Yesterday at 2000 IST, the Indian PM – Mr Modi announced that the two highest denomination bills (INR 1000 and INR 500) in India will not be valid currency after midnight; barring some emergency use. $217 billion, 86 per cent of the value of Indian currency currently in circulation became useless from midnight as the governments crackdown on black, or unaccounted, money. Rs 500 notes amount to approx. $120 billion while Rs 1,000 notes add up to $97 billion, according to Reserve Bank of India data.
Needless to mention that this was a very well planned move.
For my non Indian friends – black money is reference to illicit money held by people and obviously no taxes have been paid on the same. Last month in the biggest ever black money disclosure, at least USD 10 billion of undisclosed assets were declared in the one-time compliance window, yielding USD 4.5 billion in taxes to the government. Just before closing this scheme the PM announced that people must come forward and declare this money and pay approx 45% tax, however; most people did not took this advantage and obviously missed to see whats coming next!
We all know what is the source of creation of this illicit money: Crime, corruption, manipulation of accounts, land and real estate transactions, capital market transactions, transfer pricing, etc. Government procurements could create huge piles of cash if not done with integrity.
Eventually this money either stays in your drawers, oops! wardrobes and creates a parallel economy and people buy land and real estate in the name of friends and relatives and sometimes even in names of their employees household helpers. When it exceeds millions of dollars this money finds it way to the Tax Havens. The Tax Havens need no introductions, I hope.
A World Bank Report of 2011 titled ‘The Puppet Masters’ investigated 150 big corruption cases and in almost all such cases, misuse of corporate vehicles, such as companies and trusts, was found to the tune of US$ 50 billion. As a response to such blatant misuse of legal privileges, many countries are now demanding meaningful information about beneficial ownership. The FATF has also taken a strong stand on this issue and is in the process of revamping its recommendations to tighten the rules. It is expected that there will be a shift towards identifying real rather than merely legal ownership and global efforts will plug the loopholes existing in the form of such unethical practices prevalent today.
What to expect in India now?
- Land and real estate prices will move down by 20-30% as this was the component of black money involved,
- India faces big counterfeiting problem. This move immediately puts all the money into circulation to a stand still, thereby curtailing illicit activities. The new currency is more security enhanced.
- The lack of black money will play a major role for politicians who wooed voters by buying votes.
- Correction in the capital markets and prices of bullion.
What to do with the bills you have in hand? You can find answers to most of your questions on this link http://economictimes.indiatimes.com/news/politics-and-nation/rs-500-and-rs-1000-notes-banned-your-questions-answered-by-the-rbi/articleshow/55320904.cms
People must remember, India is a country of the people, by the people, for the people; and majority of Indian people are not elite class, and surprisingly they are not gravely affected by this announcement. And this is exactly what this Government intends to do, work for the common Indian citizen.
Over all, a very good step, in the right direction. God bless India!