How some of our Currency become piece of paper overnight

The demonetization of INR 500 and INR 1000 Indian Currency Note has come as a surprise to everybody. Whatever change is going to happen, but, this is the first time in my life when I have sensed that a person who is living on his liabilities, honesty and morality is feeling safe in this country. “Honesty is the best policy”, the saying, in fact, is now making much sense for the Indians. But, this isn’t the only change, which made Narendra Modi’s mind to take such a huge step, there were a lot of factors that bound him to do this. So what was that? Why this decision came into effect so sudden? Is it for unaccounted money? If yes, then what kind of effect will be seen, if that black money will become white or get captured by the country’s central body institutions. So many questions are raised.

Despite possessing legal earnings, Indians (Mostly in rural areas) accumulate their makings either at their home or lend them to the nearby surroundings. Even in the 21st century, when the banking network has spread more or less in every small area, money lending, the oldest form of business, is still effective in many areas.

With these changes, people who have a lot of legally earned cash in their pocket or at home, will have to deposit it in the bank before the date proclaimed by the government (30-Dec-2016). As it is legally earned money, it will surely be deposited in the banks (with id proof) and this will let the banks house surplus amount.

Now, talking about black money basically found in large digits i.e. crore or more than it undoubtedly carry INR 500 and INR 1000 currency notes, acquired through unrecognized or illegal ways, has no option other than to be destroyed or to be deposited. But, for considering the second option, they have to disclose it as legal income and have to pay heavy tax on it. So, how they’ll make it possible with these legal boundaries.No matter, if they found a way to make their income legal or they just get frightened, they have to pull out all the money that is not under the account of Indian government. Later on, it will help to minimise the total currency circulation in the Indian economy. As the currency circulation will be reduced, the inflation rate will also become negative, it is known as deflation. Although, deflation leads to unemployment problem, it increases the internal value of money as well.

So, the bottom line is: The demonetization of INR 500 and INR 1000 currency notes is such a positive move for the Indian economy as well a good lesson to those who are playing with Indian taxation policy. 

By:

Priyanka Sinha

Student, INLEAD

Black is Out & White is In

“It don’t matter if you are black or white…” sang Michael Jackson in his eponymous song Black or White. India’s chant is diametrically opposite “It matters if its Black or White!”, and no it’s not a racist statement, it’s all about the money that many have realized has ceased to be legal tender since India’s 9/11 (9^th of November).

At the stroke of midnight, 8^th November 2016, the Prime Minister demonetised all Rs.500 and Rs.1000 currency notes, rendering them worthless paper. However to not irk the common man they have been provided with time to convert their currencies into Rs.100s or maybe the new Rs.500s or Rs.2000s.

The idea behind this Master stroke

Master stroke, that’s what it is! The idea behind all of this is to curb the black economy that has taken gargantuan proportions in India. A parallel black economy was the reason behind very few people filing tax returns in India. With a population of 121 odd crores, only about 3.9 crores file their IT returns. (Economic Times, dated 10.11.2016) Those are the ones the Government is targeting & those are the ones who will be adversely affected.

Money being deposited in different bank accounts will be monitored, and any large sum deposited would come under Income Tax net. There is no immunity scheme in place. There may be a spurt in foreign currency purchases, gold purchases; and the respective rates have risen due to speculative effect. People may turn religious and deposit their black money, of no use to them since they can’t declare it, in Dan Patras.

Drawbacks to this idea

There may be mushrooming of middlemen across India who for a 10% – 30% commission may offer to convert high denomination notes to smaller ones. The temples if benevolent enough, can convert the offered black money into smaller denominations. Money for temples is tax free, and they can go ahead and get their newly received cash donations converted in banks.

Micro Finance Institutions that deal largely in currencies while lending to or retrieving loans from farmers. They may have to hold off their work for a few days. The biggest setback was 1500 points fall in Sensex on the 9^th of November. By 10^th it had gone up by around 250 odd points.

