Gradeup Magazine: Let's Talk Business #6

Q: What do you think of the decision by the Indian Government to demonetize ₹500 and ₹1000 notes?

Withdrawing high denomination currency notes [demonetization] have been done before [1946, 1978]. However, I believe the present move [2016] might have a bigger impact than the one done by British India and Morarji Desai. This is a move I have been dreaming of years and glad that it was done.

The fact that the government was able to do this so secretly in such a connected volumes speaks volumes. Indira Gandhi tried this in early 1970s, but could not as the move leaked out and the bad guys quickly changed over the notes. The government had to back out of the move then. I’m even thinking if the move to ban NDTV was just a ploy to distract the whole media, to pull off this.

There are 5 key incentives for this:

1. Bringing out illicit money sloshed in the parallel economy
2. Having a lid on the fake money racket supported by our western neighbor
3. Incentivizing India to cashless. The banks would not hand you wades of the new cash, but will just credit the money to your bank account in place of your old currency.
4. Moving the notes to a more secure standard - with better protection against counterfeiting.
5. Curbing inflation in real estate and reducing gold imports.

As the 6th incentive, it would impact coalitions ahead of the major elections in UP and Punjab. It is not shocking that elections, especially in these states with multi-dimensional politics [a lot of parties fighting] involve a lot of illicit money. MLAs get traded like horses - with suitcases of cash. Some of that trading get impacted.

Unlike in the past, I don’t see much impact on normal users of currency. The transactions that happen on Rs. 500 and Rs. 1000 should be moving to netbanking/check/cards anyway. If someone is still holding out against modern transaction methods this is the opportunity to come out of the rock.

For the poor who don’t have debit/credit cards, there might not be much impact either - as most of their transaction happen under Rs. 500.

Impact of the move

1. Black Money & corruption: The impact on black money usage will be temporary as those would eventually move to the new Rs. 2000 notes in time. Also, a lot of the black money lies in real estate, gold and other physical things. Still even a temporary, small impact on this sector is better than nothing. The mere fear of government taking out your black money is good enough. That the government could so secretly do this will increase the fear.

2. Elections: Especially with the major elections barely weeks away, the move would impact politics in the crucial states. My guess is that the government waited for the Diwali to pass [will be a huge pain for many to have this move before the festival] and do it reasonably before the elections [EC could throw a spanner on any major move just before the elections]. Thus, unlike the previous occasions, the government didn’t do this on January 16. It could have impact on corruption in those elections and it is a way of the government saying, “Check, Mahagathbandhan”.

3. Counterfeiting: The impact on the counterfeit notes would be more significant. Many “dealers” with the existing counterfeit notes would be stuck as they would have to take the notes to the bank and have better chances of getting their racket exposed. Thus, they are more likely to destroy their notes and incur losses. Losses to the bad guys is good and maybe some of them could get shot unable to pay their debts. It would be quite hard to counterfeit the new currency and until they develop the technology for that, there will be an impact on counterfeit notes and terrorism that is funded through that.

4. Cashless society. All of the above things are temporary things. But, I believe the long lasting one could be in moving cashless. The pain of transferring cash could incentivize many to think about going bits and plastic. Today could be a day to introspect for the legal users of the currency. That could have a more significant impact on counterfeiting and unaccounted money.

5. Gold/silver. In the short term, gold and silver buying will be hampered, as a lot of the buyers buy with their black money. That means less importing. Over the long term, there might be more purchase of gold as the black money guys will be afraid to hold too much cash.

6. Real Estate. In the short term, prices of real estate would come down for the same reason above. There will be less suitcases moving. It is not clear what would happen to this sector in the long term. Maybe there could be a little more land buying, but that could be neutralized by the spiraling down of the prices that could go now.

7. Markets. This is overall a positive move that is lauded by a lot of people and could bring more confidence in Indian markets by overseas investors. However, the exit of black money temporarily could cause other repercussions in buying. I would not be surprised if the market goes a bit down in the short and medium term.

