding a single currency note. That’s quite an achievement which everyone is failing to recognize. However it was reported that several businesses got shut because of lack of currency. Again, I am not sure what kind of businesses are we talking about? To my understanding, they were the ones which were thriving only on cash (means zero tax) and I may sound harsh but if they cannot convert to the formal system fully or partially, they deserve to be closed.

I believe that if the problem had been really severe in terms of unemployment or deaths due to hunger due to unavailability of cash, millions of Indians would rather have been on roads putting the entire country on fire instead of standing on lines near banks. Right after India, Venezuela announced demonetization, however, it was forced to call it back because of immediate chaos that struck the country.

Things have just begun! The number of people who are filing IT returns are set get doubled in a matter of 3 years based on the current CAGR of 25%. The growth was in mid-single digits earlier as well. All the black money hoarders have realized that the life was only going to get tougher post demon. At the end of the last financial year itself, over 1.7million people received notices from IT department. India is a country which has the potential to give double digit growth just by bringing in the parallel economy to the mainstream one. Once the things settle in and our PM comes back to power again in 2019, the wrath on the black money is set to continue…

Only time tells if a certain decision has gone right or wrong and this decision is different magnitude and thus needs more time. I would like to quote Jeff bezoz: “Bold bets pay for a lot of failures. I’ve made billions of dollars of failures at Amazon.com, in simple a great leader must have courage to keep trying new ideas 9 may fail but the 10 one will create history. This one I am sure was the 10 th one. Just imagine if someone had a hint about the idea and had it gone out it would be like a wild fire, people would have just offloaded cash in markets (Gold prices doubled indeed for few hours though). This could have zoomed up inflation and not only would the poor but large masses have actually died of hunger as money would have lost value I Mean All THE VALUE. As a country, we were on a weak footage and a Kargil like situation would have been extremely difficult to manage. So again I would like to quote Jeff Bezoz on criticism: “Take criticism in good stead and keep working towards improving, the bigger waves you create in the business community, the louder the ruckus your detractors create”. My observation genuine people by and large were supportive of the idea and continued to have hope on the Government. Only the guilty are and were crying foul in the name of poor people. However there is no way around criticism, especially if you want to do something new and interesting; accepting criticism is the only way ahead

We the common people of India should try to spend maximum of our expenditure in the electronic form, and have our savings in the form of financial assets or gold bonds. Else I guess, someday, we will also be on the way of hyperinflation kind of situation, however so far we have had a lifeline of about 5 yrs at least. Hopefully sanity will prevail and down the line, after 10-15 years, when you see our country proudly competing with the ‘big two’ by not just remaining as an un-recognized branch in the emerging economies universe, then you look back and think where it all began!