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How demonetization is going to change India?


SATURDAY, DECEMBER 3, 2016: Let me try to explain this with simple, common man's language.

With demonetization, all of the big currency notes went back to Banks, the Government's systems. Now Government knows how much cash each person or company has. With demonetization, all of the currency had to come from hidden places to the banks. After the end of the day for the old currency deposits, for example, January 1st, 2017, the actual story starts.

Let's see what happens to our milk vendor. She is getting all of the revenue so far in cash. If the milk vendor is from any big town, this person is probably well off. This vendor has deposited all of her cash in the bank already. This vendor will be asked to show the income and expense statements eventually. IT officials may not come to these Vendors level at this time, but they will eventually come. If this vendor has a ration card, and has a substantial income, the person is going to lose her ration card. This milk vendor is not paying any tax to the government so far. This milk vendor starts going to pay the tax eventually, if there is any tax. This cost of the taxes will be passed on to the customer, so the milk price will go up. If the milk vendor is big enough the vendor has to buy a computer now and start writing down all of the transaction details there. The milk vendor may have to buy a software package to maintain her accounts. Few of the many software companies in the country will come up with software packages for milk vendors. The milk vendor passes on these additional costs to the customers, so the milk price will further goes up. Software companies got more revenues now and they can hire more software engineers and customer support executives. This will result in more jobs created and more revenues to the government. Just imagine how this chain reaction goes on. The milk vendor will eventually have card processing systems and her customers will start paying through their cards or bank accounts. There is tax collected at every point of time. The milk vendor will be asked to pay minimum salaries to her workers, if any.

Next, think about this. The population of United States is 30 crore and the population of India is 4 times bigger. But why all of the software companies in India are working only for the American companies? All these software companies are getting revenues from other countries. If our businesses starting from our milk vendor starts using accounting systems, the software jobs in our country will quadruple. Think how many more Chartered Accountants we need now? Think how many more bank branches we need now and how many more bank employees we need.

A restaurant manager from Hyderabad told me what is happening in their business now. Until demonetization started, their sales per day are around one lakh on average. Out of the one lakh, they used to get around 20,000 from credit or debit cards, and the remaining 80,000 in cash. So, they are only showing the 20,000 in their accounts. They were not showing their cash sales. They were collecting tax from the customers based on their annual sales volume, which is approximately 5 percent. But they were only paying the tax to the government for the 20,000. And they are keeping the taxes they are collecting from the customers on the remaining 80,000. After demonetization, their card sales went up to about 60,000 per day and cash sales came down to around 10,000 a day. They lost about 30,000 business per day. Now, they have to suddenly show 60,000 sales, which is three times more each day in their accounts. So, now the government is getting three times more tax income. The restaurant is now not keeping any tax amount with them, which is a loss or a reduced profit for them. But to make up these losses or to increase their profit margins, they may have to increase their prices eventually. If the tax income increases for the government, and if the subsidies come down since the income for many families went up, the controlled prices will come down in the country. The productivity of the country will go up, and the costs will come down. The quality of life of the people will be improved substantially.

If there is no unaccounted money, you will not see people around an MLA or an MP. You see any local leader and he has at least 10 to 20 people working around him without any formal salaries. They all are going to lose their 'jobs' now since the local leader cannot maintain them anymore. Without these 10 to 20 people, this local leader cannot threaten anyone and make money from them. You will not see thousands of people coming to rallies and public meetings anymore. People will focus on their work and increase the productivity of the country. This is going to affect genuine people's movements as well. However they are genuine, they need to adopt the change. The demonetization will force everyone to work in the legal framework.

The demonetization decision Modi took is a big shock for the Indian mindset. Indians are thinking that black money is somewhere else, but it is with them only. Black money is everywhere in India, right from your milk vendor to your servant maid. The jewelry, ornaments, expensive leather bags, gold and diamond watches, rings, paintings and arts are all assets and must be accounted. If you see, all of the expensive paintings are in the Europe and the United States with rich people. It's a huge business and many people live on this business and there are so many people working in their related jobs. Indian mindset keeps everything a secret. Indians want to expose others but not themselves. We feel happy if there is an IT raid on a movie star, but we get angry if the government asks us to tell how much gold we have! We are changing a lot in the last 15 to 20 years. We will change further and get used to the new, developed world. India is going to be like United States eventually. In this process of transformation, pains and heart burn for many is unavoidable.

In fact, this is not just Modi's personal decision even though it looks like that. This is part of financial reforms we started couple of decades ago. Modi made a tough decision to take it forward. If not him, someone will have to do this anyway in a much more painful process. India's external debt is huge and if we do not start moving in the right direction, our rupee will further devalue and the country will eventually collapse. Just think why we get 85 rupees now for a pound? When India got independence from the British, the pound and the rupee had the same value.

Coming to personal life and family, In the United States, parents will not keep their children with them when they come to around 17 or 18 years of age. The parents send them to part time work. After the 12 years of education, at the age of 17, the youth get jobs. If any person is interested in continuing their studies they will have to work part-time, get a student loan to join a college. The same thing is going to happen in India too. You will not see youth going to college with their parent's money. With these type of changes, the people will know the value of the money from their young age. Even the rich people in the US do the same to make sure their kids are responsible for their money. Bill Gates and Warren Buffet gave less than 1% of their wealth to their kids and this is very common in the United States. When the system is transparent and allows you to grow, why would you depend on your parent's money?

Coming to the implementation of the demonetization. It is definitely a messy situation. Modi must have setup a website in all of the Indian languages (all the languages that we have on our Currency notes) to release announcements. Now people are believing meaningless social media and whatsapp messages. TV Channels and News Media are writing with their own ideology leaving the facts behind, pushing people in to further confusion. At this time, the people should stand strong and should do their part to help themselves, the people around them and the country overall. Without everyone's contribution, the Government alone cannot do everything.

About the Author: Prasad Kunisetty is the founder of He has extensive experience covering various aspects of Information Technology, Business, Politics, Finance, Taxes and Economy. He is close to the common man and understands the common man's life in India as well as United States.

News Posted: 3 December, 2016
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