Demonitization,

Its impact on GDP Growth, Corruption, Terrorism

From the midnight of November 8, 2016 , India banned its Rupee notes value of Rs.500 and Rs. 1000. The value of these notes in circulation at that point of time was substantial.

By this one measure, India aims to control corruption, (by getting rid of Black or un accounted money) , tackle terrorism ( terrorists / enemy countries use fake notes to fund terrorist activities). and speed up the process of converting the economy to a cash less economy

Let us take each one the above separately and discuss them very briefly:

1.     India aims to control corruption, (by getting rid of Black or un accounted money) :

a.      It is estimated that only about 1  per cent of the population of India pay income taxes . Most of them are those who pay are whose tax is deducted at source (TDS) and remitted to Tax Authorities by the Tax deductor.  So here, most of the persons paying tax operate their income and earnings and expenditure through Bank accounts

b.     The second part  relates to them who do not pay or pay less taxes: It is estimated that a substantial part of Income earners do not remit tax at all or remit very less tax . This is so because they a. Do not show their full income and earning through bank b. they overestimate their expenses , by creating false vouchers and expense bills. B. Many collect their income earnings in cash only. This results in a parallel economy where most of these people hoard cash substantially and store them in lockers, or buy jewels or transfer it to a account abroad or a combination of all these . This results in black money. Generally, it is believed that infra projects and real estate do contribute a good sum towards the black money stream.

c.      By this process of Demonetization, those who had stored money is Rs 500 and Rs 1000 in lockers in huge numbers feel the heat . This money becomes illegal unless it is disclosed and tax paid (now proposed @50%, and balance to kept in bank account, with a lock in period of 4 years) .

d.     Those who risk disclosure and take chances, and are  caught , could end up paying taxes of 85% and penalty .(now proposed)

e.      So there is still time for the parallel money to come into the mainstream.

2.     tackle terrorism ( terrorists / enemy countries use fake notes to fund terrorist activities

a.      This is an Important measure aimed to be achieved through this process of demonetization.

b.     It is well known that enemy / terrorists use fake currency to fund their activities and also create economic chaos .

c.      By withdrawing the notes , the source of funding is choked .

d.     This choking helps in tackling terrorism.

3.     Does this demonetization aid Growth:  To put it straight …. Yes. It does. In the short term, there could be difficulties , since the economy moves towards cashless economy from cash economy. (it was estimated that aboutn 75% of Indian economic activities was being done in cash). So, this digitization will usher in an clean economic growth, free from parallel economy (black money economy) .

4.     Are these the only measures that is being taken : It is expected that  some  further measures are  to follow to render India a cashless economy.

  

Press Release Link:http://finmin.nic.in/press_room/2016/press_cancellation_high_denomination_notes.pdf

(  disclaimer note: This is a review and  is not a legal advise. Please check authenticity of figures  and data and seek appropriate advise from your legal teams 

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