Reasons behind the Demonetization of the existing currency

Something to ponder on ….

Now, where does Modi’s demonetization of the OHD currency come into the picture?

Is it really to curb black money? To a very small extent.

Is it to end corruption? You wish!

Is it to end terror financing? How innocent!

Is it to end counterfeits? Quite impractical

So what does Modi really intend to do with this demonetization scheme?

The answer is that, right from the beginning Modi has all been having an eye the savings of the middle class and the small fish and trying to get them to deposit cash into banks. This includes both cash and gold deposits. For this reason, he has launched many ‘schemes’, two of which the Jan Dhan Yojana and the Gold Monetization scheme. Under the Jan Dhan Yojana, even the lower income people and people from rural areas can begin to use banks to keep their cash. Atleast that is what is being said. Modi wants the people of India to keeping their cash in the banks, instead of holding it with themselves in any form. In the Gold Monetization scheme, he tried to incentivize people to deposit their gold assets into banks. When both failed to provide the returns he was looking for, he is now resorting to other methods.

So why does Modi so desperately want people to keep their assets in liquid form and in the banks?

The answer is quite simple: When banks have cash holdings, the politicians can easily force and arm twist the banks into granting loans to their crony capitalist friends like the Mallyas, Adanis and Ambanis, who have funded their election campaigns. In many cases like in Mallya’s case, they end up not even returning the borrowed capital back to the banks, let alone repay the interest. All these loans by crony capitalist loans will be converted as bad assets eventually and get written off by the banks(Rs 5,71,443 crore as of June 2016). All this while continuously increasing the interest rates on the loans taken by the middle class and smaller businesses.

So what happens next?

The thousands of crores that will get deposited into banks over the next few weeks will be immediately handed out as loans to the big businesses like Adani, Ambani etc, who are now entering the defence sector and other similar projects(Adani’s Bhutan Power project worth Rs. 800 cr). For example, the Ambanis (RIL)need to make investments to the tune of approximately Rs. 1,300cr for entering the defence sector. Ambani is not going to invest all the money from his pocket, right. Why?

A. Because he doesn’t know how profitable the venture will be. It will be profitable no doubt because he will land all the government defense contracts for sure, but he may not be sure of the degree of profitability of the Returns on Investment (RoI). On a side note, it is worth noting that as soon as Modi came to power, the diesel supply contract for Indian Railways was taken away from Indian Oil Corporation (IOC) and awarded to Reliance. As per 2013 figures, Railways consumed fuel worth Rs. 24,000 cr. As per 2015 figures, Railways consume 2.6 billion litres of diesel annually. So as of 2015, this contract alone was worth a ballpark Rs. 35,000 cr, and rising every year.

B. Secondly, this is free public money, which corporates may or may not choose to pay back to the banks.

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