Quantity theory of money – Why 2000 rupee notes

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Subsequent to the current demonetisation of the high value currency by the Government of India, the existing currency notes of Rs.500 and Rs.1000 has ceased to be legal tender.

The Prime Minister of the Country in his message to the nation on that fateful night of 8th November, at 8 pm had mentioned that the main reason for withdrawing the currency notes of these denominations was that these high value bills are mostly used in money laundering schemes apart from the glaring truth that the fake currency being routed into the country from our neighbouring country is mostly in these denominations.

However, the announcement by the Prime Minister to introduce new currency notes of denomination of Rs.2000 has raised a plethora of doubts as to how it would help in curbing the hoarding of black money when it logically seems easier for a person to hoard money in higher denomination, requiring lesser space to store.

I conjure a probable perspective for the withdrawal of the Rs.1000 notes and replacing the same with Rs.2000 notes and this is perhaps what my logical reasoning says.

If the old currency notes (OCN) of Rs.1000 would have been replaced by new currency notes (NCN) of Rs.1000, a sly businessman would have found out an ingenious modus-operandi of not being required to declare his entire black money hoarded, which would now not be possible in the current scenario.

This is how he would have made his tactical move.

On Day-1, he would deposit 10 OCN of Rs.1000 into the bank totalling to Rs.10000 and withdraw Rs.10000 in 10 NCN of Rs.1000. He would declare to the Income Tax Department that he had held these OCN with him in his possession.

On Day-2 or any other day of the same week, he would again deposit 10 OCN of Rs.1000 into the bank totalling to Rs.10000 and later during the day withdraw Rs.10000 in 10 NCN of Rs.1000. He would declare to the Income Tax Department that he had withdrawn the new currency notes for some reason but since the objective was not achieved, he is depositing the same NCN which he had withdrawn on Day-1, back into his bank account.

He has documentary evidence in the form of his deposit slip that he has deposited notes of Rs.1000 only, with no evidence whether it was in the form of OCN or NCN. His logic for withdrawing again later during the day would be that another requirement of the funds arose during the day.

On Day-1, next week, he would again deposit 10 OCN of Rs.1000 into the bank totalling to Rs.10000 and withdraw Rs.10000 in 10 NCN of Rs.1000 and declare to the Income Tax Department that he has deposited the NCN that he had withdrawn on Day-2 of first week, providing the same reasoning.

On Day-2 or any other day of the same week, he would repeat the same transaction, providing the same logic.

Within the 50 stipulated days till 30th December, 2016, he will have seven weeks to carry out this modus-operandi, which would be 14 instances of deposit and withdrawal by which time; he would have deposited Rs.140000 worth of OCN and converted the same into NCN of same value.

However, what he would be declaring to the Income Tax Department is that only the first instance of deposit on Day-1 of first week was in OCN and all the other deposits were in NCN which he had withdrawn earlier.

He would conveniently manage to convert Rs.140000 worth of his black money into valid tender while declaring to the Income Tax Department to the tune of only Rs.10000. Now imagine that he can carry out the same operation in the bank accounts of all his family members. One individual holding Rs.10000 worth of cash in hand in OCN can be easily justified.

Now let us imagine the current situation of no NCN of Rs.1000 available and instead they are in denomination of Rs.2000. He cannot claim that he has deposited back the same money that he had withdrawn earlier because he will be proved wrong by the denomination mentioned in the deposit slip which will reflect that he has deposited money in Rs.1000 notes whereas all the money that he withdrew were in Rs.2000 denomination.

Let us pursue the argument that he can carry out the same operation with currency notes of denomination of Rs.500 too. It will be improbable that he would be equally incentivised to do it.

If he deposits 10 OCN of Rs.1000 into the bank totalling to Rs.10000 and withdraws Rs.10000, it is very likely that he would get the maximum currency notes or at least half of the money he seeks to withdraw in denomination of Rs.2000 or in other lower denomination thus making it impossible for him to claim his entire deposits as having accrued from his earlier withdrawals.

Whether this is a master stroke or pure coincidence is of course a wild guess. I leave this to the political pundits to ponder over it.

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