Purchase of consumer goods & automobiles and fine dining will see a drop in the coming few days. Online shopping will see a decline, where Cash on Delivery is the most preferred mode of payment. But all of this will be short term, in the long run consumers and companies will get used to the new systems and mechanisms put in place by RBI.

What happens to the demonetized 500s & 1000s?

Well, if you have black money and cannot declare it or get it deposited in your bank account, you have to destroy them (don’t burn them, there’s enough pollution in the air already)! So what will RBI do with all the old notes?

They have to handle the truckloads of demonetized currency notes rather delicately. All money will be shredded minutely such that they cannot be reconstructed. They will then be passed through a humidifier to be converted into briquettes, which are then given to contractors who mostly use them for land filling. They may even use some briquettes for sale as souvenirs, or for artistic or commercial purposes, as is done by Federal Reserve in United States of America.

That’s the story of how Black has become White in India, and we will along with westerners be celebrating “Thanksgiving to our Govt”.

By: 

Monica Mor

Sr. Faculty, INLEAD

Does Raghuram Rajan deserve to get a second term?

“He is rightly deemed as one of the very best central bank governors in the world”, say El – Erian, Allianz SE’s Chief economic advisor. Many bigwigs are backing a second term for our RBI governor. And why is this discussion in the offing? Raghuram Rajan’s tenure as RBI governor is up for renewal (or not), in September 2016. An RBI governor’s tenure is for about 3 years. Discussions are abuzz all around in India and abroad about the possibility of his extension. Hardly anyone is interested in whether the governor will cut rates or not, they are keen to know if he plans to stay put or move on.

Why is a central bank governor so important to any economy?

Well, it’s because he is just that, the governor. He is responsible for the country’s monetary policy. He is responsible for managing the liquidity in the country, which is so vital to the GDP growth of the economy.

According to an article in The Economic Times, dated 6^th June, this is probably the first time since liberalization of the economy began in 1991 that the prospects of the financial markets and industry have become so inextricably linked with the office of the RBI governor, or rather, who’s in it.

History of RBI guvs in India

The Governor of the Reserve Bank of India (RBI) is the chief executive of India's central bank and the ex-officio chairperson of its Central Board of Directors. Indian Rupee currency notes, issued by the RBI, bear the governor's signature. Since its establishment in 1935 by the British colonial government, the RBI has been headed by 23 governors.

The first governor was a Britisher, Sir Osborne Smith, who was the governor for 2 years and 90 days. The first Indian to hold this post was CD Deshmukh who held the post from 11^th June 1943 till 30^th June 1949. Dr. Manmohan Singh was the 15^th RBI governor and he held his position for 2 years & 120 days.

Often the ruling political party wants to bring in their favoured RBI governor, but there has been a different trend since YV Reddy. He was appointed the governor while NDA was in power & continued to be so in the subsequent UPA government in 2004.

Impact of Rajan’s exit

There’s speculation that Raghuram Rajan may want to return to academics post September 2016. So what would be adversely affected with him not getting a second term? So far as monetary policy is concerned, it is unlikely to be affected by the ongoing controversy, especially the one created by the loud-mouthed BJP politician, Subramaniam Swamy, who has been demanding his exit. India’s economy is growing at an impressive rate of 7.9% and that is a story in itself.

Raghuram Rajan unfortunately had been elevated to a superstar status by media. He’s had his successes and his failures, all which have been covered elaborately by all sections of media. His biggest success has been on the inflation front, contributed extensively by the falling oil prices. His crackdown on large corporate defaulters have won him kudos and made him the Indian public’s hero. However, he has often spoken out more than his predecessors which hasn’t really gone down well with the ruling party.

Dr. Manmohan Singh has often described governorship as the “loneliest job in India”. Let’s see if it’s vox populi (voice of the public) or a body of work that determines the future of our current governor.

Ms. Monica Mor

Sr. Faculty, INLEAD