INR Bonanza Model 2016THE SWEETER SIDE OF DEMONETIZATION

Government Facts

Indian Currency Notes – Rupee or INR as it is referred to has various denominations – Rs.10/-, Rs.20/-, Rs.50/-, Rs.100/-, Rs.500/- and Rs.1000/- in common circulation in all parts of India

Government of India by way of a notification declared all Rs.500/- and Rs.1000/- notes as “not a legal tender” beginning the midnight of 8th and 9th November, 2016

These notes form 86% of all currency notes in circulation Limited use of Rs.500/-Notes permitted in stages

Declared Purpose of demonetization

to identify and take control of “stashed cash” leading to enhancement in available deposits with the Banking system in India

to identify tax evaders and avoiders enhancing the reach of the banking system per force Digitizing banking spread and network

Notified Process

New Currency Rationing Deposit the “demonetized” currency notes in the Bank Prove the source or face the Music “Music” primarily includes 60-200% Penalty plus Tax plus untold harassment by

the officials of the Income Tax Department Base assumption – any Indian citizen who has more than Rs.250,000 in Cash

(USD 3650/-) and deposits it with his Bank will receive a Court and Tax Notice demanding to prove the source of this “savings” or “income” and if it is found (subjectively) “disproportionate” to his filed tax returns, he or she will have to face the “Music”

Farmers (agricultural land owners) remain exempted from tax

Direct Impact of the Notified Process

Rush at Banks to exchange / deposit old notes held in small numbers by millions of students, smaller employees, pensioners, senior citizens and farmers

“Stashed Cash holders” dispose of old currency in the following manner –a) At Par

i. Depositing in the Bank – using open books of accountsii. Over payments to employees (including Tax liabilities)

b) At a discounti. Buying Gold in Cashii. Buying Foreign Currency in the grey marketiii. Booking Forward Deliveries for New Currency Discounts Range from 18% to 55% depending upon Asset, Volume, Pressing Need and Availability

Indirect Impact of the Notified Process

Continued Parallel economy (operations) in Rs.500/- Notes and High Denomination Private IoU (I Owe You) Notes by Trusting groups of Traders, Businessmen, Industrialists, Workers etc. Central Bank IoUs i.e., Currency Notes have less acceptability now than private IoUs and Hundis.

Loss of employment Industrial Casual Labour Agricultural Labour Blue Collared Contracted labour which was used to Cash Payments and

Collections

Bonanza Options

Collection of Rupee NotesBuying Rs.500/-Notes at a Discount and on Credit (Going Discount – 18% to 55%)

Delivery tenor of new Notes is being promised in this Market at between 4-6 months)

Utilization Exchanging the Notes at Par from RBI / Banks through Agrarian / Steel economy Using the same notes to pay off purchase of farm produce Keep holding on until the signage to exchange

Assumptions

If people have already sold in the market at a price (discount here), there are also buyers at the given price

Existence of a buyer means that there is existing a final “Point of Utilization” which is more profitable to B

Existence of a final “PoU” implies that there are ways of disposal other than at a discount

Which implies that there is an information mis-match between the common masses and the buyer B

Currency in Circulation

Bonanza Arithmetic

Total demonetized Currency in Circulation – 14.2 lakh crore INR Assuming only 40% will go on the “discounting” highway Assuming final Discount of only 10% Profit for the Intermediaries – 0.57 lakh crore INR (US$ 9 Billion)

By popular guess – while those who are expected to go the discounting highway is over 66% - while the final discount is expected to be at least 18% the profit for the bookies / intermediaries is also between 0.57 lakh crore INR to 1.69

lakh crore INR (9 Billion USD to 28 Billion USD) from this demonetization move

Who are the gainers?

The Buyers in the Market – whose existence cannot be denied Those who have complete knowledge of the system introduced, its

existing loopholes and expected corrections Pure speculators

Given the numbers and the environment that cases the current monetary policy, the judiciary, the Reserve bank of India etc., I would leave the decision on the readers.

Next Move of the Govt., should be….

Must push Production Reduced Interest Rates Enhanced Credit Limits Roll over loan Interest waivers

Enhance Consumption in all regions Enhanced Credit Card Limits Low Interest on outstanding/dues Nil to minimal transaction cost

Re-monetize