What happens to the Rs. 14 lakh Crore cash in Rs 500 and Rs 1000 notes?
These are the scenarios I have built.
These percentages are my
estimates
Decision of
Nov 8th is for exchange of old notes. Consequences can be tax
liability and penal liability.
We will
discuss impact and modus operandi that people/company will use to move this
cash to the banking channel and take it out again.
Type 1 People/companies who have
cash which they can deposit in their accounts and explain its source if
questioned and/or pay tax as applicable.
Type 2 People/companies who have significant
monies as “black” and now use other people /accounts to convert old notes to
new.
Goons/ local
area leaders/ businesses and businessmen use lakhs of people to launder money
and hence avoid paying taxes. Imagine a person who uses 100s of people to
change old notes to new. He must be a local terror with no one who is able to
touch/question him. He can continue his life or people would realise the
magnitude of money he has made suppressing and keeping common man poor. However,
now people around will become aware of the extent of his ill-gotten wealth and awareness is the first step towards some
change.
There will
also be a large segment of business/ self-employed people who need new cash for
daily business. They will also use their employees and friends to quickly
exchange cash.
Type 3 People / companies who use this event
to become “benevolent”
Companies
and people give their friend’s employee’s cash as advances, salary or gifts.
This is essentially soft favour or soft pressure to help them out of the
crisis. Slightly better than Type 2 people/ companies
Type 4 People who buy or sell assets exchanging
old money
Cash in
circulation as of 8th Nov cannot convert to gold USD or Land. It has
to be exchanged for gold USD or Land. Cash can move from person A to person B
but by Dec 31 this cash has to be deposited in the bank. In the bank account of
person A or person B. So the logic that black money will move to gold / land
may be possible but cash still has to come to the bank.
How easy is it today, to take out cash from a
banking system without being monitored?
Generating
cash by selling assets is now very tough as land/home buyers and sellers have
to record their PAN card and withholding tax is paid.
Same is the case
with gold above a level. It is much more difficult to generate and hide cash
too easily going ahead.
Similarly,
withdrawing huge amounts of money from bank accounts too requires a PAN card.
Cash economy - some consequences.
Tax saved
and cash money made in excess cannot enter the organised financial markets so
it fuels run away prices in gold and land.
Incremental
cash was also getting used up as land prices were going up rapidly for last
decade or so. If end use of cash gets limited, then cash generation will get
limited too.
Other way
around, run away prices in gold and land lead to increase in cash supply in the
system which led to price rise in cash based market like food and shelter.
To sum it up..
Hope this
step adds more money in the hands of the farmers and yet makes food cheaper for
everyone.
Hope this step is the beginning of the journey to improve the
standard of living for all and growth which adds jobs.
Hope it becomes more rewarding to sweat out and earn than to squat
out and earn.
It will be interesting to build
hypotheses on..
How much
cash is really needed in flow economy of the size of India?
Will
reduction of cash reduce cost of land and food and if so how soon will it start
reflecting?
Will it increase
tax revenue and tax to GDP ratio?
Will this
step of making all Indians act and react change India and how?
