These questions asked by my brother and he wanted me to answer, first I was reluctant to answer all these questions because spill over effect of this decision difficult to predict but I tried to answer his questions with my limited knowledge.
Question- How demonetization of 500 and 1000 Rs notes will impact in rebuilding Indian economy system and impact on terror financing.
India has adapted demonetization in past 1946 and 1978 also to reduce inflation, neutralize forged currency, and check the black money menace. The present decision of demonetization of 500 and 1000 Rs which has 84% share on total currency market will have following impacts
- Parallel economy of black money will be hit hard and it unaccountable money will come out.
- Fake currency supply from Pakistan will be no more so it will have directly impact on terrorism finance and activities of disturbing elements in Kashmir valley.
- India will move to cashless economy and this is probably most important long term impact of this decision as it will help for many other reforms like GST, NPCL, and push for Rupay card and so on.
- Indian currency will have better protection against counterfeiting as RRR committee also suggested turning down all notes printed before 2005 because of security reason.
- Curbing inflation in real estate and reducing gold imports as illegal money will be slashed down.
- Inflation checks in long run although commodity rate may go high in short period because shortage of real cash and ample access of 500 and 1000 Rs note.
- Banking sector may get boost as faster recovery of NPAs
- It would also impact elections in UP and Punjab and will check misuse of financial muscles.
It is true that it is bold move but it cannot be the end to bring all black money out few more steps need like implement strictly black money and benami act, monitoring of P notes, ensure international support on unaccounted money as FATCA treaty with USA, and so on.
Demonetization impact on Banking NPA-
This is not yet clear how bank NPA will respond because one move and NPA can rise or can go down; if bank accept old currency for settlement of loan than NPA will go down but if not (as MFIs are not allow to accept old notes as bank) than NPA actually go up because poor like farmers who pay in cash (on monthly basis) will not have it and so problem may increase. Also it will go down in that case only when one hold that much cash, no impact on those NPA cases when loan repayment by online facilities.
2- What can be the after effects of strong demonetization on Banking sector
Major possible impact on banking sector is-
1- Bank digitization movement will get big push now
2- Rupay card, debit and credit card users will increase significantly so service charge on online payment may government reduce up to 0% for further incentive to promote it. Other case many banks will come with better plans for online users.
3-NPCL gateway will get big boost
4- ATM services may also get some innovation because in recent time it has faces many challenges so new portable ATMs may get push especially for rural areas
5- Forge currency from banking sector will washout significantly.
6- This sudden decision has provoked many questions on HR quality of bank, technology up gradation, online security of transactions, which need to re look by bank in long run.
How do you relate Demonetization & employment generation ?
I do not see any logical direct relation between both; in fact some job may go out if significantly digitization will increase in bank
Don’t you think Demonetization will lead to different kind of practices of money laundering of small denominations
very true, it has to happen and in last few days we have seen in media that how people are looking for alternative methods to switch form one to other method of whitening the money. So that is interesting to see what else government will do to pluck down other holes in system. few steps like monitoring of P notes, re look DTAA policy with all countries like Mauritius, taxation treaty like FATCA (with USA) need to do with other major countries, easy and predictable taxation policy, online security of banking system to ensure people faith on it, monitoring of sensitive sectors like gold, real estate, drug business, under GST, will be few critical areas to monitor. To slash down old black money, one important step can be to nationalize all Indian citizen property outside India which is not accounted with RBI. Implementation of black money act and benami act will be other turning point on this regard.
Is demonetization is good for healthy democracy practices, what can be the alternative ways for Govt, to avoid possible hassles due to this ?
It is healthy or not that is depend on its frequency, intention, and other measurements. it was happened in 1946 and 1948 also but it had little impact. Across the globe demonetization mostly countries practice when inflation cross the limit like Germany after first world war or Zimbabwe in recent past. Present step of government to demonetize is largely welcome because it was well planned step after rigorous efforts of last two years with a clear road map for future also. However it cannot be done in every 5-10 years because it will shake currency credibility at national and international level. so to avoid it for minimum hassles, certain steps can be taken
1- Credible note security to make it almost impossible for currency forging.
2- One target of this step was check black money so alternative legislation as discussed earlier need to be strong to avoid generation of it.
3- Sustain push for bank digitization and not dependence on any such knee jerk step.