Will the Dematerialisation of Currency on the lines of 'Demat Shares' work in India?
Going by the recent developments in black money stashed in Swiss Banks and in mattresses, pillows etc, fake currency in circulation, bribe, number 2 component in big transactions like real estate etc., I think there is a need to control the flow of currency in Indian economy. Hence a need to come out with a solution to stop the evil.
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Before we can discuss the issues raised in this question we need to understand clearly the difference between money and currency. Money is measure of value used for exchange of goods and services. Money available with a person represents the ability of that person to buy goods and services worth the value represented by money. Thus money itself is a dematerialized form of goods and services. Currency - that is, coins and notes - is a material form of representing money - which itself is a dematerialized form of value.
There are many other forms of representing money, such as cheques, drafts, bonds, and other similar financial instruments. All these are documents to establish ownership of money in dematerialized form. When we say that that a bank has deposits of customer worth $X billions, it does not mean that the bank has all that money in form of currency. Most of it is in dematerialized form only a small percentage is in form of currency.
As a matter of fact in all major economies, the cash transactions - that is transferring money in form of currency constitutes only a small amount of total financial transactions.
Thus, the money is basically already dematerialized. A small part of this is reconverted in materialized form of currency which is essential for some types of transactions. Thus, it makes no sense in saying that currency should be dematerialized. However it is possible to reduce the percentage of transactions in the form of currency.
The government has already taken many steps to reduce the extent of cash transactions, and these must have contributed to some extent to control of black money and associated dishonest practices. It has definitely made it less attractive to stash currency in mattresses. But it is worthwhile noting that stashing of money in Swiss Banks usually does not involve cash or currency transactions.
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