De-monetization is the name given to a process in which certain denominations (typically high value) are made illegal tender so that they are surrendered to the bank/agency that issued them in the first place. As a rule, the same denominations are not re-issued at all, atleast immediately.
De-monetization is typically done for three reasons.
Fake currency abolition
First reason is if Government is unable to control fake currency production, then those denominations are made illegal tender. But when it is done for combating fake currency, the same denominations are re-issued. When they are re-issued they are issued with additional security features that will make it tougher for fake currency production.
Water marks, security threads, fibre, latent image etc. comprise security features of a currency note. Between the old Rs.500 and the new Rs. 500 there are NO NEW security features. What is different are the design of the new note. What this also means is that whoever is printing the old 500 can actually print the new design, once they learn of the new design.
There are also other dimensions to this currency printing. Our currencies were printed by ABC (USA) and 2 European companies. As The Hindu reported, in 2014, the 2 European companies, the De la Rue (UK) and GDC (Germany) were barred from printing currency for India based on the suspicion that they could be passing information about these security features to ISI.
But on subsequent investigations, the ban was lifted by the PMO according to The Hindu. With the the help of De la Rue Mysuru printing press was setup. This is the press which is printing new Rs.2000 notes.
In panama papers leak De la Rue was mentioned to have provided 15% commission to a New Delhi Businessman during August 2002 for getting the currency printing contracts. There is also a news item that says that Roberto Giori who owns De La Rue was one of the passengers of IC 814 that was hijacked by gunmen in 1999. More on these here.
As of now we can be sure that FICN will be halted for now, still the new fake printing presses are adjusted for new design. This will hamper the terror activities for sure. The disappointment is the fact that there are no new security features.
Fighting Black money
Second reason is when higher denominations are used to hoard cash, then those higher denominations are rooted out. This brings out the cash hoarded onto the mainstream system. But in this process the same denominations are NOT issued. Mostly the higher denominations are withdrawn and people are left with only lower denomination.
A lower denomination helps avoid hoarding cash or even transacting very high value transactions in cash in black. This is the real success of demonetisation. It avoids hoarding of cash as only lower denominations make it difficult to hoard and move such cash physically.
For eg. weight of 100 crores with old Rs. 500 notes was around 1.3 tons. So if a cash transaction has to happen in 100's of crores, the money has to be virtually transported in huge containers. It is simply impossible. Hence such high valued transactions do not happen in cash. Hence they are NOT stopped by demonetisation or currency swap. They happen through investments and investment transfers between fake companies nationally and internationally. They also happen through hawala. These are primarily done by High Networth Individuals (HNI) and wealthy Corporates.
The basis of hawala is that there is trade between countries (imports and exports) which are over taxed and hence under invoiced. The gap in real value and invoice value is transacted as hawala between the hawala traders The 'hawaladhars' are actually often traders who are doing perfectly legitimate trade. Ofcourse drug and diamond smugglers also indulge in hawala. Hawaladhars are primarily paid through fictitious company investments often. Such transactions are not deterred by demonetization.
People who give 'cash' to small-scale hawaladhars will be deterred due to demonetization. Removing higher denominations make it very difficult to handover loads of cash. But a currency swap as being done now with a higher denomination (2000 notes) may pause small hawala transactions for some time, but will make it easier in future.
For 10 crores of Rs.500 notes it weighs 130 Kg. It is not hard to transact but has a high security risk. Hence I doubt even 10 crores of illegal transaction happen in cash. But there could be exceptions. Most of these transactions are NOT stopped by demonetisation. These transactions happen through fictitious loans to loss-making or defunct or fake companies. These are primarily done by middle-level corporates, wealthy distributors, stockists, corrupt high level govt functionaries, high level politicians etc.
A crore weighs just 13 kg. Hence few crores of transactions can easily happen in cash. These transactions are STOPPED by de-monetisation. But the hall-mark of such transactions are they are kept in cash rarely. Most people who do this kind of crores of cash hoarding keep transacting them or moving them. Hence this cash becomes land, gold, company loans etc. These are done by traders, retail suppliers, low level bureaucrats, low level politicians etc..
Then there are black money transactions ranging from few lakhs to few crores. These are the primary transactions that we see happening before us. Mostly this is done by middle-class pensioners, traders, very low level bureaucrats, very low level political functionaries etc. These people often don't know to handle the complexity of such money transactions and they keep cash in their lockers. These transactions get STOPPED by demonetisation.
Currently in India, all higher denominations are re-introduced. Hence it becomes a currency swap. A currency swap disturbs the black money cycle. But it does not stop. After a pause all of them continues.
