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De-monetization and impact on general population

Recently as part of Indian Governments demonetisation drive, there is a significant opinion divide on whom the real impact falls upon. This article is more of a data driven analysis based on key metrics
  • Black Money - What is it? Who owns it?
  • Wealth division - How wealth is divided and how it is stored
  • Balance of power with Money
  • Population
  • Permanent vs temporary removal of high currency denominations

Summary of Black Money

In simple terms "black-money" means funds/wealth earned in day-to-day "transactions" which are NOT subjected to tax and therefore unaccounted. One of the biggest misconceptions for the word "black-money" is that it is some type of fake currency, but it is not.  Also other key word here is "transactions" which involves shift of funds/wealth. For instance, if a ordinary blue collar worker earns Rs500 and goes and buys milk from his friendly neighbour for Rs 100, then that IS black-money transaction of Rs100. In a modern economy the "blue collar worker" should pay income tax, the neighbour who earns money via milk also should, but in a country like India this is no-where near practical. In Short, every single person in the world owns black money, but it is substantially high in countries like India where the transactions are NOT tracked.

Wealth Division

Wealth division plays an important role to the degree of impact on end-users via a policy of demonetisation. Let's look at the division of wealth in the world (which should be pretty the same in India due to binomial distribution of the data-set)

The key things to note here are
  • 50% of the wealth is within 1% of the people
  • Top 30% of population holds 97% of wealth
  • Top 5% of population divests money and only 1% will held as "cash"
  • Ultra high net-worth Individuals NEVER store anything in Indian Rupees 

Based on above facts, the demonetisation drive has

  • negligible impact on Ultra high net-worth Individuals (Impact of 0.00001%)
  • negligible impact on high net-worth Individuals (Impact of 0.1%)
  • quite impact on High class family (Impact of 20%)
  • Significant impact on Middle class family (Impact of 40%)
  • Slight impact on poor people (Impact of 5%)

Balance of Power 

This is quite difficult to explain. With more wealth comes more responsibility!! Hence the options available for "powerful" and "wealthier" people are significant. Also they will do much more extreme steps than a "middle class" family would do to move away from the impact. Hence the "time" of impact is much reduced for the Elite while the other classes suffer for a longer term.
In a country like India, the focus should be always on high/middle & poor classes of the society. NEVER assume you can crucify the Ultra net-worth folks, as they will find methods to slip over it.


The impact of such a move is across a population of  1.35 billion with minimum of 10 monetary interactions per day (so that's 1,350,000,000 x 10 x 365 = 5 trillion interactions per year at minimum). The data-set is so huge, that the impact analysis is too complex to assume or comprehend. Someone should find a mechanism/solution to analyse the impact as the known models may not be sufficient for such a huge data-set.

Government should be frank to admit that the key focus of demonetisation is NOT the few elite rich, but the broader masses. Yes, you heard it right !! (Every single citizen has black money and are culprits). The gain from tracking money on a very broad population is very effective to the coffers of the government. So why not get it from them? Always remember, the top 0.1% cannot be touched by any government in the world as they always have the power and means to slip through the systems and is pointless going behind them.

Permanent vs Temporary removal of High denomination

This was a golden opportunity to move India to be more "tracked" transactions oriented country. But re-introduction of high value currency just spoiled the purpose of demonetisation as the malaise  of "untracked" money flow will resurface in quite short bit of time. 

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