Failure of demonetizing policy

Burning a house down is not a cure for rodent infestation. Similarly demonetizing is not a cure for black money. Modi has repeatedly and publicly announced that deposits upto 2.5Lakhs per citizen is not going to be questioned. Ever wondered why?

The total money under circulation as per wikipedia is a mere ₹17.77 lakh crore (US$260 billion) which is about 14,000/- per head. If you eliminate coins, small bank notes etc. we are talking about 12,000/- per person. This means that if 20 persons don’t exchange a single penny and one person exchanges the full limit of 2.5L, all the money under circulation will be laundered by RBI without any hassle.

If you assume that everyone exchanges 4,500/- (which is the limit of single exchange over the counter without much scrutiny), then even 3.14% of the population needs to deposit a full 2.5Lakhs is sufficient to legally exchange all the legally circulating Indian currency with Modis’s new currency system. There are 170mn PAN card holders in India, so this is about 1 in every 4.3 PAN card holder

Total currency 17,770,000,000,000 (17.77 lakh crore), USD 262,171,732,074 @ 67.78 INR per USD

Population of India 1,252,000,000
currency per capita 14,193
high demoniations per capita 12,206.23 @86%

4,500x + 2,50,000 = 12,206.23(1+x)
x = (2,50,000-12,206)/(12,206-4,500)
x = 30.85829224 (3.14%)

According to Reuters, already 44 billion dollars of currency is back with the government within the first four days. At this pace, with 46 days to go almost all the ₹17.77 lakh crore (US$260 billion) currency is getting exchanged without any problem. So this demonetizing policy has only resulted in 50 days of hardship with nothing to show for.

It claims for weeding out the counterfeit notes is also without basis. In fact in this mad rush, it is easier to legally exchange a counterfeit note and the bank clerk is too occupied to notice fraud. Most Indians, including me, are not familiar with the new currency note and hence are more likely to be duped because of new currency.

Shadow economy is a strong part of Indian society some say close to 20% of GDP. But elementary economics will tell you that there are two forms of black money: high velocity (money that is unaccounted for but requires to change hands fast usually weeks/month) and low velocity (which the owner does not wish to use in the coming years. The first one week has proven that high velocity can easily be disguised as legitimate transaction and all of it has found its way back. The low velocity is unfortunately in Gold, real estate or in USD currency notes (favorite of African despots) or swiss bank accounts. So this demonetizing scheme has achieved nothing but unnecessarily making life miserable for people.

One’s paycheck is a tiny fraction of one’s wealth the total value of house & properties, car, insurance/pension balance, jewellery etc. So GDP which is like a paycheck is not the best means of estimating the total wealth of the citizens. If you assume that 20% of this total value held by individuals is black? There is not enough currency in the whole world. 17.77Lakh is hardly 11.5% of 2.25 trillion dollar GDP of India. So assuming that 90% of the currency notes are legally exchanged, 5% are lost/damaged and 5% is caught in the net. We are talking of 5% of 11% which is less than 0.5% of GDP and no where close to the figures that RSS keeps harping about.

Fuel stations, hospitals and most avenues used to launder the money are already exempt from these restrictions and without any trace ability being used to exchange old tender with the new tender. Enough loopholes are provided for CA & cash economy agents to help out those in need of money laundry services.

Al Capone was convicted not for smuggling, not for the countless crimes & murders but income tax frauds by US Government. But has Modi with his tall claims and grand plans achieved anything substantial? Well the only way to succeed against black money is by improving the tracabliity of transactions. Swapping a bundle of 500/- note with another bundle of 2000/- rupee will achieve nothing except wiping out the faith of people in indian currency. “I promise to pay the bearer a sum of 500 rupees” is the signed promise by RBI governor and today it means nothing!
At this moment only two pictures come in my mind. One of the famous story of a monkey chasing a fly with a sword and second of Muhammad Bin Tughlaq, one of the wisest ruler of Delhi yet achieving one of the most disastrous results because of his demonetizing policy.

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