RIP Old Currency : What Next ? (The Black Money Myth Part 2 )

Ok...so those of you who are reading this post....please take some time to first read part 1 which I published in 2014 .The link can be found here 

Earlier this week Indian Government demonetized the old currency notes of Rs 500 and Rs 1000 in a surprise move and this has indeed far lasting impact on the fight against the black money.

Assuming you read my post (part 1 ),and by now you know that when the cash stashed away by evading tax still has a value of legal tender then this money is indeed used again in economy by some way .I had given the example of builders and jewelers there.

Now with recent move,this very cash which is lying with "tax evaders " is worthless overnight...This cash can't be SPENT on anything as no one will accept it and hence it will be out of circulation. Liquidity at stake !The only option is to deposit this money in bank and the come out open with source of income for many ,which is difficult as the window provided by government for voluntary disclosure of the income has been already closed and now depositing money will attract lot of questions from Income Tax.

(Image Credit : Indian CEO )

Here are my predictions on what would happen now :

1.As liquidity is low in market,it will not be easy for builders and govt babus to ask for cash in black for real estate or in bribes respectively.So for next 6 months at least till the liquidity situation improves,we will see all real estate transaction and government work getting slower .

2.The safe havens like Gold and Silver will see upward moment for sometime ,then go down and be stagnated .

3.Real estate and land prices will come down as no one would be able to match the "black" component of the property prices quoted.Legal white money will flow.

4.Stock market MAY see increased inflows as that remains a "legal" way of investing surplus money as bank deposit rates will be downwards .Banks will get adequate money in banking system and they won't need to lure investors with higher interest.

5.Government is introducing new bank notes of Rs 2000,Rs 500 and latest news is even Rs 1000 again.Many people ask what the logic is.In every debate post currency notes demonetisation , the economy "pundits " keep on repeating that reprinting new 500 and 2000 notes is not correct as high value currency notes are used for black cash stashing .Examples are given about USD and EUR that how US and the EU stopped printing any bank note greater than the face value of 100 each .But what they conveniently ignore is purchasing parity of the currency! Ignoring the Forex rates which are not real indicator of "value " of the currency,the simple purchasing parity comparison suggests that USD 100 can buy same amount of goods in US as that of almost Rs 1000 in India ! (+/- 10 % ) .

So for Indian economy which is still predominantly cash driven we need at least Rs 500 note !Try going to a vegetable market today and buy veggies and fruits for 2 days and Rs 500 gone !So rather than comparing how US and EU have highest note of 100 face value of local currency ,think practical and welcome then new currency notes !
Rs 2000 note seems to be overkill but Rs 500 note is absolutely needed !And as government promised,the supply of this currency will be tightly controlled and many people will stop accepting these notes anyway fearing that the same government may repeat the demonetisation act AGAIN in near future :-)

Government did mention that though they are facing criticism on this move to get new high value notes,they will control the supply in floating currency market...let's hope they do that .

Then what should a common investor and middle class taxpayer like you and me do :

1.Stay calm ! Forwarding whatsapp messages of Income Tax raids and how cash deposits are tracked won't help as anyway we have NOTHING to do with it !

2.Don't exit stock market if you are invested through SIPs.This is the time to buy...remember 2008 mayhem ?People who stayed invested and bought more are kings !

3.Gold is dead ! Come out of your "Indian" habit of "INVESTING " ( ! ) in Jewellery ....Jewellery is emotional piece..chances are you will NEVER sell that necklace you bought for your wife on your 10 th anniversary no matter how much trouble you would be in,.your money is locked FOREVER  .If you want gold exposure buy ETF s !

4.Learn to use digital currency/plastic money more and more AND teach your parents/family to use as well..gone are the days when you will go to market with "cash ki gaddi " (stash ) and buy things..today even subjeewala and autowalla accept digital payments like PayTM/Mobikwik et all.

5.If you INDEED have some unaccounted cash due to some property transaction/gift/loan received and no records kept properly for the transaction,please consult your CA and come clean on this in  your next IT return.No point in trying to hide the skeletons in the cupboard .They will come out tumbling some day .It's better to be honest up front than get caught later and justify .