Across the aisle: Old notes for new is not game-changer

The reality is the old notes will be replaced by new notes. Hence, the true test will be the answer to the question ‘what proportion of the old notes will be tendered for replacement’? It is only the notes that are not tendered that will be ‘demonetised’ in the true sense of the word

Written by P Chidambaram | Published:November 13, 2016 12:40 am
RBI, reserve bank of india, inflation, inflation rate, niti aayog, money supply, currency ban, new notes, notes ban, narendra modi, black money, indian express news, business As long as taxable income and non-taxable income co-exist, when money passes from one person to another, it may change colour.

Money, inherently, has no colour. In most countries, specified money transactions are taxed. This gives rise to two classes of money — money that is not taxed and money that is taxed. If money that is liable to be taxed is not offered to tax or otherwise escapes taxation, that money is usually referred to as unaccounted money or ‘black money’.

The best known tax on money is income tax. It is regarded as a progressive tax — more the income, more the tax. Not many are happy to pay income tax. They view income-tax rates as excessive and income-tax as confiscatory.

Non-taxable income

The tax evader is regarded as a villain. Sometimes, wrong persons are dubbed as villains. If, for policy reasons, a significant part of the incomes earned by the people is not taxed, those incomes are perfectly legal and legitimate. The best example is India where agricultural income is not taxed but is legitimate and legal income.

As long as taxable income and non-taxable income co-exist, when money passes from one person to another, it may change colour. Consider money passing from a farmer to a shopkeeper to a doctor. Depending upon who is a taxable entity, it may turn from white to black and to white again.

Besides, as any economist will point out, black money is not entirely ‘stock’. Mostly, it is a ‘flow’. In the old days, perhaps unaccounted money was stored as cash — the proverbial ‘under the mattress’. Nowadays, unaccounted money is mostly hidden in real estate, buildings, bullion, jewellery and shares/securities.

All of the above, make it difficult to stop the generation of unaccounted money and it is also difficult to detect the flow of unaccounted money.

Not demonetisation

A few days ago, the government announced that currency notes of the denomination of Rs 500 and Rs 1,000 had been ‘demonetised’. ‘Demonetisation’ has a special meaning. It means that the currency note of that denomination will, henceforth, be a scrap of paper! Nothing of that kind happened.

The government’s notification of November 8, 2016, withdrew the “legal tender status” from the notes of the two denominations but made it clear that those “holding these notes can tender them at any office of the Reserve Bank or any bank branch and obtain value thereof by credit to their accounts”. So, we can be clear on one thing, there was no demonetisation, and the government’s spokespersons would be well advised to avoid that word. The correct way to describe the decision is ‘Old notes for new’!

Both the government and the RBI have declared three objectives for the ‘Old notes for new’ decision. Firstly, to “tackle counterfeiting Indian banknotes”. This is nothing new, the RBI does this from time to time, new series notes are issued and the old series notes are impounded over a period of time and destroyed.

The second objective is to “curb funding of terrorism through fake notes”. This is really a part of the first objective.

The third objective is to “nullify black money hoarded in cash”. The assumption is that unaccounted money is stored in Rs 500 and Rs 1,000 notes and therefore they must be “nullified”. At the end of March 2016, there were 1,570 crore

Rs 500 notes and 632 crore Rs 1,000 notes in circulation, representing 85 per cent, by value, of all notes in circulation. Step one: pull them out by forcing people to deposit them in banks within a 51-day period ending on December 30. Step two: if it is true demonetisation, destroy the notes, which for obvious reasons the government dare not do — unless it wanted a revolution!

The reality is the old notes will be replaced by new notes. Hence, the true test will be the answer to the question ‘what proportion of the old notes will be tendered for replacement’? It is only the notes that are not tendered that will be ‘demonetised’ in the true sense of the word.

