'Demonetization'

Hello there !!

Something on the topic everyone is affected by in India.

"I know the forces up against me, they may not let me live... they may ruin me because their loot of 70 years is in trouble, but I am prepared,"  PM Modi  in an emotional speech in Goa.

Demonetization is the act of stripping a currency unit of its status as legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit. It is a   step in which a currency unit’s status as a legal tender is declared invalid. A recent example of demonetization occurred when the nations of the European Monetary Union adopted the euro. In order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into euros. 

When the euro was introduced, the old national currencies were demonetized. However, the old currencies remained convertible into euros for a while so that a smooth transition through demonetization would be assured. Countries like Zimbabwe, Fiji, Singapore and Philippines  have opted for currency demonetisation.

According to a blog by  Raja Mitra (RM) the purpose of demonetization' is to :

1.To shakeup the stock of unaccounted money hoarded as cash.

2. To project as a bold & effective step against 'black money' ( term used for unaccounted money in India) and about unearthing it, during campaigns for elections.

But it has its advantages and disadvantages also。

Pros:

1. Shakes up the stocks of 'unaccounted money' hoarded outside the banking system as cash.

2. Disrupts the cycle of hoarding of unaccounted money as cash by individuals or organizations for a certain period of time.

Cons:

1. Does not shake up or control big-ticket corruption largely.

2. Without various systemic changes, rationalizations of tax structures, controls & regulations and the effective implementation of these, does nothing to control the generation & 'circulation' of unaccounted funds over the mid-term.

3. Causes major disruption & losses in the short-term to small & cash-based businesses and wage workers & the extent of daily transactions for these individuals & businesses.

4. Does not affect unaccounted funds circulating in the real-estate & property sector, parked in assets like gold, silver & diamonds, unaccounted funds going out of the country and round-tripping its way back into the country as FDI. Does not address or redress the root causes of why so many Indian banks have run up such huge 'NonPerforming Assets' (NPAs)

A handful of national currencies such as the U.S. dollar and the euro have achieved global status as reserve currencies and are extensively used in international trade transactions. The euro has supplanted the national currencies of a number of nations that comprise the European Union. The national currencies of some countries such as the United Arab Emirates are pegged or fixed to the U.S. dollar.

In India’s case, the move has been taken to curb the menace of black money and fake notes by reducing the amount of cash available in the system. It is s not the first time the Government of India has gone for the demonetization of high-value currency. It was first implemented in 1946 when the Reserve Bank of India demonetised the then circulated Rs 1,000 and Rs 10,000 notes. The government then introduced higher denomination banknotes in Rs 1000, Rs 5000 and Rs 10000  eight years later in 1954 .

The  Morarji Desai government demonetized these same notes in  January1978.  The move was enacted under the High Denomination Bank Note (Demonetisation) Act, 1978. Under the law all “high denomination bank notes” ceased to be legal tender after January 16, 1978. People who possessed these notes were given a weeks time  till January 24 the same year to exchange the high denomination bank notes. But then the  currency of higher denomination was barely in circulation, unlike the Rs 500 and Rs 1000 note today which is in possession by rick pullers also.

PM held a midnight meeting on Monday with his high financial officials and it was decided that the use of old denomination notes would be extended to 24th Nov midnight, in particular places like government hospitals, petrol bunks etc.  Banks were advised on Sunday to increase the Cash Withdrawal limit at ATMs from the existing Rs 2000 to Rs 2500 per day in the recalibrated ATMs. The weekly limit of Rs. 20,000 for withdrawal from Bank accounts has also been increased to Rs 24,000 and the limit of Rs 10,000 per day has been removed.

The Opposition have banded together against the demonetization, with the Congress and Arvind Kejriwal accusing PM Modi of leaving ordinary people in trouble . The Congress and Bengal Chief Minister Mamata Banerjee's Trinamool will meet today to plan a united attack in Parliament. Ms Banerjee  to arch rival CPM's Sitaram Yechury yesterday to form a consensus to attack the government.

But as per the common belief  and opinion of  analysts, this bold  move has been  broadly welcomed. Saying that even if consumer spending will likely dip in the short term as the new notes make their way into circulation,  it will be a big boost to the GDP in the long term. The European Union and other world economic bodies have also welcomed the move.