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 8^th 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 8^th 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?