Magnitude of Demonetization (?)

Prime Minister Modi announced on 8th November 2016 the decision to withdraw highest value currency notes vix. Rs. 1000 and Rs. 500 and replace them with new Rs. 2000 and Rs. 500 notes. RBI also mentioned that new Rs. 1000 notes would be issued soon. In that sense this decision cannot be termed as “demonetization” in true sense. It is more of new currency notes replacing the old ones.

This step will help flush out existing black money,but it may not stop  creation of new black money. There are other steps needed to prevent that – movement towards cashless economy. But with poor infrastructure and reach of cashless payment systems (online payment, credit/debit cards, mobile wallet etc) and with high costs of using these means it would take long time to become majority cashless economy. I booked tickets online on BookMyShow and they charged 10%+ as “Convenience Charges”…that is ridiculous. The Govt should abolish by law all such charges; and should in fact provide incentives for using cashless systems and levy a charge for using cash.

As My IIM Professor, Prof. Jayanth Verma has explained in his blog “It is not money but credit that makes the world go round“, cash should be used only when you run out of credit. So unless government simultaneously brings in measures to incentivize cashless payment systems and penalize cash transactions the black money creation is not going to reduce/stop.

Anyways, let’s see what government does on this front and when.

I read information about magnitude of demonetization and wanted to share it with some perspective. Here is the split of different currency denominations in circulation till 8th Nov:

Currency Distribution.png

So the currency denominations cancelled by PM Modi accounts for 86% of total currency (by value). It is worth a whopping Rs. 14 Lakh Crore. And that explains the chaos and cash crunch we are facing today even after 1 week of cancelling Rs. 500/1000 currency notes.

Imagine if government were to truly demonetize i.e. remove highest currency notes and not replace them with new ones, then Govt would need Rs. 14 Lakh Crore of currency in denominations of Rs. 100 or lower. If entire new currency is of Rs. 100, Govt would have to print 5-10 times more notes (500 = 5 x 100, 1000 = 10 x 100). i.e. 14,000 Crore Rs. 100 currency notes!!!

Just to put this in perspective, if the printing press prints 100 Crores notes a day (which itself is a ridiculous assumption), it would take 140 days i.e. over 5 months! If there are lower currency denomination notes it would take even longer to replace the cancelled currency notes.

Are you getting the magnitude of “demonetization” (or currency replacement decision – whatever you want to call it)?

Had Government taken into account the massive logistics? I hope they had. If so, could they have started printing currency notes earlier? Were there secrecy issues in doing that?

I am not sure if we will know these details ever.  But it would be interesting to track this decision and see if it yields some success in “War on Black Money”.

And the war has just begun! More action to come against “Benaami” property and Gold and other forms of Black Assets.

 

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