Show Para
Comprehension:(Que No. 6 - 13)
Direction: Read the passage carefully and select the best answer to each question out of the given five alternatives.
The move by the government to demonetize Rs. 500 and Rs. 1000 notes by replacing them with new Rs. 500 and Rs. 2000 notes has taken the country by surprise. The move by the government is to tackle the menace of black money, corruption, terror funding, and fake currency. From a market perspective, we think that this is a very welcome move by the government and which has taken the black money hoarders by surprise. The total value of old Rs. 500 and Rs. 1000 notes in the circulation is to the tune of Rs. 14.2 trillion, which is about 85% of the total value of the currency in circulation. This means that the total cash has to now pass through the formal banking channels to get legitimacy. The World Bank in July 2010 estimated the size of the shadow economy for India at 20.7% of the Gross Domestic Product (GDP) in 1999 and rising to 23.2% in 2007. Assuming that this figure has not risen since then (quite unlikely though) and that the cash component of the shadow economy is also proportional (it could be higher), the estimated unaccounted value of the currency could be to the tune of Rs. 3.3 trillion. Now, post the announcement of demonetization by the government this money would have to either account for by paying the relevant tax and penalties or would get extinguished. There are higher chances of a larger proportion of this unaccounted currency getting extinguished as the tax rate and subsequent legal issues could be prohibitively high for such money.
This move by the government is likely to have long-term benefits for the economy. The extinguishing of the major proportion of unaccounted currency would reduce the liabilities of the government and. would add to its finances. This can have very strong implications as the government would get money to spend without borrowing from the market. This would mean that while interest rates can be low, the government spending on large infrastructure (we assume that the government would use a large proportion for infra spending) projects would kick start the apex cycle and push economic growth higher in the medium term. The move is also likely to have a habit-changing impact on the Indian populous and there could be an increased belief in keeping cash in the banks rather than stashed at home and use formal banking channels for their spending needs. With a large part of the cash moving through the banking channels, the banking sector is likely to be flush with funds in the near term and this would help them reduce the cost of funds for such period. Also with more money being kept in the banking channel, some of these low-cost deposits may be sticky and improve the medium to long term Current Account and Savings Account (CASA) ratio of the banks. Another element of the demonetization would be a reduction in cash transactions in real estate which has been acting like a cash cow for the corrupt.
Direction: Read the passage carefully and select the best answer to each question out of the given five alternatives.
The move by the government to demonetize Rs. 500 and Rs. 1000 notes by replacing them with new Rs. 500 and Rs. 2000 notes has taken the country by surprise. The move by the government is to tackle the menace of black money, corruption, terror funding, and fake currency. From a market perspective, we think that this is a very welcome move by the government and which has taken the black money hoarders by surprise. The total value of old Rs. 500 and Rs. 1000 notes in the circulation is to the tune of Rs. 14.2 trillion, which is about 85% of the total value of the currency in circulation. This means that the total cash has to now pass through the formal banking channels to get legitimacy. The World Bank in July 2010 estimated the size of the shadow economy for India at 20.7% of the Gross Domestic Product (GDP) in 1999 and rising to 23.2% in 2007. Assuming that this figure has not risen since then (quite unlikely though) and that the cash component of the shadow economy is also proportional (it could be higher), the estimated unaccounted value of the currency could be to the tune of Rs. 3.3 trillion. Now, post the announcement of demonetization by the government this money would have to either account for by paying the relevant tax and penalties or would get extinguished. There are higher chances of a larger proportion of this unaccounted currency getting extinguished as the tax rate and subsequent legal issues could be prohibitively high for such money.
This move by the government is likely to have long-term benefits for the economy. The extinguishing of the major proportion of unaccounted currency would reduce the liabilities of the government and. would add to its finances. This can have very strong implications as the government would get money to spend without borrowing from the market. This would mean that while interest rates can be low, the government spending on large infrastructure (we assume that the government would use a large proportion for infra spending) projects would kick start the apex cycle and push economic growth higher in the medium term. The move is also likely to have a habit-changing impact on the Indian populous and there could be an increased belief in keeping cash in the banks rather than stashed at home and use formal banking channels for their spending needs. With a large part of the cash moving through the banking channels, the banking sector is likely to be flush with funds in the near term and this would help them reduce the cost of funds for such period. Also with more money being kept in the banking channel, some of these low-cost deposits may be sticky and improve the medium to long term Current Account and Savings Account (CASA) ratio of the banks. Another element of the demonetization would be a reduction in cash transactions in real estate which has been acting like a cash cow for the corrupt.
Go to Question: