Demonetization – A Sudden Secret Move by Modi

Cureency demonetization indiaMoney exchanging of old with new.

“Currency Demonetization india” is an act of stripping a currency unit of its status as legal tender. The recent Indian demonetization of Rs. 500 and Rs. 1,000 banknotes is a step taken by the Government of India in November 2016 to fight corruption and black money issued in the country. The latest announcement of demonetization of currency was made by Prime Minister Modi on November 8, 2016, with immediate effect (since November 9) in a live televised address to the nation at 8:15 pm IST. At one fell swoop, 16.5 billion Rs. 500 and 6.7 billion Rs. 1,000 bank notes in public circulation were reduced to worthless pieces of paper, 86% of Indian currency was frozen overnight. Rs 500 notes constituted almost 47.8% of the currency in circulation while 38.5% of the notes were of the Rs 1,000 denomination, in value terms. It was a direct attack on black money. In reality, the entire story of Demonetization was being planned since 6 months, but the only people who knew about this were Modi, Arun Jaitley and RBI Governor.

Present RBI Governor Urjit Patel is a past President of Reliance Industries ((Business Development), & Non-Executive Director of Gujarat State Petroleum Corporation Ltd, slammed by the CAG. The RBI started to print new Rs. 2,000 and Rs. 500 notes 6 months back, but what everybody thought was they were a new inclusion to the existing currency. Once everything was ready, Modi called for a top level cabinet meet at 6.30 pm on November 8th. The only people who attended this meet were Modi, Arun Jaitley, Ajit Doval and RBI Governor Urjit Patel. No person was allowed to carry any electronic devices including phones. Modi even met all three heads of the armed forces. In the meeting, the decision was made to announce the entire plan at 8.00 PM. Until Modi’s speech got over, no person was allowed to go out of the cabinet meet room

We might remember that this move was not unprecedented, because earlier, the RBI demonetized Rs 1,000 and Rs 10,000 banknotes in January 1946. These two denominations were reintroduced in 1954 along with currency notes of Rs 5,000, and all the three were again demonetized in January 1978. More recently, in 2014, the RBI had demonetized all banknotes printed before 2005.

Currency Demonetization: Was it a Total Secret?

‘Ganashakti’, the mouthpiece of the Communist Party of India (Marxist) in West Bengal, claimed that the Bengal unit of the Bharatiya Janata Party knew of PM Modi’s demonetization of currency plan before his public announcement and deposited Rs 1 crore into its bank account comprising Rs 500 and Rs 1,000 currency notes in two installments on the afternoon of November 8, a bank account at Indian Bank’s Central Avenue branch, Kolkata, registered in the name of BJP – West Bengal (Account No 554510034) and a total of Rs 3 crore had been deposited in to the bank accounts of the BJP in six days preceding November 8.

A Masterstroke by Modi

First, people who have a lot of cash, legally earned, will deposit the cancelled notes in the bank. This will increase bank’s deposits by a huge margin. This will also increase banks’ capability to lend with higher cash reserve ratio (CRR). With a broad money supply, gradually the loans will be easier to get and become cheaper. However, there could be an overnight deflation because of the reduction in currency supply in the country. Deflation makes things cheaper. Real estate prices could dip to the lowest by the end of 2017.

As per analyst Roshmita Dey, ‘demonetization’ will support government finances. Since some huge black or unaccounted money will make way into the formal channel, the government will stand to benefit from higher income tax collections. Growth in cash-intensive sectors such as real estate, construction, and discretionary household consumption might push the GDP to a higher level in the long run. Currency demonetization india will improve monetary transmission and reduce lending rates. Bond market may flourish. It could provide positive implications for liquidity, inflation, fiscal and external deficit in the short term.

Demonetization Currency in India –  To Counter Black and Counterfeit Money

According to some recent estimates the amount of black money in the country equals 20% of our over Rs 30 trillion Gross Domestic Product. (GDP)— which is bigger than the economies of some nations such as Argentina and Thailand. The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways.  The figure of Indian parallel economy for the year 1992 was Rs 1925 billion or 90% of the GDP at 1980-81 prices. The unholy nexus between politicians, bureaucrats and businessmen has ensured that a black economy continues to thrive in India. At least $70-80 billion goes out every year. The cost of India’s black economy is 5% of GDP growth sacrificed every year since the mid-70s, that is, India could have grown faster -by about 5%- since the 1970s if it did not have a black or parallel economy. Black economy is also the opportunity cost of not having India become the world’s second-largest economy, just after the US. In 2013, consulting firm McKinsey & Company calculated India’s shadow economy is as large as 26% of the country’s Gross Domestic Product (Nigeria highest with 63% of its GDP). This implies that almost one fourth of the Indian economy goes untaxed and unaccounted. According to a 2015 report from Price Water House Coopers, in India, 98% of all transactions by volume happen in cash. 68% of the total values of transactions are conducted in cash.

However, there is no guarantee that the high denomination currency notes won’t be faked again. You may also check the indian economy outlook in 2011.

About the Author

Sandra
I am working as Editor in Chief for Financeninvestments.com. Writing on Financial Topics is my passion. You can find me on , Seeking Alpha Instablogs or join our Facebook Community, s. FNI is a great Community for financial bloggers and writers. Get everything you wanted to know about your finance and investment related matters such as mutual funds, banking, retirement, economics and much more.

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