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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