11/12/2016

HowthebanonRs500andRs1000noteswillaffectthecommonman
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How the ban on Rs 500 and Rs 1000 notes

will affect the common man
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DEEPAK KANAKARAJU , 8 NOVEMBER 2016

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Editors note: In what people are already calling a historic move, Prime Minister Narendra
Modi today announced the demonetization of Rs 500 and Rs 1000 currency notes. Deepak
Kanakaraju of DigitalDeepak.com puts forth his opinion on the historic move. Please note
that the copy has been reproduced as is and has not been copyedited.
First, people who have a lot of cash, legally earned, will deposit it in the bank. This will
increase banks deposits by a huge margin.
This will also increase the lending activity because banks have a CRR (cash reserve ratio) to
maintain and with more deposits they can do more lending.
Credit (loans) will become easier and interest rates may come down. More loans given out
increases broad money supply and creates inflation. But this will happen slowly, not overnight.

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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.

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HowthebanonRs500andRs1000noteswillaffectthecommonman

Must read:How black money keeps an economy from flourishing

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.
[Example] If there are 100 widgets and 100 coins, each widget's value would be Rs.1. If there
are 100 widgets and only 50 coins, each widget would cost Rs.0.50 only. Which means with
each coin, you can buy 2 widgets.
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The inflation and deflation will balance out each other on some level. But it is going to take
some time for the inflation to happen because lending activities do not happen over night.
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.
Now no one can predict the extent of the deflation and inflation. In an ideal world, if 100% of
the people who have Rs.500 and Rs.1000 notes have it as white money, then we would see
only inflation. If a lot of these are black money and if many people decide to waste the
money instead of depositing it, then we will have deflation in the short term.
If you see heavy deflation and heavy drop in prices, then it means that India has a lot of
corrupt people who earned money in illegal ways, too afraid to deposit the money in a bank!
And my gut feeling says that we would see heavy deflation in the next 6 months. If you bet
on this, then buy gold, stocks of asset-heavy companies.
Related read:Social media abuzz with talk of NGC chip that makes new Rs 2,000 note
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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.

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Let's say I have a real estate plot - a 40 x 60 plot which I bought for 1 crore a year back. Let's
the say market value of it until yesterday was 1.5 crores. I would still think that the value of it
would be 1.5 crores and I wouldn't sell it for less than that.
But if I want to sell it because I need money, I wouldn't get a buyer immediately. Because
most buyers in real estate are doing the transactions in black money. Potential buyers would
tell me that they don't have 1.5 crores in white money, so they will not be able to buy it.
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. If I yield and sell it for 1.2 crores, I am
driving down the market price in the entire locality.
Read more:What do Industry veterans have to say after PM Modis demonetization move?

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.
[Currencies, inflation, deflation, payments and banking is a very interesting subject for me
and I have read a lot of books on this topic. This is just my opinion, but I am bold enough to
share this in the public domain. However, I may be wrong. Let's see how this pans out.
Today is an iconic day in India's journey. History in the making. Nov 8th 2016! This would be
a day to remember.]

(Disclaimer: The views and opinions expressed in this article are those of the author and do
not necessarily reflect the views of YourStory.)
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NARENDRA MODI

RS 500 AND RS 1000

RS 500 AND RS 1000 NOTES

ABOUT THE AUTHOR

Deepak Kanakaraju
Deepak Kanakaraju is a digital marketing author, speaker, and consultant. He blogs about digital
marketing at DigitalDeepak.com and heads digital marketing at Razorpay.com. He has previously
worked in well-known B2B and B2C startups such as Exotel, Practo & Instamojo. Before that, he
founded a publishing startup called BikeAdvice.in and had an exit. He has invested over a million dollars
in digital advertising through the course of his career. He has extensive experience in all the major
digital marketing channels such as Search Engine marketing, SEO, Display Marketing and Integrated
Digital Marketing.Read My Blog athttp://DigitalDeepak.com

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77Comments

Sortby Oldest

Addacomment...

