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|Posted on November 19, 2016 at 4:49 PM|
The procedure introduced in India in an attempt to make 'black money' null and void, or 'demonitise' such funds is inherent with a flaw, I believe.
In practice, the idea of forcing people to exchange their 1, 000 and 500 rupee notes has caused lot of frustration, with people having to que up outside banks to exchange these high denomination notes. Some of the banks don't have the money to give in exchange - such are the ques and such is the quantity of money being brought to be exchanged. So far, about five billion pounds worth equivalent has already been exchanged. The Indian authorities believe there still is about nine billion pounds worth of the high denomination notes still in circulation. Of that, they estimate it will whittle it down to approximately five billion poundsnt? worth equivalent which will not be able to be exchanged legitimately.
What will happen with this five billion pounds worth equivalent in rupees? By demonitising this, the Indian government is going to write it off, I suppose, making the possessors of the black money effectively holding worthless paper, never in the future being able to use their treasure which has been written off. Effectively, the Indian government surely is not going to reduce the amount of money in circulation by such a grand amount? It would be such a shame. Removing such an amount from circulation would create a squueze, probably necessitating an increase in the benchmark interest rate. When the Western nations with their reserve currencies have been printing more or authorizing more digitally, can India afford to be effectively tightening their money supply to their detriment?
It just not make sense, to effectively reduce to null and void what is part of their nation's wealth.
That is where I suggest the flaw lies.
What may be better may be to levy a tax of say twenty five or thirty percent on money that may be surmised to be black money. This way, the culprits with black money will be identified, charged tax on that, but they may have the oppprtunity to hold as savings in banks their hoarded money, effectively keeping it legitimately in circulation. This would be good for perpetuation of the nation's wealth. And the tax thus collected will prove useful for national purposes, be it providing education, social security, or building houses, schools, dispensaries.
Categories: DEmonitisation may have a flaw