News Alerts
prev next

Demonetisation of Currency – The Fight against Black Money

By Ibu Sanjeeb Garg

Beating the Rhetoric

The sudden move to derecognise the legal status of currency notes of 500 and 1000 denominations has thrown the nation into a tizzy. However, this is not the first time currency notes have been demonetised. Government generally resort to demonetisation of currency as a step towards combating forgery. The recent demonetisation must be seen more in the background of the continued campaign against black money.

In the last few years, the issue of black money has caught public imagination. Although no concrete figures on the same are available, yet numerous studies in the past few years have shown interesting numbers. Schneider estimates the size of the Indian black money to be anywhere between 23 and 26 per cent of GDP. Other reports peg the figure at three fourths of the total size of the Indian economy. Today 500 and 1000 rupees notes (which means high denomination notes) dominate four- fifths of the currency notes in circulation. International organisations like OECD have repeatedly advocated for a gradual shifting away from the high value notes. While none of these numbers can be corroborated by secondary evidences, there is no doubt that the issue of black money is a major thorn in the Indian economy.

And it is in the light of the above that this move must be evaluated and discussed on a few major points. Contrary to popular imagination and pulp fiction, a large part of unaccounted is not stashed in the form of cash. Those who have black money at their disposal would rather transfer their money to foreign shores or route it within the hawala channel. Others deposit it in the form of jewellery or real estate. A study conducted by the National Institute of Public Finance put cash as the least preferred mode of routing unaccounted cash.

A second issue that must be considered is the fact that the higher denominations of 500 and 1000 have been replaced by another higher note of 2000 which many feel would dilute the purpose of controlling transactions via high value denomination notes. Yet all hues of higher denomination currencies cannot be replaced in one stroke in a transitory economy like India. And thus the necessity of newly minted 500 or 2000 cannot be wished away.

The third issue is the challenge of India’s transition towards a cashless economy. Although the use of plastic money and online payments has increased in the past decade, yet India remains grossly under banked. Some of the hilly areas in North East and other border states have very low bank and ATM penetration. However a recent report released by Bank for International Settlements (BIS) throws up some interesting numbers. While India still has much catching up  to do in terms of percentage of cashless transaction vis-a-vis advanced economies, yet India clocked the fastest growth both in terms of numbers and the value of e-money transactions in 2015 among the twenty-three major economies studied by BIS. The launch of payment services like PayTm and Freecharge only increases the penetration of mobile money not only in cities but also towns and bigger villages. The challenge towards the last mile connectivity for the unbanked areas remains but India has undeniably been making slow and steady progress.  The move to demonetise higher currency notes would give further impetus to cashless transactions.

Fourthly, government has since announced a number of guidelines towards exchanging as well depositing the erstwhile cash including limits to which one can do so. There is much hope that this will result into fresh flow of funds into banking accounts which in turn would translate into investment in infrastructure sector, thus kick-starting the engine of high growth rate in turn. It would perhaps not be unwise to assume that the accounts opened under Jan Dhan Yojana would see much activity in the coming months. This step can also act as a nudge for citizens to accept banking channels as more preferred norm of conducting financial transactions.

Critics have pointed out that this move has created a lot of hindrance for the general population. Also, parallel business of money conversion has blossomed in the last few days. Others point to the spike in gold prices and argue that the black money has converted itself into jewellery.

It is truly difficult to gauge the impact of this step alone towards curbing black money. It must be seen in the backdrop of the larger ideas that have gained acceptance in the past years. This announcement was preceded by a successful Income Declaration Scheme which earned the government almost twenty eight thousand crores in taxes. Over the past few years measures, like curbing cash transactions, furnishing PAN Nos, informing income tax authorities for certain transactions, have controlled the flow of black money in the economy. The direct taxes department now makes extensive use of ICT to scan for possible tax offenders. Today the department can track even those  tax offenders who do not have PAN Nos. An archaic system of scrutiny assessment has been replaced by the algorithmic Computer Aided Selection System. While the precision of the algorithm is subject to discussion, there is no doubt that each of this measure has boosted the direct tax administration in the country. The fight against black money continues and it is in this realm that this move to demonetise high value currency would place itself. It is not the action of curbing black money itself but also the firm stance taken by the government which would send a stern message.

We have to bear in mind, however, that this decision should not be seen through the prism of black money alone. Today a large number of Indians are unable to buy a house because of the astronomical rates prevalent in the primary and the secondary real estate market. The real estate market is one the major sectors which is completely propelled by cash transactions. The present decision would hopefully force a price correction.

Counterfeit currency is a major problem in the Indian currency. This step would undoubtedly curb the counterfeit currency market. Also increased features of the newly minted 500 and 2000 rupees notes would make it almost impossible to be forged. Tackling counterfeit currency is an important tool in fighting against terrorism and India has taken a strong step in this regard. Similarly terror financing would receive a major jolt. Both these steps comprise important milestones towards safeguard of national security.

Thus the step towards demonetisation of currency, which, by itself may not end black money entirely, is still is a major step towards achieving certain national objectives. At the same time it has other consequences as well that is equally important for the nation. And this is what makes this step a welcome reform, while we continue to remain vigilant.

(Views expressed by the author are personal)

You might also like More from author