Sunday, November 20, 2016

Will the ban on high denomination currency notes work?

This is a complex question; different political parties will have different answers. Results will be judged by various criteria.

I will focus in this post on how the banned notes are being surrendered through bank deposits. There is no ban on such deposits till Dec 30, 2016; the ban is only in using them for payments outside the banking system. The deposits can be withdrawn in the form of new currency notes. A problem will be faced by those who have unaccounted money; that is wealth, the sources of which cannot be explained to the tax authorities. Of course, any tax due on the money now surfacing will have to be paid. The Income Tax officer can ask those who did not pay tax on similar income in the past to explain how they suddenly earned so much this year!  Such presumed evasion of tax could be penalized heavily. 

This leads to the belief that some of the 14.73 Trillion Rupees that was in circulation in the high denomination notes will not be returned through the banking system. The holders of such cash would be unwilling to face investigation. It is argued by some people that this will reduce the liability of the Reserve Bank of India, and result in a gain for the people of India as a whole. 

If this is true, we should watch with bated breadth deposit flow into the banks as it progresses. Like an election result, the suspense will be great till Dec 30 when these deposits will stop. We will then know whether all the pain and suffering millions underwent while standing in bank queues was worth it. I provide bank deposit information up to Nov 20. The tables are given below, and a graph is near the top of this page. I will add new posts to cover growth of deposits in the coming weeks. Keep watching this blog!

Source of information summarized against that date


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