While there has been a lot of focus on the short-term hassles faced by the common people, thanks to the demonetisation of Rs 500 and Rs 1,000 notes and laments that the corrupt will find a way to offload money, a lot of people are missing the long term benefits of such a move.
1) The corrupt will lose money: How much black money is there in India? Nobody really knows though most estimates are in the tune of lakhs of crores of rupees. While some of that is in gold, benami property and foreign bank accounts, there is no doubt that quite a lot of it is hoarded in Rs 500 and Rs 1,000 bundles in households all across India.
The corrupt will not be able to offload all the money. Some they will be able to convert themselves, some will be passed off for conversion to others and even given away (good for the recipients). But the rest will miss the deadline and have to be burnt or thrown away.
This is already happening even though it's just been a few days since the announcement. Burnt notes are being discovered all over India and many sacks are being dumped in dustbins! If any person finds that, it will be a windfall of tens of thousands of rupees (an amount easily convertible) at least.
But the corrupt will lose their black money in large numbers. That itself is a huge win from the scheme. It will take a few months for experts to figure the exact amount, which is likely to be quite huge.
2) Counterfeiting just became super difficult: The Rs 500 rupee note was introduced in 1997 and the Rs 1,000 note in 2000. Once counterfeiters mastered the art of duplicating them, it became a huge cash cow for them.
The Indian government has failed to check this menace and in certain border areas, it has got so bad that people have no idea which are the real notes and which ones are fake. In fact, many small shops in small towns all over India don't accept high-denomination notes, which is a real pain for customers.
Now come the new notes and counterfeiters will have to start from scratch. News reports said intelligence agencies have taken a look at the notes and declared them virtually impossible to duplicate. Let's hope they are right.
|A cashless economy is easier to track for the government and discourages black money. (Photo credit: India Today)|
3) Second surgical strike on Pakistan: While everyone knows of Pakistan's direct wars and terror group attacks, a little discussed fact is its policy of economic warfare. Pakistan prints fake Indian notes with impunity and one commentator even joked that now the Pakistani economy would crash!
A bigger problem is that terror groups enter India with this fake currency. Those fake notes not only sponsor their terror operations but also destabilise the Indian economy, so it's a double whammy for us.
Post-9/11, Pakistan was on the ascendant. It re-cemented ties with America and got flush with funds while America looked the other way. That's why it was quite easy for the ISI to run an elaborate fake Indian rupee operation.
However, now the new notes are more difficult to counterfeit and US president-elect Donald Trump may not be that favourable to looking the other way to all of Pakistan's illegal activities. This is probably India's second surgical strike on Pakistan this year and they have been checkmated.
4) Bad notes will exit the market: Anyone who has studied basic economics will know that after the Gold Standard was cancelled internationally and thanks to fractional-reserve banking, any government can print as many currency notes as it likes.
The only problem is that the more notes they flood into the market, the weaker the rupee becomes and problems like inflation come up. The counterfeit money flooding the market has the same effect.
Well now, as discussed above, first a lot of money is going to be burnt and thrown out. Second counterfeit money will be eliminated and more won't come for some time. These "bad notes" will be taken out of the market and the spending power of the rupee will go up.
5) Forward step towards a cashless economy: A cashless economy is quite convenient, easier to track for the government and discourages black money. (I am not talking about Swiss banks for the rich but day-to-day activities of Indian citizens.)
While a good chunk of India has embraced online banking, shopping, ticketing, taxis… a part of India is unwilling to try it out. However, this move will make them see it in a new light.
For one, thanks to the great inconvenience due to demonetisation in the next few months, a lot of Indians will switch to cashless transactions for what they think is a temporary measure, but they could well get hooked to it.
The Indian government has been pushing for the same and just received a fillip.