8. Overseas Indians. There is a lot of INR that gets transacted outside of India. Technically it is illegal [NRIs, foreigners can’t leave with rupee], but there are not many practical alternatives. They would be impacted as they cannot change the money to the new notes quick and those overseas currency trading markets on rupee would be impacted [UAE money exchanges won’t accept notes in India recall]. Some of these transactions are good ones that improve the economy, while others might help Dawood bhai like ones.

9. Banking to all. The government’s key objective is to bring banking to all and this will help that. If you have more than Rs. 4000, the bank will not give you new notes, but will just ask you to open an account and credit it there. This when followed with the fees on ATM transactions will make it harder to transact on cash.

The government gave the black money holders enough time [until Sep 30] to come clean [Black money: Rs. 65,250 crore disclosed under Income Declaration Scheme] and following up on its warnings would make them take the government seriously in this aspect.

On the whole, the government has announced that it is alive and bold. At a time it looked like the government was sagging and losing speed, it is a time to reinvigorate.

Q: What does Government mean when it says Indian economy has grown 7.5% ? What kind of growth is being referred here?

A: Imagine this way, have the salaries on an average grown since last year? Have there been new factories and other businesses producing new/more stuff since last year?

Governments want to measure the welfare of the society in various ways and want to understand whether they are on right track or not. The Gross Domestic Product (GDP) is one of the most used metrics to find out the overall welfare in the society. You can imagine it this way. Add the salaries of everyone in the country. The resulting sum would be the GDP. If the GDP grows, it means the salaries are growing and people are getting rich. Good. And if the GDP doesn’t grow/falls it means the people are not getting richer. Bad.

In short, 7.5% GDP growth means the average incomes of nation have risen by 7.5% from last year, after subtracting the inflation.

Now, you might say that your salary has not grown at all since last year. You might be right. We are talking about the averages. Some might see more growth and others might get none at all. Think of a new college graduate. She didn’t earn anything at all last year and might be earning something this year. For her the growth in salaries is infinity. Or think of the guy who got a big promotion. Or an entrepreneur who made it big. Or an unemployed person who now has gotten a job in a big city. All of them are seeing higher wages than last year and that means GDP growth.

It would still be hard to experience GDP growth in a short period. Think of watching grass grow. You wait for 10 minutes and still not be able to see the grass growing. But, it is growing. Same for GDP. The growth is visualized only during long periods of time.

Think of the houses in Indian cities 30 years ago and many of the modern houses. Or the buses and highways and metro trains and airports. Do you notice change? Or how much the maids earn at your home. Was there an increase?

See the image below:

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In 1993, there were 40 crore poor people. India’s total population then was around 92 crore. That means 52 crore people were above poverty line then. In 2011, there were 27 crore poor people out of 122 crore people. That means 95 crore people were not poor. In short, between liberalization and 2011, there were 95–52 = 43 crore people who got above the poverty line & earning more money than before. That is called the economic growth.

Q: How can India use its hidden gold reserves in temples in a situation of economic crisis?

A: Many of India’s temples, mosques, churches, monastries, gurudwaras have plenty of gold assets. But, it is not easily tappable as there is plenty of religious sensitivities involved. Again, it is not just religious ones. The government cannot take money from a variety of NGOs and private trusts either.

That said, the government has been bringing innovative gold monetization schemes to arrest some of gold price without taking wealth out of temples. In these schemes, the temples and other religious bodies will keep a part of their gold wealth in the banks that the banks can used to lend/sell in the market. When the religious bodies need them, the banks can repurchase and give them.

This is getting some traction. Tirupati temple deposits 1,311 kg gold in bank and Mumbai's Siddhivinayak temple to mobilise gold as India scrambles to cut imports

Also see:

1. Govt tweaks gold monetisation scheme to woo temples, now allows repayments in gold - Firstpost
2. Tirumala temple explores gold schemes with high interest rates
3. Gold monetisation scheme attracts deposits from eight temples

 (The author, as mentioned in all the articles before this one, is Mr. Balaji Viswanathan , Top Writer on Quora , who has agreed for his answers to be used for knowledge sharing purposes on Quora .)