With newer Rs.2000 notes, it is pretty easy to transact black money in cash. There is an argument that there will be a fear of deterrence for sometime. That's not true. While it is easy to transact black money with Rs 2000 notes, the fear will ensure the money is either changed hands or gets its way into the system through land, gold, fake company deposits etc. The fear will ensure people don't hoard it in cash in their lockers. Chartered accountants will see that their business expands.
Fighting terror
The third reason is to stop all sorts of shady dealings in cash from smuggling, terror operations in naxal areas, maoist areas, separatist areas etc.
Maoists and Naxalites collect 'cash' from extortion from corporates and levies from mining companies. These corporates and greedy mining companies which generate huge black money in cash pass on some of them to naxalites and maoists. These terror outfits keep a part of cash in dollars using hawala routes. The dollar portion will not be hit, while the cash portion becomes useless. But then for them 'cash' is a continuous source of income from illegal miners and corporates. That's why while they are hit, they won't crumble.
The terror operations in Kashmir has two components. Weapons and people support. People support will get dampened due to demonetization as terror outfits don't have legal cash to incite or pay for 'matryrs'. But weapons support will continue. The number of demonstrations will come down. While fidayeen attacks come down, the hit and run on schools or security agencies will continue.
The terror operations in North east will also take a hit. I suspect they will take a hit much more than anyone else. To recover to their original level of terror, it will take some time.
Corporate Debts conspiracy theory
Then there are conspiracy theories. Several reasons go around in conspiracy theories. Most credible of them is the point that as bank deposits soar their balance sheets will look better and they can put NPA's (read loans to corporates) under AUCA. Once a loan is put under AUCA, recovery efforts will continue in auto-pilot mode. After 2 years, if it does not go anywhere, the loans can be dropped and wiped off from the balance sheet, after approval from a 'steering committee'. This is what SBI has done to Mallya's loans.
The above scenario is absolutely possible. Since India is an unique country with a large population with PSU banks and with huge corporate debts running into thousands of crores, the scenario is possible.
Sample this. Videocon has 45000+ crores debt. It is under loss around 200+ crore per quarter. But it gave donations of 100's of crores to BJP, SS, INC. This is how PSU banks money flow to corporates, out of which some flow to political parties and their debts get waived off. While the connections are obvious, they can't be proved.
Hence I would term this a credible conspiracy theory. But one should not assign this motive at this point of time without any proofs. People should keep a watch on what's happening to corporate debts.
-TBT
De-monetization is typically done for three reasons.
Fake currency abolition
First reason is if Government is unable to control fake currency production, then those denominations are made illegal tender. But when it is done for combating fake currency, the same denominations are re-issued. When they are re-issued they are issued with additional security features that will make it tougher for fake currency production.
Water marks, security threads, fibre, latent image etc. comprise security features of a currency note. Between the old Rs.500 and the new Rs. 500 there are NO NEW security features. What is different are the design of the new note. What this also means is that whoever is printing the old 500 can actually print the new design, once they learn of the new design.
There are also other dimensions to this currency printing. Our currencies were printed by ABC (USA) and 2 European companies. As The Hindu reported, in 2014, the 2 European companies, the De la Rue (UK) and GDC (Germany) were barred from printing currency for India based on the suspicion that they could be passing information about these security features to ISI.
But on subsequent investigations, the ban was lifted by the PMO according to The Hindu. With the the help of De la Rue Mysuru printing press was setup. This is the press which is printing new Rs.2000 notes.
In panama papers leak De la Rue was mentioned to have provided 15% commission to a New Delhi Businessman during August 2002 for getting the currency printing contracts. There is also a news item that says that Roberto Giori who owns De La Rue was one of the passengers of IC 814 that was hijacked by gunmen in 1999. More on these here.
As of now we can be sure that FICN will be halted for now, still the new fake printing presses are adjusted for new design. This will hamper the terror activities for sure. The disappointment is the fact that there are no new security features.
Fighting Black money
Second reason is when higher denominations are used to hoard cash, then those higher denominations are rooted out. This brings out the cash hoarded onto the mainstream system. But in this process the same denominations are NOT issued. Mostly the higher denominations are withdrawn and people are left with only lower denomination.
A lower denomination helps avoid hoarding cash or even transacting very high value transactions in cash in black. This is the real success of demonetisation. It avoids hoarding of cash as only lower denominations make it difficult to hoard and move such cash physically.
For eg. weight of 100 crores with old Rs. 500 notes was around 1.3 tons. So if a cash transaction has to happen in 100's of crores, the money has to be virtually transported in huge containers. It is simply impossible. Hence such high valued transactions do not happen in cash. Hence they are NOT stopped by demonetisation or currency swap. They happen through investments and investment transfers between fake companies nationally and internationally. They also happen through hawala. These are primarily done by High Networth Individuals (HNI) and wealthy Corporates.
