The Prime Minister announced demonetization of Rs 500 and Rs 1000 currency notes with effect from midnight, making these notes invalid. By now, we know this move is to curb corruption and end black money trade. How exactly?
Let’s take a simple example – Mr X possesses Rs 10 crore black money right now. Let’s say he has Rs 1000 notes. That means 1,00,000 notes of Rs 1000. Now, with government abolishing Rs 500 and Rs 1000 notes, Mr X should exchange his Rs 1,000 notes with smaller currency notes which he can’t because banks will ask for the source of that amount. Even if he decides to convert them into Rs 100 notes somehow, he would have 10,00,000 notes. Such a huge amount of cash is difficult to store and transport when dealing in heavy illegal transactions. Another instance is when giving a bribe. Let’s say someone is bribing a government official with Rs 1 crore, it would mean carrying 1,00,000 notes of Rs 100. It’s laughable to be dealing with that kind of transaction.
All of this means – Money launderers will either try to hoard cash, exchange them with new notes or deposit them in the banks to convert them into white. But, they won’t be able to do any of these because firstly, hoarding is no good. Secondly, they go to the banks to exchange these higher denominated currencies with lower ones or new ones, they will have to give an account of the source of money. For the same reason, they won’t be able to deposit the unaccounted cash in their bank accounts. If at all they resort to illegal ways, every old 500 or 1000 rupee note in circulation will be accounted for and it wouldn’t be difficult to unearth local black money.
Moreover, people will increasingly resort to banks for any financial transaction. This will be easier than carrying a bunch of notes of lower denominations. This will automatically reduce black money and lead to more financial inclusion. Some other clear areas where it will bring down malpractices are during elections, instances of bribing government officials, hawala transactions, terrorist activities, cross-border smuggling and illegal trade, human trafficking deals, child labor and related practices.
Also removing Rs 500 and 1000 notes will reduce fake currency as it is not profitable to print Rs 100 notes. If there is one sector which will benefit the maximum by doing away with Rs 500 and Rs 1000 notes, it will be the real estate sector.
This explains how Modi’s recent move will definitely have a bearing on the economy as a whole, and only for the nation’s good.