TsivaSantoshRaghavendraReddyCreditOfficeratSHRIRAMCITYUNIONFINANCELTD
ihavewithdrawmypfamounttodaytopayagricultureloantomarrowinsbiwillthayaccept500/and1000/
insbibankforloanpayment?
LikeReply

5Nov8,201610:42am

Dakhnis
Hopeso!
LikeReplyNov8,201610:48am

TsivaSantoshRaghavendraReddyCreditOfficeratSHRIRAMCITYUNIONFINANCELTD
Dakhnisifonlythisannouncementmade1daybeforeor1dayaftercomeonijustwithdawamontto
daytopayandthisannouncementcame
LikeReply

3Nov8,201610:57am

AnandShankarBangalore,India
TsivaSantoshRaghavendraReddytillDec31banksandPOwillacceptwasthenews,correct?
LikeReply

2Nov8,201611:49am

Show10morerepliesinthisthread

SunilNainManagingDirectoratBeWiseAiimsGkInstitute
Siristhereanychancesofinvestmentsratherthantodepositinabank.
Orhemaydealwithhisemployeesomethinglikejustdepositblackmoneyintheaccountofemployeeand
laterdivideitinto60:40.80:20.Oremployermaygivebonustotheiremployees.Soinflationmaybthere
LikeReply

11 Nov8,201610:53am

ShahHemantPartneratHemantshah&associates
insteadof60:40hewillretain70%afterpaying30%Tax.Ifhewanttogivebonushecangivethe
sameoutoftheamountdepositedandshownasincomeandcanshow/claimsuchbonusad
deduction,savingtheIncomeTax.
LikeReplyNov9,201610:15am

SunilNainManagingDirectoratBeWiseAiimsGkInstitute
Ifhedid7030throughthismethod,hehastogiveexplanationofincomesource.butthereislimit,
hewouldnotbeabletodothtbecausetheirpocketsareverydeep.SoIthinktheyaregoingtotry
everymeanspossible.
LikeReplyNov9,201610:28am

VishOntoorNewYork,NewYork
Butiftheemployeegetstaxedthisyear,taxmenwouldsendataxbillnextyeartoo.Howwouldthe
employeejustifymoreincomethisyear?IfIwasonesuchemployee,Iwon'tagreetoparticipatein
suchaschemeandinstead,findanewemployer.
LikeReply12hrs

PavitraAtre
Thenthequestionariseshowdidtheymakethisincomeinthefirstplace.Mostoftheseguyswillchicken
out,counttheirblessingsandjustwastethemoneytheyhavestashedsomewhereinRs.500andRs.1000
notes.WhatdoesthismeanIwonder..dumpitintheocean?becausenoonewillactuallyacceptthese
notesanyways
LikeReply

6Nov8,20166:55pm

MiteshCharolaMaharajaSayajiraoUniversity
yes.theywilldumpitandstopthecircullationofmoney
LikeReply

1Nov8,20169:19pm

KrishanKumarMittalPunjabUniversity,Chandigarh
Thereisnolawunderwhichthegovtcanaskfromwherethemoneycamesolongasyoupaytax
now.TakethecaseofUpwomanleaderincomeincreasedto114crores,taxpaidnoquestions
askedaboutsourceofmoney.
LikeReply

2Nov9,20162:16am

AsfanHashmiWorksatCAREHospitals
WhoknowstheMayhaveconvertedtheirmoneybeforeinhandonly...
LikeReply

4Nov9,20162:55am

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11/12/2016

HowthebanonRs500andRs1000noteswillaffectthecommonman
Show6morerepliesinthisthread

PrakashHathiSCMHRD
goodonethere.insightfulandinteresting..
LikeReply

4Nov8,20169:37pm

StudyInnKashipurWorksatSelfemployed
Inmyopenion,itwillaffectmarketinapositiveandnegativemannerdepeningonthenatureoftheworkor
product.Ifitisrealestate,ofcourseforsellerwhowantstogetabigpartofmoneytransactionincashor
blackmoney,theywillloosewhilepeoplewhowanttobuyanewapartmentoronloanbasismayhaveto
payinwhitemoneysotheywillnotsuffer.
SmiPatil
LikeReplyNov8,201610:28pm

ShahHemantPartneratHemantshah&associates
AgreeincaseofBigTicketSizedealstherateswillcomedownbutincaseofaffordablehousing
theloanwillbecheaperandeasilyavailablesothedemandwillriseandthepricesalsotosome
extend.
LikeReplyNov9,201610:00am