The basis of hawala is that there is trade between countries (imports and exports) which are over taxed and hence under invoiced. The gap in real value and invoice value is transacted as hawala between the hawala traders The 'hawaladhars' are actually often traders who are doing perfectly legitimate trade. Ofcourse drug and diamond smugglers also indulge in hawala. Hawaladhars are primarily paid through fictitious company investments often. Such transactions are not deterred by demonetization.
People who give 'cash' to small-scale hawaladhars will be deterred due to demonetization. Removing higher denominations make it very difficult to handover loads of cash. But a currency swap as being done now with a higher denomination (2000 notes) may pause small hawala transactions for some time, but will make it easier in future.
For 10 crores of Rs.500 notes it weighs 130 Kg. It is not hard to transact but has a high security risk. Hence I doubt even 10 crores of illegal transaction happen in cash. But there could be exceptions. Most of these transactions are NOT stopped by demonetisation. These transactions happen through fictitious loans to loss-making or defunct or fake companies. These are primarily done by middle-level corporates, wealthy distributors, stockists, corrupt high level govt functionaries, high level politicians etc.
A crore weighs just 13 kg. Hence few crores of transactions can easily happen in cash. These transactions are STOPPED by de-monetisation. But the hall-mark of such transactions are they are kept in cash rarely. Most people who do this kind of crores of cash hoarding keep transacting them or moving them. Hence this cash becomes land, gold, company loans etc. These are done by traders, retail suppliers, low level bureaucrats, low level politicians etc..
Then there are black money transactions ranging from few lakhs to few crores. These are the primary transactions that we see happening before us. Mostly this is done by middle-class pensioners, traders, very low level bureaucrats, very low level political functionaries etc. These people often don't know to handle the complexity of such money transactions and they keep cash in their lockers. These transactions get STOPPED by demonetisation.
Currently in India, all higher denominations are re-introduced. Hence it becomes a currency swap. A currency swap disturbs the black money cycle. But it does not stop. After a pause all of them continues.
With newer Rs.2000 notes, it is pretty easy to transact black money in cash. There is an argument that there will be a fear of deterrence for sometime. That's not true. While it is easy to transact black money with Rs 2000 notes, the fear will ensure the money is either changed hands or gets its way into the system through land, gold, fake company deposits etc. The fear will ensure people don't hoard it in cash in their lockers. Chartered accountants will see that their business expands.
Fighting terror
The third reason is to stop all sorts of shady dealings in cash from smuggling, terror operations in naxal areas, maoist areas, separatist areas etc.
Maoists and Naxalites collect 'cash' from extortion from corporates and levies from mining companies. These corporates and greedy mining companies which generate huge black money in cash pass on some of them to naxalites and maoists. These terror outfits keep a part of cash in dollars using hawala routes. The dollar portion will not be hit, while the cash portion becomes useless. But then for them 'cash' is a continuous source of income from illegal miners and corporates. That's why while they are hit, they won't crumble.
The terror operations in Kashmir has two components. Weapons and people support. People support will get dampened due to demonetization as terror outfits don't have legal cash to incite or pay for 'matryrs'. But weapons support will continue. The number of demonstrations will come down. While fidayeen attacks come down, the hit and run on schools or security agencies will continue.
The terror operations in North east will also take a hit. I suspect they will take a hit much more than anyone else. To recover to their original level of terror, it will take some time.
Corporate Debts conspiracy theory
Then there are conspiracy theories. Several reasons go around in conspiracy theories. Most credible of them is the point that as bank deposits soar their balance sheets will look better and they can put NPA's (read loans to corporates) under AUCA. Once a loan is put under AUCA, recovery efforts will continue in auto-pilot mode. After 2 years, if it does not go anywhere, the loans can be dropped and wiped off from the balance sheet, after approval from a 'steering committee'. This is what SBI has done to Mallya's loans.
The above scenario is absolutely possible. Since India is an unique country with a large population with PSU banks and with huge corporate debts running into thousands of crores, the scenario is possible.
Sample this. Videocon has 45000+ crores debt. It is under loss around 200+ crore per quarter. But it gave donations of 100's of crores to BJP, SS, INC. This is how PSU banks money flow to corporates, out of which some flow to political parties and their debts get waived off. While the connections are obvious, they can't be proved.
Hence I would term this a credible conspiracy theory. But one should not assign this motive at this point of time without any proofs. People should keep a watch on what's happening to corporate debts.
-TBT
