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What Happens When Black Money Is Destroyed?

Mr. C.S. Sudheer | Updated On Saturday, November 19,2016, 01:05 PM
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What Happens When Black Money Is Destroyed?

 

In a bold move, the Prime Minister Narendra Modi, scrapped the 500 and 1000 rupee note, effective midnight, November 8th 2016. This is a surgical strike against black money. The Prime Minister has struck two birds with one stone. It deals a blow to both corruption and terrorism. Now several citizens ask…What was the need to ban 500 and 1000 rupee notes…all of a sudden? Could not a time of 2 or 3 days be given?

Yes….but by then, all the black money would have disappeared. By conducting a surgical strike on black money, the Prime Minister has practically destroyed black money.

Effect of curbing black money

There are currently INR 17,54,000 crore worth of rupee notes, in circulation in our economy, according to the RBI. Out of this, 500 rupee notes constitute 45% of the value of currency in circulation. The 1000 rupee notes constitute, 39% of the value of currency in circulation. What does this mean? Nearly 86% of currency by value in India, is in 500 and 1000 rupee notes. Now this money must be replaced, by the new 500 and 2000 rupee notes. A herculean task indeed….

You could see a fall in money supply in the economy in the near future, as the new rupee notes take time to flow into the economy. Also black money fuelling corruption, smuggling, terrorism and illegal activities, will not flow into the economy….for obvious reasons This means Deflation in the short run….What is deflation? Deflation increases the value of money that you have, because the supply of money in the economy has come down, while goods and commodities available in the economy, do not come down.

Let’s understand this with an example. You have 1000 coins of Rupee 1. You can buy 1000 plastic spoons, each costing Rupee 1.

1000 coins of rupee 1 = 1000 plastic spoons of rupee 1.

1 Rupee = 1 Plastic spoon

In deflationary times as money supply slows, you have 500 coins of rupee 1. However there are still 1000 plastic spoons.

Now 500 coins = 1000 plastic spoons

                OR

1 Rupee Coin = 2 Plastic spoons. You can buy 2 plastic spoons, with a single coin.

Conclusion:

Less money in the economy (deflation) = higher purchasing power of your money. The value of your money increases and you can buy more.

What is the impact of deflation?

In the near term

  • You will see long queues in front of banks and ATM’s.
  • Housewives would find managing money difficult.
  • Wedding season would see difficult times.

 

After sometime

  • Price of gold comes down, as demand falls.
  • Prices of real estate fall and property sees a correction of 20% to 30%, in the near term.

 

Conclusion: As prices of gold fall, along with properties and real estate….Congratulations all around. Every citizen is happy.

Why banning 500 and 1000 rupee notes is a good move?

Citizens deposit money with banks

 

Banks will see a surge in deposits, as citizens rush to deposit money in banks. Banks would be flush with money. Banks would have lots of money to lend. Expect banks, to cut interest rates on home loans.  Now, black money has been artificially inflating the prices of property, in many cities.

With no black money supporting real estate, prices of property come down. Now as banks give loans, money supply increases in the economy. Inflation comes back and goes up. If there is inflation in the economy, citizens will increase investments in financial products. The economy will bounce back.

With property prices down, you and other salaried employees can buy your dream home. Affordable housing gets a great boost.

India could become a cashless economy

The Government is doing its level best, to curb the use of cash in the economy.

  • ATM withdrawals are restricted to INR 2,000 a day.
  • Withdrawals from bank accounts limited to INR 10,000 a day and INR 20,000 a week.

 

So what happens….You have no choice but to use your debit card, for making purchases. Card transactions will soon replace cash transactions in daily activities.

Unified payment interface

You have unified payment interface, also known as UPI. It’s just a simple payment system like cheque, debit card or a mobile wallet. All you need is a bank account, to send and receive money, using your smart phone.

Mobile Wallets

You can preload money into your mobile wallet. All you need is a smart phone. This money can be used for payment of goods and services, including financial services you use.

NEFT

National electronics fund transfer also called NEFT, can be used to transfer money, during bank’s working hours in hourly batches. There is no maximum limit, on the amount of money you can transfer. You can read more on cashless instruments at Will Scrapping Of 500 And 1000 Rupee Notes Make India A Cashless Economy?

Government can collect more money in tax

You must be knowing that only 3% of our citizens actually pay taxes. Now tax evasion means…Government loses money. Government loses revenue and to finance itself, it has to borrow. The Government would be forced to increase taxes, which is a burden on the common man.

Black money in the hands of a few, improves their living standards. The rest of the population has to suffer. Now black money hoarders have two choices.

  • Declare this black money and pay tax on it.
  • Burn this money.

 

If black money is declared, a lot of tax must be paid. Just read, Depositing Black Money? Get Ready For Income Tax Notices.  The next question….where did you get so much money?

This is a very bold move by the Prime Minister of India. There would be pain in the short run, as citizens stand in queues at banks and ATM’s. However in the long run, India would become a cashless economy and corruption fueled by black money….permanently finished. Be Wise, Get Rich.

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Article Author

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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