Cash is king in India?

Most people in villages and small towns in India have been most hit. Tempers are high. Many banks are shut adding to the woes of the people.

by Victor Cherubim 

(November 19, 2016, London, Sri Lanka Guardian) Almost everything in India is predictable or is the basis on astrological prediction, say some.  Nothing it seems happens without the sun, moon and stars predestine actions of ordinary people and of its rulers. Even the current demonetisation was according to plan. A month after closure of the Income Disclosure Week on 30 September 2016, a week after Diwali, was the auspicious time for action.

What really happened on 8 November 2016 when India announced and demonetised the Rs.500/- and Rs.1000/- notes in circulation, is now being analysed as the defining moment in the trajectory of the Modi government. According to sources, this move was needed to eliminate black money, counterfeit and possibly terror financing, but could there have been other reasons?

Nothing new happens without precedent?

The Rs.1000/- and the Rs.10,000/- notes were first demonetised in January 1946.In 1978 the Janatha Party of Moraji Desai demonetised currency notes of Rs.1000/-,Rs.5000/- and Rs.10,000/-. But then it was not done so abruptly.

Most recently in 2014, the Reserve Bank of India demonetised all bank notes printed before 2005.

Why do people hoard cash and in fact gold in India? 

Many want security and cash is king. People hoard cash but many hoard gold jewellery. It is understandable for people in small towns and villages without access to banks to keep cash.  Cash is the unit of account and most of the circulating currency is stored in cash. From the ordinary farming class to the “charwalas,” the medium of exchange for goods and services is cash and will most probably remain so. In fact a large amount of unaccounted wealth is also stored and used in the form of cash. It is not the poor or the needy but the rich too hoard as much as 30 percent of their net worth in cash and gold.

The hardship

Most people in villages and small towns in India have been most hit. Tempers are high. Many banks are shut adding to the woes of the people.

The surprisingly swift withdrawal of all low value denomination notes in circulation was expected but never anticipated so soon.

Mamata Banerjee immediately tweeted: “heartless and ill-conceived blow to the common people and middle class in the fake name of anti-corruption”.

Others said it was politically motivated and mean spirited. But India’s PM Narendra Modi conceded that “people would face some inconvenience in the beginning.”

Queues of ordinary people are to be seen everywhere across India wanting to en-cash old notes. Banks say they have received 3 trillion (£35 billion) of large denomination notes since demonetisation. The 50 day window for depositing and redeeming new high value notes ends on 31 December 2016.

With this new demonetisation, a large amount of cash in circulation will be brought within the purview of the formal banking system by way of deposits. People will be able to change a small sum of “old cash” into legal tender currency as long as they produce their ID. But there is a tax penalty of up to 200% on amounts deposited. As in the past, these penalties can however, be challenged in Court.

Short term effect 

There are rumours that there is a shortage of new currency notes in circulation in some

cities and areas, banks and ATM’s. Perhaps, the banks were unprepared. Banks aren’t human?

We also are reliably informed that the new notes will take approx.6 months to re-circulate in the economy for a country the size of India.

This is not supposed to create credit but perhaps squash its demand, thereby pushing deposit rates lower.

Consumption will take a knock for now, but in the long run the projection is that there will be positive impact on growth and inflation.

In the short to medium term 

Over the medium term, besides all the above mentioned inconvenience or call it disruption, organised activity “players”, like business and trading will benefit at the cost of unorganised, black market economy. Gold imports which have been mostly done by unofficial channels are likely to be affected, if not reduced.

In the long term 

The value of money which is the measure of its worth is decreased by fake currency.

Although trade is expected to slow down by approx 25% across India perhaps within months, it is the expectation that it is good for India in the long term and bad for the middle and poor in the short term.

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