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The Day That Changed Our Money

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Saraswati, our house help, is unfazed by the bombshell that Prime Minister Narendra Modi dropped on the evening of 8th November, 2016. A reform that will change India forever. For the past few months, Saraswati has been getting her monthly salary directly credited into her bank account. She withdraws money whenever she, or her family back in Bihar, needs cash to spend.

The same cannot be said for Rajender, our driver, who will now no longer get his salary in cash. Every month, I would need to make a mandatory visit to the ATM to withdraw his salary and hand over the cash to him. He would obviously not disclose this cash as his income and would spend it over the month. I will now need to give him a cheque, unless I decide to visit my ATM six times (and three times, once the daily ATM withdrawal limit is hiked to Rs. 4,000) to muster up the cash for his salary. Rajender is now part of the official economy.

Millions like Rajender will now be part of the official economy.

While the headlines have been more around the demonetisation of existing Rs. 500 and Rs. 1,000 notes, the bigger story is in the cash withdrawal limits that have been put in place. A daily cash limit on ATM withdrawals, as well as from bank branches, will push us all toward digital transactions, debit/credit cards or online banking.

When you look at all the three pieces together as one, you get the impact this reform will have in draining out black money from the system, and bringing every one into the formal economy. While official figures put the black economy at almost a fifth of the real economy, many estimates suggest it is equal to the real economy.

So how will this play out?

People like you and me will have lesser amount of cash in hand and will therefore gravitate towards digital spending. So, shops that have no swipe machines will be given the go-by and we will head to retail stores that accept cards. Or simply, more of us will now order our food and groceries online. Unless of course we plan to go to the ATM every second day. Now quite obviously, millions of these shopkeepers will be unhappy simply because a large amount of their transactions were done in cash. They will now need to account for all sales and pay tax accordingly.

Physical assets take the hit

The bigger hit will be on two physical assets we Indians have obsessed about: Gold and Real Estate. With the introduction of PAN for Gold transactions, sales have already dropped close to 30 per cent.

Imagine what will happen now? No longer would you go to a jewellery shop that only accepts cash. Similarly, Real Estate, where even now between 10-15% of a transaction is in cash, will take a huge blow.

I, for one, can now finally consider buying a house since prices will fall, as also no seller will demand a cash component from me. This is great news for honest earners, who rely on their disclosed income and a bank loan to buy property and find it impossible to pay the cash component. Little wonder, why Real Estate sector stocks crashed .

The flip side

Money will move into financial assets like equity that has given far better returns than Gold or Real Estate and is already digital in both transactions and settlement. And this is great news for our economy.

There will, however, will be a lot of pain in the near-term. Go outside cities and there are not that many ATMs or bank branches as we have in our bigger cities. There are not that many retail stores that accept cards. While, we have seen more than 20 crore bank accounts opened thanks to the Jan Dhan initiative of the Government, there are crores of Indians, who are still not comfortable using a bank account, leave alone a debit card or an online payment wallet. But this is changing fast. However, till the shift happens, there will be a lot of pain out there.

History repeats

It would be prudent to go back to 1998, when the Government decided to put an end to physical share certificates and, instead, move to electronic shares. The move was criticised. A doomsday picture of the stock market crashing, and even coming to an end, was projected day in and day out. It came largely from those who stood to benefit from physical shares! Barely a year later, the same people were singing praises of the great reform. There was no stock market crash. In fact, more money moved into the stock markets, especially from global investors, because finally India was conforming to global norms.

Short term pains, long term gains

Yes, there will be long lines outside banks and ATMs for a few days. Yes, many who were used to a certain process in the unorganised sector will suffer badly. Over time, they will adapt to the change. And of course, those with black money, will have probably not slept last night and won’t for a long time.

As an honest citizen, you have no reason to worry, leave alone panic. You will now learn to spend your cash wisely, and invest it even more wisely. And considering India’s economy just received a big boost for years to come, it’s an even better time to tank-up on your investments and not allow the doomsday voices to drown out reason.

Disclaimer: The views and opinions expressed in this article are for informational purposes only. The authors and publishers are not responsible or liable in any manner for any actions you might take relying on the contents of this article.


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