2. Government Facts
Indian Currency Notes – Rupee or INR as it is referred to has various
denominations – Rs.10/-, Rs.20/-, Rs.50/-, Rs.100/-, Rs.500/- and Rs.1000/- in
common circulation in all parts of India
Government of India by way of a notification declared all Rs.500/- and Rs.1000/-
notes as “not a legal tender” beginning the midnight of 8th and 9th November,
2016
These notes form 86% of all currency notes in circulation
Limited use of Rs.500/-Notes permitted in stages
3. Declared Purpose of demonetization
to identify and take control of “stashed cash” leading to enhancement in
available deposits with the Banking system in India
to identify tax evaders and avoiders
enhancing the reach of the banking system per force
Digitizing banking spread and network
4. Notified Process
New Currency Rationing
Deposit the “demonetized” currency notes in the Bank
Prove the source or face the Music
“Music” primarily includes 60-200% Penalty plus Tax plus untold harassment by the
officials of the Income Tax Department
Base assumption – any Indian citizen who has more than Rs.250,000 in Cash (USD
3650/-) and deposits it with his Bank will receive a Court and Tax Notice demanding to
prove the source of this “savings” or “income” and if it is found (subjectively)
“disproportionate” to his filed tax returns, he or she will have to face the “Music”
Farmers (agricultural land owners) remain exempted from tax
5. Direct Impact of the Notified Process
Rush at Banks to exchange / deposit old notes held in small numbers by millions of
students, smaller employees, pensioners, senior citizens and farmers
“Stashed Cash holders” dispose of old currency in the following manner –
a) At Par
i. Depositing in the Bank – using open books of accounts
ii. Over payments to employees (including Tax liabilities)
b) At a discount
i. Buying Gold in Cash
ii. Buying Foreign Currency in the grey market
iii. Booking Forward Deliveries for New Currency
Discounts Range from 18% to 55% depending upon Asset, Volume, Pressing Need and Availability
6. Indirect Impact of the Notified Process
Continued Parallel economy (operations) in Rs.500/- Notes and High
Denomination Private IoU (I Owe You) Notes by Trusting groups of Traders,
Businessmen, Industrialists, Workers etc. Central Bank IoUs i.e., Currency Notes
have less acceptability now than private IoUs and Hundis.
Loss of employment
Industrial Casual Labour
Agricultural Labour
Blue Collared Contracted labour which was used to Cash Payments and Collections
7. Bonanza Options
Collection of Rupee Notes
Buying Rs.500/-Notes at a Discount and on Credit
(Going Discount – 18% to 55%)
Delivery tenor of new Notes is being promised in this Market at between 4-6 months)
Utilization
Exchanging the Notes at Par from RBI / Banks through Agrarian / Steel economy
Using the same notes to pay off purchase of farm produce
Keep holding on until the signage to exchange
8. Assumptions
If people have already sold in the market at a price (discount here), there are also
buyers at the given price
Existence of a buyer means that there is existing a final “Point of Utilization” which
is more profitable to B
Existence of a final “PoU” implies that there are ways of disposal other than at a
discount
Which implies that there is an information mis-match between the common
masses and the buyer B
10. Bonanza Arithmetic
Total demonetized Currency in Circulation – 14.2 lakh crore INR
Assuming only 40% will go on the “discounting” highway
Assuming final Discount of only 10%
Profit for the Intermediaries – 0.57 lakh crore INR (US$ 9 Billion)
By popular guess –
while those who are expected to go the discounting highway is over 66% -
while the final discount is expected to be at least 18%
the profit for the bookies / intermediaries is also between 0.57 lakh crore INR to 1.69 lakh
crore INR (9 Billion USD to 28 Billion USD) from this demonetization move
11. Who are the gainers?
The Buyers in the Market – whose existence cannot be denied
Those who have complete knowledge of the system introduced, its existing
loopholes and expected corrections
Pure speculators
Given the numbers and the environment that cases the current monetary policy,
the judiciary, the Reserve bank of India etc., I would leave the decision on the
readers.
12. Next Move of the Govt., should be….
Must push Production
Reduced Interest Rates
Enhanced Credit Limits
Roll over loan
Interest waivers
Enhance Consumption in all regions
Enhanced Credit Card Limits
Low Interest on outstanding/dues
Nil to minimal transaction cost
Re-monetize