kumarn wrote:I have an honest question. I am not an economist so would urge the gurus to humour me a bit.
It is being said that 15 lakh crore worth of 500/1000 notes are under circulation. Most of the common people have under 10k in cash. So it is safe to assume that most of the notes are with people who would not be able to account for this money. What choices do they have? Some will deposit it and face the law. But many wouldn't. They would just burn it (or wbatever they fancy). Let us assume that 5 lakh crores worth of notes gets junked this way.
What would be the affect on the economy if that were to happen? Please be gentle
Not a guru, but would still give my reply.
Some of the money will be brought on the books, there is always way to do that, especially those who have own business. CA's will charge hefty fees for this. So not all the BM will vanish into thin air. Some money will surely get converted to new notes through some insider help (which is not too outlandish assumption for India).
Say I had 1000 Rs and BM, I would go to CA and ask him how much money he can save for me. He takes a good look and says OK, 500 of it could be shown on books somehow. In return he charges 30% of that 500 as his charge. So out of 1000rs, 500rs becomes white on my account, I pay some 100-150rs on that as tax to GOI. I give 150 of the rest 500 to CA as fees. Now since CA also has to dispose of his BM, that 150 rs will come as white money on his account and GOI will get some of it as tax. So about 350rs lose value if I cannot put it into gold or something.
This could work for those who has few Cr as BM, for medium to big fishes its bigger loss.
Surely loss of this money is gonna have some adverse effect on economy in short term, since some of it was used to fund businesses, particularly businesses like Contraction or jewellers. But a large part of it was just getting exchanged from one hand to the other without being spent in real sense so it would contribute to economy through consumption, or was anyway stacked somewhere or being used to inflate prices of commodities, RE. So vanishing of that part will not have much of an effect.
In long term this should not affect economy much. Plus it would help relieve inflationary pressure.
Also we should note that Modi did honest attempts to bring that money in system by giving warnings, and a way out through income declaration scheme till 30Sept. Unless such drastic step was taken, most were not gonna take his seriously. Coming on hard on people especially big fishes would have made him a villain (we know how every step from him is portrayed). This is a far better way of removing the monetary power of medium and big fishes to influence the system be it elections or something else without doing all the hard work to go after a large number of people with large number of legal proceedings.
. Even at that price no gold is available. Neither biscuit nor jewelry!
All jewelers refused 
(Don't exactly know how the rate works, my guess.)