A complete cashless economy where transactions from bank account is mandatory could dis-incentivize cash transactions by attracting investigation and law-suit on big transactions with unaccounted money on which taxes have not been paid...To dramatically reduce the circulation of black-money the government might had made the use of debit or credit cards with a pan number in 30 days with the help of some software in smart phones to verify finger-prints and the bank account number... we already have Adhar-card and Jan-dhan bank accounts... the bump would have been narrowed... for this too we would need bank-deposits for future transactions... money had come to the banks in the form of deposits... Modi has still left room for future black-money by not abolishing cash transactions altogether... Still notes could be hoarded...
A thought over this
move on its effect on the economy is crucial to convey the idea behind the
government decision to unearth black-money to the public... The whole concept
is to ban use of unaccounted money and fake or counterfeit money in the
everyday transactions which may affect the demand within the economy in the
short-run. To remove fake currency from the circulation the government measure
is also to curb terrorist activities in the short-run is the most important
argument in favour of ban of high denomination notes for which little-pain in
the public life comes worthwhile, besides black-money... Security of human-life
is more important...
However, lower
consumer-spending with only white-money due to disruption in the supply of
notes is hurt, the consumption is being delayed till the crunch is over and we
are back to the normal-life in terms of money supply and demand... Nonetheless,
the rate of price-rise or expectation about it would decide the sames in future,
too, including the prices... The ban on
high denomination notes may negatively affect demand and the invalid-demand,
both, is the short-run, but in the long-run it is likely to curb invalid demand
or black-money-demand to a greater-degree...
The total demand less
the demand dependent on the black-money might help reduce prices to a
significant-level which would increase real-incomes in the medium-term... All
those things that could be purchased with the black-money would see
price-reductions and increase in demand as the life gathers momentum with the
right money-supply... The reserve bank has committed a liquidity-neutral-stance
to lower inflation and inflation expectation and employment and production and
the economic-growth-rate...
The monetary-policy
should try to match demand and supply of notes and quantity of money with the
pre-ban levels... More deposits in banks could lower the rate of interest and
increase investment... Lower prices may help increase savings and investment in
the long-run... The RBI must try to keep demand intact by lowering the
key-interest-rates. We may expect a rate-cut in the upcoming monetary-policy
reviews...
Lower prices and lower
interest-rate in the near-term would prove to be expansionary and beneficial
for demand and growth.
The retail inflation in
October has come lower to 4.2 % which also fosters rate cut expectations when we
have set an inflation-target of 4% with a band of +/- 2% in the medium-term...
The
real-interest-rate-cut expectation is also lower when inflation has scored
lower and the RBI has set a neutral rate target of 1.25%...
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