You would have heard, read and discussed a lot over last 24 hours on demonetisation and destruction of black money.
I want to just share few points I understood from reading and watching television.
The total currency in circulation is about Rs.17 lakh crores.
Out of this 86% (around Rs.14 lakh crores) consist of high denomination notes (HDN) or Rs.500 & Rs.1000 notes.
Out of this, around Rs.4 lakh crores is considered as unaccounted or black money.
This black money is not going to come back to the system. Any deposit over and above Rs.2 lakh for a PAN may be scrutinised by Income Tax department.
This 4 lakhs crore simply vanishes into thin air. Government can print a similar amount without raising inflation and can say use it for developing infrastructure. There may not be even need to print; it may even simply be a credit entry in government books. By this, the black money of Rs.4 lakh crores is transferred from corrupt people to Government of India. It is one of the greatest transfers of ill-gotten wealth.
Manish Chokani explained in detail about this and said it would lead to softening of interest rates, strengthening of INR, reduction of fiscal deficit, controlling of inflation and adding few percentage points to GDP.
Already real estate has been sluggish for last few years. This move would further choke the lifeline of real estate and can result in property prices correcting significantly. Also real estate regulatory bill and benami transaction act would further streamline real estate sector. So it is going to be very difficult to use real estate for parking black money.
If anyone still suspects this government intention to root out black money, wait to see some future steps (which are under discussion) like a legal ceiling on cash a person can hold, limited and channelized supply of high denomination notes etc.
This action against black money would strengthen the economy, reduce slippages, cut down parallel economy and improve GDP. Financial assets, especially equity markets, would do very well in the long run because of this. Softening of interest rates would be good for bond markets as well. We need to go through short term pain for long term gain.
So far, honest tax payers were always mocked at. Cheating the government was considered the smart thing to do. This is going to change. It has just begun.
For Equity investors Modi is a great leader, investors respect for him has gone up. He has the guts to take on his own tribe, politicians. They are in the top of corruption food chain.
Lakhs of crores of black money lying in lockers, godowns and farm houses have become worthless papers.