Reasons behind rupee Demonetisation


What is the purpose of rupee demonetisation?  Does it reduce corruption?
I think the main motives behind the above said action are as follow:

A. Curbing the finances for terrorist activities temporarily:
One of the funding for terrorist organisations is printing fake currency.  There is approximately Rs.400 crore worth of fake curreny circulating in India and Rs.70 crore worth of fake currency pumped each year. (Source: The Hindu).  By demonetisation, the new money which is being pumped into the India will be stopped temporarily.  The money which is in stock with those terrorist organizations also rendered useless with this move.  But the fake money which is already in circulation only be removed by demonetisation.  So those terrorist organisations take some time to redesign their machines to print new fake money.  Because the recent Rs.500 fake notes are so perfect that common man may not find any difference.  So they already have the technology to re-create the security features. Therefore, we cannot say this step stops terrorism completely.

If this is the case why this move helps reduce terrorism?  As the creation of new fake money takes time, those leaders of the terrorist organizations find it difficult to manage their teams.  It is difficult to recruit new people and maintain existing people.  So we are simply cutting one arm of the demon.

B. Unearthing Blackmoney:
Let us understand why black money is bad for an economy.  Black money is simply the money on which taxes are not paid.  For general understanding, let us take taxation in India is 30%.  This means for each Rs.100, Rupees 30 should go to the exchequer.  Then the question arises why we have to pay tax on the money we earned?  As we live in society, we use many services of the society without notice.  Just imagine if there is no police patrolling in nights? Any one can rob you in the night when you are coming from night show.  Just imagine, if there are no street lights.  Parks, roads, dams, power stations,.... like many services are provided by the government and it needs money to provide all services.  If it won't get sufficient taxes, like any business it runs into trouble.  Then why can't a government print money on its own? This leads to inflation.  Read this article

Why people reluctant to pay taxes?
Firstly, A certain section of the government employees takes bribes and there is no way to pay taxes citing this as genuine money.  Their income-tax returns indicates only salary.  We don't get bills for the bribe we provide. Is n't it?  Politicians also hoard money for general elections on which they can't pay any taxes.
Secondly, people who earn money through illegal means.  Like betting, smuggling etc. So they can't pay taxes.
Thirdly, Some people have natural aversion to part some of their income with government.  So they can't pay taxes.

Corruption vs Demonetisation: 
I have seen in numerous interviews, many prominent leaders are asking why Rs.2000 note being introduced? In their view it leads to corruption.
The demonetisation move is not meant to reduce corruption.  Almost No way.  Corruption is caused by the fact that when a government employee who thinks that he is underpaid for his worth or naturally accepts bribes due to the power of the position he holds.  No one hates money.  Corruption also caused by the impatience of the people.  Some people think that by giving a small bribe if he can save some time, he gives it.

With this demonetisation move, in future most corrupt people convert their unaccounted money into other assets.  They hate to keep cash with them.  As their existing money became useless, they may demand higher bribes also in future.

When 90% of the currency is with drawn suddenly, We have to print bigger denomination notes to provide liquidity in the economy.  So instead of printing all the notes withdrawn, we can print roughly half of the notes to provide more or less same liquidity.  The person who accepts bribe may take it in any form.

What to do to reduce corruption?
As long as there is human involvement in the decision making, the position gets power to attract bribes.   Take an example of passport issuing.  Except for police inquiry, no one is giving single rupee as bribe as it is completely online.  With the introduction of Aadhaar card, this inquiry also may not necessary in future.  So there is absolutely no way an employee working in passport office earns bribe.  So by introducing technology and other aspects, we can make this happen.

Why long queues and why there is no preparation on the government part?
Actions like these should be taken suddenly.  If government starts printing Rs.500 and Rs.1000 notes in bulk for long time, some one working with the printing press may easily understand what is going on.  So the news easily leaks.   So it should be done suddenly.
But I think immediately after the demonetisation, government must have given some papers ads addressing the common problems faced by us and requesting people have patience.  Also Instead of 1 day bank holiday, they might have announce it on Friday. And 3 days bank holidays should be declared.  This might have given the banks to think and address the problems.

What happens with this move?
With this move, Banks have lot of cash with them electronically.  They can give loans at cheaper rate which is very good for business expansion and starting new businesses. Also government have funds for social welfare and development programs as they make people pay taxes.

So we, citizens of this country should be patient and let things run on their own for some time.