Taking the nation by surprise, Prime Minister Narendra Modi on Tuesday night announced demonetisation of Rs. 1000 and Rs. 500 notes with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption.
In his first televised address to the nation, Mr. Modi said people holding notes of Rs. 500 and Rs. 1000 can deposit the same in their bank and post office accounts from November 10 till December 30.
It hoped that this step would curtail the counterfeit currency economy in the country. JD (U) leader Pawan Varma told ANI, however, that the blueprint has to be studied and an assessment has to be made on both the substantive measures taken and its implementation and what inconvenience it may cause on the citizen.
What will happen over-night is heavy deflation?
Because people who have illegally earned this money may be afraid to deposit it in a bank. There are people with crores of cash, black money, earned through illegal ways, such as corruption, smuggling etc. Some of these guys will try to find this money into a bank, but they have to declare it as income and pay taxes on it. Then the question arises – how did they make this income in the first place. Most of these guys will chicken out, count their blessings and just waste the money they have stashed somewhere in Rs.500 and Rs.1000 notes.
This will reduce the total currency circulation in the economy – leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down. Deflation will happen first, for the next 6 months to 1 year. Gold prices will drop, stocks & commodities will drop. Everyone will get excited and congratulate the government for making this move.
Then slowly, as lending activity goes up, the broad money supply will go up and prices of all things would go up, slowly and steadily.
What about Real estate?
It would crash slowly and recover quickly. That’s because, in real estate, there is no index price like gold and it is fixed by the market in a demand-supply balance. With less potential buyers in the market and fewer people having white money, the demand for the land goes down and drives down its price. Real estate crash will happen slowly because people will yield to the pressure slowly and start selling at lower prices because suddenly the pool of potential buyers have gone down. I predict that real estate prices would dip to lowest by end of 2017 and then start moving up again as inflation catches up.
Dept. of Communicative English with Media Studies
Patna Women’s College