Put on thinking cap

There are many uncertainties and unknowns in the government’s plan:

1. How did the government come to the conclusion that the Rs 500 note was, in the present day, a high denomination note?

2. Was the government prepared to handle the demand for new notes? The first few days have been utterly chaotic and people have been put through a lot of hardship.

3. What will be the cost of replacing the old notes with new notes, including the cost of printing the new notes? My estimate is Rs 15,000 to Rs 20,000 crore. Was the cost worth the effort?

4. The present cash to GDP ratio is 12 per cent. Will it come down to the world average of about 4 per cent?

5. The value of the high denomination notes currently in circulation is about 15 lakh crore rupees. Will that value come down significantly?

6. Will gold imports surge indicating that unaccounted income/wealth will seek refuge in bullion and gold jewellery?

7. How will the government’s plan stop the generation of fresh black money?

8. And the most puzzling aspect: how will the government’s objectives be met if new and higher denomination series of notes (Rs 2,000) are introduced?

I have been derisively referred to as a columnist. Will the bloggers, if not the ministers, please answer the questions of this columnist?

Website: @Pchidambaram_IN

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  1. P
    Nov 13, 2016 at 5:47 am
    6th point is good,,,I think after 30th december all gold nd land transaction will be made mandatory to be done in bank cheques
    1. P
      Nov 13, 2016 at 6:28 am
      Chidambaram earned billions in Stock market policies,,,every one knows about it(IE plz don't delete my comments),,,,,nd these Thugs are now giving suggestions
      1. P
        Nov 13, 2016 at 5:26 am
        Chidambaram is the biggest scamster ,,earned billions in Stock market scams,,,,,,,,,Now if we talk about This govt,,,their plan has not failed yet if even today situation improves,,,but if this chaos will continue for weeks,,,surely riots will happen,,,Nd inspite of having good repo NAMO may even looseeven some of his sincerest Bhakts(including me)
        1. A
          Nov 13, 2016 at 3:06 am
          Completely agree with you gone r the days when blackmoney was hidden in mattress, sofa or false ceilings. Its in flow now ultimately culminating to agricultural income. Real estate industry is fast converting agricultural land into city land, black money is invested in this as it is not required for immediate consumption, under high inflation sitting on the money will make it go zero. Almost all bullion traders have some agricultural land to cover up the trading done without bills i.e. blavk money. Root cause and solution is to tax the agricultural income, which no political leader can do. Replacing old to new notes is not a bold decision, this is a political decision. Bold decision will be to start taxing farmers may be to start with more than 15 acres first, which you were planning to do. For that your govt thinking to raise farm income by raising prices was good that once farmer has minimum level he won't mind paying tax as well. This decision is to do politics not change the game, this you may call a kiddish work its my bat and i will play even if I am out.
          1. R
            Nov 13, 2016 at 7:42 pm
            Absolutely agree!!! Why is the government pushing for 2000, when it will make high value transactions in cash easier?
            1. C
              Nov 12, 2016 at 10:08 pm
              Good Questions to govt. yet another decision byModi, which put hardship on poor and middle-cl people. Millions of people waiting in linesto get new2000 note; where is the change to give for those 2000 notes. No planniing. ATMs are broke. This really is affecting every one. Ridiculus decision. people are frus strated by thos centeral govt...will be taught a lesson in eacj and every election going forward.
              1. D
                Nov 14, 2016 at 3:26 am
                Worst analysis. Jumping to the conclusion too fast . Dec 30 is not yet reached . How you data is going to be real before that date.
                1. I
                  Nov 13, 2016 at 2:43 am
                  Thought-provoking article. Rabid bhakts are as usual going to abuse this wise man.
                  1. G
                    Nov 13, 2016 at 1:20 am
                    Extremely important explanation. We should not end up in upturning the mountain for catching a mice. If for Rs 400 cr counterfeits and Rs 100 cr fake terror currency, what is the point in replacing 86% of the money in circulation and spening 15k to 20K. There must me other better methods for do this. It could become refreshing black money. Populist measures should not hinder economic growth. You only brought true light in to this argument sir. Thanks a lot.
                    1. H
                      Nov 13, 2016 at 10:48 am
