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Is this Demonetisation? Do we need it? Why do we need it?

I am not a fan of Right wing communalists, and I think this recent move of their government is a catastrophic disaster. Though I hate them , I will try to be rational in my opinion and let us give the benefit of doubt to NaMo and assume that his intentions are good.

Did he think it through ?

I ‘ll leave that for you to decide.

How novel and efficient is this modi’s Demonetisation

Most of us think that this withdrawal of legal tender is completely new Idea and that it is the first time the world has ever seen it. India had taken such steps in the past not once but twice. It was a failure both in 1946 and in 1978. The current government must have huge balls to try it again, but unfortunately the signs of failure are already evident. Even sanghis were against the withdrawal of banknotes in 2014 when the central bank withdrew the banknotes issued prior to 2005 and called it as “anti-poor”. Central Board of Direct Taxes wasn’t a fan of demonetisation either as they knew that we hoard it in many different form other than cash.

Finance Ministry estimated that about 1.7510^13 INR worth banknotes were circulated last month in which a whopping 84% was in the 500 and 1000 INR notes which is no longer a legal tender. So if the banks continue to deliver in the same phase, i,e, roughly 1.2510^11 INR / day , it could take more than three months to replace the currencies that lost their status as legal tender.

I would higly recommend you to skip this paragraph, read the Wikipedia articles on Money, Currency & legal tender and then just move on to next paragraph. The way we do our transactions have always evolved, but it was a slow process and it was quite natural. When we had barter system, a monarch didn’t come out on a fine day to announce a currency. People involved in transaction decided on a common material that was to be used instead of barter. That common material, whether it was bronze or gold or silver was in use for quite sometime before it started to bear the seal of the monarch. That seal added to the authenticity to the coin. It is quite possible that these early coins might have been the objects used in rituals and prayers, probably issued by a priest.. Long story short, it took millennia before the coins started to bear the value of fiat money. This is when the governments started to control the money.
When the banks became prevalent, they started to issue banknote, which was supposed to be exchanged for the money as per face value. So when banks issued these banknotes, they always had to ensure that they were capable of exchanging these notes for coins. This was going fine, but it wasn’t uncommon for the banks to become bankrupt. So government interfered again and appointed the central bank to issue the national banknotes. These then became legal tender. All hell broke loose… These national banknotes no longer have backing in gold/silver, not even coins, but can be just traded for their face value of fiat money. Legal tender is any official medium of payment recognized by law that can be used to settle a trasaction like extinguishing a debt, or meeting a financial obligation.

Is it actual demonetisation ?

Though this story about money was boring and irrelevant, it is important that one understands the difference between money and a legal tender. If these 1000 and 500 INR notes cease to be the legal tender, they are still banknotes, aka promissory notes. The RBI governor has signed that they promise to pay the bearer. These RBI issued notes doesn’t specify to pay on a specific date nor an expiry date, hence they have to pay on demand. There is nothing to stop us from using these notes and going to RBI and asking for the face value of fiat money after a year. For example, the Bank of England exchanges the pre-decimal banknotes for legal tender even today irrespective of how old they are. Those ceased be a legal tender almost half a century ago. India does not ban the use of banknotes as money even if it is not a legal tender. So the transactions cannot be settled, but you can still use it. For example when you do a electronic transfer, you are not using a legal tender, but you can still use it for exchange. So when you transfer money electronically, instead of settling a transaction, you are just directing the recipient to get the legal tender from his bank. These old notes can still be used in that way unless these are deemed as contraband by the government. There are currencies like Iraqi Swiss dinar that have had a stable value for more than a decade despite the lack of government’s backing. So we can easily manage the situation as long as the people stay calm.

I have accepted about 15000 INR from fellow people in denomination of old 500 INR and 1000 INR RBI Gandhi series notes and wired them the face value of the currency and I did it after 09-11-2016. If you are a government official and if you want to contact/arrest/sue me, please email to [email protected] I promise that I won’t forward those messages to /dev/null. ;)

Potential benefits

The prime reason behind this havoc was to address the black money, but now that most news establishments and political commentators have quite established that it would be foolish to expect a significant positive result in uncovering black money, let’s move on.

One would suspect that militants would have had quite a large sum of cash in their reserve, but one would be overlooking the fact that most of those such militant groups in India live intertwined with the local community. Though it will certainly pose some trouble, they should be able to distribute the cash and get it converted to new currency.

If the RBI had improved the security features of the note, we could have hoped that the forged currency could minimize; but they had no time

No wonder some people are worried that it might be facade for some serious heinous shit being done by government.

But I don’t doubt the government’s intention; but its logic, planning and execution is very bad. If only 6 % of black money is in Cash, why go after it causing such hardships to poor whilst we have crores of NPA with nationalised banks and a shit load of money owed to us as Taxes by giant corporates.

I would like to close by quoting The Guardian: “..the scale and speed of Mr Modi’s scheme has more in common with the failed experiments of dictatorships which led to runaway inflation, currency collapse and mass protests.