The announcement by honourable Prime Minister to demonetise 500 and 1,000 rupee currency notes is truly unprecedented, probably beyond anything that the nation has witnessed since the imposition of emergency. While demonetisation has happened earlier too in 1978, the scale at which it is being done now is much higher. What is even more amazing is that the government managed to keep an announcement requiring such detailed planning, under wraps till it was actually implemented..! While there would be some hardships to common man, it is quite like a bitter pill essential to restore the health of the economy.
Even though the nation faces multitude of problems, the issue of black money has taken monstrous proportion. Worse, the menace seemed to have spread like a contagion engulfing more and more area of economic activity. Currency note of Rs 500 and Rs 1,000, other than gold, has been the most critical element of black economy because of its obvious ease of use. The increasing share of these currency notes, most of which escape from the real economy into the black economy, has further accentuated the problem. As per RBI annual report 2016, out of total currency in circulation of Rs 16.4 lakh crore, Rs 14.2 lakh crore or 86.4% is in the form of Rs 500 and Rs 1,000 rupees notes. The ratio has moved up sharply from 64% in FY07.
What is more concerning is that Rs 500 and Rs 1,000 notes have accounted for more than 95% of the increase in currency circulation over last nine years, making RBI, willy-nilly, a partner in crime. It would not be surprising if only half of this money comes back for replacement, reducing the money supply by that much amount and helping ease off the inflation further. A sudden spurt in government’s tax collection is also not ruled out with traders, other small/ medium sized sellers disclosing their true income. Other than black money, the move also serves another purpose by cutting the source of financing for the terror channels although there is no clear estimate of total amount involved.
While the mover undeniably strikes at the root of the issue, there is a worry that it may cause disruption to the economy in the near term, However, the impact may actually be very limited. One reason for this is that electronic transfer accounted for more than 95% of total transaction in value terms in the economy. As per the RBI annual report, out of the total annual transaction of Rs 1,723 lakh crore, nearly 90% is on account of what it calls “Systemically Important Financial Market” which includes government bonds, forex clearing etc which are electronic. Of the remaining 10% which is classified as retail, only 4.8% involves paper clearing, down from about 12% in FY07. Clearly, role of paper currency in the real economy has come down substantially even though it has menacingly increased its role in the black economy.
Similarly, with regard to currency replacement, the total amount of 500 and 1,000 rupee note stands at Rs 14 lakh crore to be replaced from nearly 1.3 lakh bank branches and 1.5 lakh post offices. Of this, nearly 80,000 banks and 16,000 post offices are in urban areas. Assuming 60% of the amount to be replaced in the urban area, the average amount per bank/post office works out to Rs 9 crore, or Rs 18 lakh per day only over 50 day period. More importantly, this assumes full replacement whereas actual amount that comes up for replacement may be much less. And despite the inconvenience that it may cause for the next few days, the decision would drive the destiny of the nation ten, or even twenty years from now and certainly, worth many times more than the hardships..
Any plans to get that gold out from the hidden chests..??!