                      Terrorists, Naxalites, Anti-Nationals, and Corrupt Politicians who looted public money - are all frustrated that their cash reserve in 500 and 1000 notes have become worth less than toilet paper. That is why thy are all exaggerating common mans short term inconvenience. The stan Agent Karji already made some wild allegation yesterday against Modi. Nobody took him seriously. Today, another terror agent is writing against the demonitisation. All have only one agenda: They want to continue destroying the country, and they will oppose any good move by the government.
                      1. I
                        Nov 13, 2016 at 11:15 am
                        Purchasing large quanies of gold is not easy as u need to provide PAN no for every purchase.
                        1. J
                          Nov 13, 2016 at 9:25 am
                          We now have true patriotic PM. For nearly 70 years, the country was ruined by one fake hi family. Now is the time to recover. PM has stated that "I know the forces up against me. They may not let me live. They may ruin me, because their loot of 70 years is in trouble. But I am prepared,".
                          1. K
                            Kanu Patel
                            Nov 13, 2016 at 4:46 am
                            A common man will understand the BENIFITS of the actions by the government but not a learned ex minister because he does not want to recognize a good decision.
                            1. K
                              Kavitha Velayutham
                              Nov 13, 2016 at 9:20 am
                              Yes, it is not complete game changer until you and your masters - Italy Madam, and Prince - return all the looted money from 2G, Coalgate, CWG, National Herals, and Agusta scams.
                              1. K
                                Nov 13, 2016 at 12:04 pm
                                PC here few thoughts for you:lt;br/gt;1. What is wrong in getting all cash (legitimate or illegitimate) into banking system?lt;br/gt;2. Why should not people stop using cash?lt;br/gt;3. Why should not people start using plastic money? And lastlylt;br/gt;4. Why should not be there a cleansing of fake/counterfeit currency that is used for wrong purposes?lt;br/gt;Congress has a very bad history of bringing India out of license raj, illiteracy, discrimination and;br/gt;There are many examples people can quote for not doing anything for betterment of economy. When you were finance minster of India, please suggest one action you have taken against corruption. lt;br/gt;lt;br/gt;Opposition is good, feedback is good, but just criticise an action because that is taken by your opponent reflect narrow mindset.
                                1. P
                                  Nov 13, 2016 at 8:59 am
                                  If the columnist and his party had determination and coherent plans for addressing the menace of untaxed income generation and counterfeit notes the problem would not have become acute.It is easy to juggle hats,especially when out of power.Rather than taking,not invented here,atude,it would have been better if suggestions are given to the government to successfully complete the gigantic task of destroying black and counterfeit money.
                                  1. A
                                    Nov 13, 2016 at 7:57 am
                                    Why is IE giving this criminal column space? What is the outcome of the vasan scam by pc and family which IE exposed? Did IE get some tons of 1000rs to bury the story and treat him like a dignified finance expert? He questions whether this initiative will yield result - making his family's blackmoney useless will itself be a huge result. 15000crores is nothing. Imagine how many more PCs are there in india. All of them are trying all political and legal options to roll this back. It is upto the common man to stand with the PM and be smart....
                                    1. V
                                      Vikram sehgal
                                      Nov 14, 2016 at 5:05 am
                                      Seems like an unwanted column but forced upon the writer to pen down.
                                      1. S
                                        Nov 13, 2016 at 6:30 am
                                        1. S
                                          Nov 13, 2016 at 6:36 am
                                          Typos in my below COMENT:- lt;br/gt;STOCKING 50RS not STOCKING THEM( 100RS)
                                          1. T
                                            Nov 13, 2016 at 7:44 am
                                            It will get rid of some of the existing black money. People stocking a huge amount will distribute it amongst their kins n group members to turn black to white. But there needs to be more policies to prevent black money coming into the system.
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