In the war against corruption, the government of India's decision to discontinue the Rs 500 and Rs 1000 notes is one of the biggest blows to those who earn and stash black money. Its implications run far and wide. First, it renders all black money held in cash in the form of these notes worthless at the end of December 30, 2016. Two, it immediately invalidates all fake currency floating within the country. It's also a big blow to election funding and is sure to impact the Punjab and UP elections scheduled next year. But more importantly, it forces black money hoarders to find new and innovative way to stash the ill gotten wealth.
As of March 31, 2016, Rs 16.5 lakh crore of currency was in circulation. A vast majority of that was being stashed in large currency notes by hoarders in the form of black money earned either through corruption or 'cash only' transactions.
Only those who have earned their money through legal means will have the courage to deposit it back into their bank accounts by the December 30, 2016 deadline. For those who have earned through illegal means will now be in a bind since their money held in these notes is as good as trash at the end of the deadline.
What does this mean for large black money possessors? Their first port of call will be--you guessed it right-GOLD. That's the eternal safe haven for every crisis. Expect demand for gold and other such investment avenues such as diamonds and silver to shoot through the roof not just until the deadline, but well after that. That is, until the government finds a way to tap sale of gold across the country as well.
Prices of property, which is already hitting the trough, is likely to go further down since a vast majority of property in India has traditionally been bought in cash through such black money stash. Nearly half of all property transactions are believed to be black money and benami transactions.
According to the Reserve Bank of India, Rs 500 notes account for 45 pc of all notes in circulation while the Rs 1000 notes account for another 39 per cent. Nearly 16 billion Rs 500 notes and 6 billion Rs 1000 notes are in circulation currently. In one swoop, the government has discontinued 84 per cent of all currency notes in circulation. That explains why the banks and ATMs across the country need to be shut for 2 days to put this into effect. It would cost the RBI in excess of Rs 10,000 crore to print fresh notes to replace the Rs 500 and Rs 1000 notes with the new Rs 500 note and the Rs 2000 note.
At various points proposals have been floated for higher denomination currency such as Rs 5,000 and Rs 10,000 notes. However, fearing higher black money stash, the government has repeatedly kept such proposals in abeyance. Estimates of domestic black money range from a quarter to our GDP to 2-3 times the size of our GDP.
This may be a radical step with the aim to curb black money but isn't the first such case of currency discontinuation in the world. Earlier this year, the European Central Bank said it was considering demonetization of 500 notes. Even in the US, there have been calls to stop fresh issuance of $100 bills for a while now. In 2010, 2.6 billion $1 bills were destroyed in what was one of the world's biggest currency destruction at that point.
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