Demonitization of Rs 500 & 1000 notes from Indian Economy

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Demonetization Simplified Shankar Jaganathan, November 11, 2017

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Imagine the Economy as an Automobile

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Money is Engine Oil:Essential for Acceleration

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With time Engine Oil Needs Change; Demonetization is Oil Change

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Oil Change Does Cause the Vehicle Owner hardship…temporary

• Some more inconvenienced than the other• Distance to service station

• For some more expensive than other

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Benefits of Demonetization or Changing Engine Oil

• Faster pick-up =Faster GDP growth• Black economy to white economy

• Better mileage = More Resources for growth

• Higher tax collection –one time + recurring

• Slower engine heating =Lower inflation• Disincentive for hoarding /black marketing

• Comfortable ride = Better income/ wealth sharing

• More people under tax net and higher spends on public /social infrastructure

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Sizing Demonetization Currency with Public

1% 4%

10%

47%

38%

Currency in Circulation: Rs.166 trillion

Coins <100 100 500 1000

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Money & Currency

Classification What it Includes

M0 - Reserve Money Currency with public, bankers deposit with RBI & Other deposits with RBI

M1 –Narrow money Currency with public + CASA deposits + deposits with RBI

M2 M1 + Post office savings account0

M3 –Broad money M1+ Time deposits

M4 M3 + Post office Deposits

Description Typical RatiosCurrency with Public 13%

Demand deposit 8%

Time deposit 78%

Other deposits with RBI 1%

M3 Money Supply 100%

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How It Impacts Us?

• Immediate: ill liquidity • Lots of wealth but no money

• Short term: ill liquidity + tedious process • ATM Rs.2000, Bank /PO exchange Rs.4000, Bank withdrawal –Rs.10,000

• Medium term: Inconvenience • Deposit all Cash into bank and then withdraw for use

• Long term: Better facilities?• Better physical infrastructure -Combination of higher resources, lower

corruption• Better social infrastructure –better public health, schooling, law & order

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Depositing Money in Bank

• If you are depositing money in bank, to ensure the following:

• Trail for the source of cash, safest in order of preference

i. Bank withdrawal –link amount withdrawn to amount deposited

ii. Person from whom received –have records names or records of events like wedding

iii. Saved over time –quantum justified w.r.t. taxable income declared

iv. Reason for holding cash –can supplement the reason for iii. Above

• If source of money not established

• Pay tax at applicable rates plus

• Penalty for concealment of income –ranging from 100% to 300% of tax evaded

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Demonetization: Impact on the Economy

Extent of Impact Reason Sectors

Positive Impact Higher taxes to spend Infrastructure, public health, education

Minimal Impact Low cash usage orLow value bills

IT Companies, Utilities, Telecom

Temporary Impact High cash usage / low value transactions

Pharma, Consumer Products, Oil Marketing Companies, Banks

Sustained Impact High cash usageHigh value transactions

Jewellery, Real Estate, Construction Material, Luxury products, Wedding arrangements

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Thank You & Happy to take Questions