JeenaKleenankandyAssistantProfessoratChinmayaInstituteofTechnology
Mydoubtis,howwillpeoplewithblackmoneybeabletowastearoundthemoneyinhandwithouttakingto
bank,asthenoteisalreadybannedandcannotbeexchangedwithoutabankaccount?Coulduplease
clarify.Thanks
LikeReplyNov8,201610:40pm

AshishNarangMechanicalEngineeratSKF
Theywillwasteinbuyingluxuryitems.AsmostoftheLuxuryitemdealersarestillaccepting.As
newswasonair,oneofknownfriendbought1Audiincashandtheygonnaaccepttilltheyclear
previousstock.
LikeReplyNov8,201611:25pm

VishOntoorNewYork,NewYork
AshishNarangButtheAudidealerhastodeclarethetransactionwiththePANnumber.Unlessyour
friendboughtanAudifromaprivateparty,hehasahighlikelyhoodofanaudit.Hemighthaveto
payahugepenaltybesidesthetaxes.Also,IdoubtaprivatepartywouldsellanAudiinblack
money.
LikeReply

3Nov9,20169:11am

ShahHemantPartneratHemantshah&associates
AshishNarang
LikeReplyNov9,201610:02am

AnkitBhansaliWorksatPRACTISINGCHARTEREDACCOUNTANT
Itwillslowdowntheeconomyintheshorttermbutgoodfortheeconomyinthelongterm.
http://taxbaniya.com/2016/11/08/rs5001000notesolution/
LikeReply

2Nov8,201611:14pm

ShahHemantPartneratHemantshah&associates
itwillnotslowdownforashorttermalso(Exceptforafortnightaspeoplewillgetchqbooks,ATM
cardandPINS).Withinamonthdaysitwillstartshowingeffect.Asbankaftergettingthedeposits
willbeeagerto,lendthemoneyastheycannotaffordtokeepitwithRBIwithlowreporate.
LikeReply

1Nov9,201610:06am

SimolBhansaliWorksatAsopalav
Ididnotunderstand,firstyousaidgoldpricewillgodown,thenyousaidinvestingold.
Infletionwillhappenslowly.Areyoutalkingaboutlonglongterminvestmenthere?
Becausegoldpricewillnotcomeupfornext23years,aspermyundestanding.
InsteadIwouldsuggestselldollarsfuture,Ithinkdollarwilltankthemostafterthisboldmove.
Innext36months,rupeewillbesomewherearound60forsure.
Restofthearticlewasexplainedprettywell.
LikeReply

4Nov8,201611:22pm

NareshCherukumalli
Aspermyunderstanding..Hementioned..."Ifyoubetonthis",means,ifyouthinkthiswon'thappen
thentakeriskofbuyinggold?
LikeReply

6Nov9,20161:26am

JogaSinghOwneratBreakTheRule
great
LikeReplyNov8,201611:26pm

AmitSharmaOwneratSelfemployed

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AmitSharmaOwneratSelfemployed
Peoplewhofilereturn2to3lacsperyearbuthaving10croresincashinmodeofRs.500/Rs.1000ifhe
depositinbankswhatwillincometaxdepartmentorgovernmentdoforthis.
LikeReply

3Nov8,201611:49pm

BitanBoseAssociateDirectoratIIHM
Theywillliaisewiththehighlycorruptincometaxofficersandagaincontinuetomakemoney(
illegal)itisthatsimple...Unlessweapprehendthosecorruptpeoplewithasimilarorganisationlike
AmericanFBIandseriouslypenalisethemwithlongtermjailsentences,nothingwillbecorrected....
letsobserve....
LikeReply

14Nov9,201612:55am

AmitSharmaOwneratSelfemployed
BitanBoseTrueandHonestAnswer.Youunderstandthewholesystem.Corruptioncannotbe
overcapitalistcountry
LikeReply

6Nov9,20161:19am

VishOntoorNewYork,NewYork
Theycanbetaxedontheamount,whichwillbetreatedasincomeforcurrentyear.Plusthetax
departmentcanfinethemupto200%ofincomedeclared.ButIagreewithBitan,thepenaltyisa
matterofsubjectiveevaluation.Butinanyways,whywouldsomeonepaybribeinwhitemoney?The
samerulesapplyforthetaxinspector.
LikeReply

3Nov9,20169:14amEdited

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