Demonetization Move: Short Term Pain For Long Term Gain

The Nation went into a frenzy on 8 November, 2016 (in the evening), when the Prime Minister of India appeared on television sets and announced that the high denominated bills (Rs 500 and Rs 1000), in a bid to curb black money menace, would cease to be legal tender in just a few hours from now! The news instantly spread like a wildfire on the street causing brief distress even to a small flower vendor sitting on the pavement outside a temple. Similarly, there were many traders, businessmen, industrialists, accountants, bankers and not to mention even politicians who were caught in the awe of the moment.

Unsurprisingly, all those who have been honest tax payers, hailed the Prime minister's announcement and you could see a sense of victory amongst them. But these joyous moments came with few short term difficulties, as the Prime Minister began to announce administrative measures that would bring inconvenience to many. For example, the government of India has imposed various restrictions on financial transactions over the next few days.

But I believe these are short term pains and over the next few days, matters should ease out. While some have genuine needs, many are panicking as if there is no tomorrow, which is adding to the chaos all around. This morning, with banks opening for business, I saw massive rush everywhere. The evening the announcement came, people started queuing up for petrol all over since petrol pumps were accepting Rs 500 and Rs 1000 notes.

I had to apply for a visa and when I called the consulate they said they will only accept Rs. 100 notes or Demand Drafts. Yesterday banks were closed and needed a visa urgently for travel on Tuesday. Finally had to request my wife to look into all her different purses/bags, to help me..... and I was indeed right on my judgement on this one :)

But as I said, these are all short term pains & challenges. On the overall, I applaud the government's efforts on curbing the menace of black money; this infact is truly a masterstroke. What I am also impressed the extent of secrecy that was maintained around this initiative, while it seems work was going on for few months. Truly Amazing.

While the policy is aimed at addressing the issues of black money, counterfeit currency, and widespread graft (as per reports, it's perhaps as much as a fifth of India's GDP, or more than $450 billion), it will also help update the overall perception of India as a business destination. Further, this move will significantly impact all terror funding, resulting in better safety & security for all.

Over the medium term, with considerable black money out of the system, we see the inflation index witnessing some downtrend, as there would be fewer hands chasing the same commodity. There would also be a renewed push to the two recently announced government initiatives namely the Pradhan Mantri Jan Dhan Yojana, ambitious financial inclusion Scheme and Digital India, where the larger banking services would be availed electronically and via e-wallets. Also we will now see more and more people paying taxes, adding to national revenue. (Did you know that as per an article by one of the leading business dailies, sometime back, India's tax paying population is only 54 mn !!! that is only about 4.5% on a base of 1.2 billion !!!).

The combined effect of all this would possibly be visible in the India's ranking in the next World Bank's report on Ease of doing business.

Finally, I was not surprised to see full page ads by Freecharge and Paytm, since this initiative helps them the most. Wish I had some equity in both these companies!