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What is demonetisation of money?

What is demonetisation of money?

History

This is not the first demonetization drive by government of India.

The Government of India demonetized Rs 1,000, Rs 5,000 and Rs 10,000 notes back in 1978 too.—

This drive was not able to curb the menace of black money. All it did was to inculcate the fear in tax evaders for a short time

Indian Scenario

—Today, nearly 80% of all transactions in Indian economy are conducted in cash.—

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India is the biggest cash intensive economies of the world with Cash to GDP ratio of 12%. i.e. the value of notes and coins in circulation as a percentage of GDP.

Whereas for example Cash to GDP ratio is just 3.93% in Brazil, 3.73% in South Africa, and 5.3% Mexico.

Parallel shadow economy eats away the vitals of our economy by

it fuels inflation

-deprives government of its legitimate revenues.

How black money is generated

Tax evasion of genuine income —

Corruption and bribes

Illegal sources: drugs, weapons trade, ancient idols trade, illegal mining, stolen goods trade, counterfeit goods trade etc

Real estate transactions

—Equity market manipulation

Impacts of demonetization

—It will push up the demand for gold as safe store of wealth.

This would result in gold imports and it will impact balance of payments.

—It will push up the demand for dollars as safe store of wealth.

People would be happy to pay the charges/commission for converting black money into gold and then reconverting it into rupees.

The same stands for dollars of other foreign currencies.

It will be a big boost for e-wallets.

E-wallet is an online prepaid account where one can stock money, to be used when required. You can pass on the benefits of your e-wallet to your friends and family as well.—

It will be a big boost for credit cards.

India is still a vastly un-banked country.

Many among the poor do not have bank accounts.

—To expect them to use plastic currency is unrealistic.

In hinterlands of India modern banking system is rudimentary so it will be a tough situation for small traders.

Political parties preparing for UP election will be in deep trouble. As political partiesspend lots of money on campaign but declare very few as income. For supply businessmen have to generate black money via various means such as over costing projects, over invoicing imports etc.

Ways to curb money

Dis-incentivise fresh generation of black money.

Clean up political funding

Real Estate: Much of the real estate sector remains outside the ambit of the formal economy, and will stay like that till a system of registration land is instituted, in which the ownership of every bit of land is entered into a central registry maintained and guaranteed by the government.

Swift implantation of GST: it creates several audit trials on production and income will help.

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