The demonetization move by the rendra Modi government is being hailed as a ‘surgical strike’ against black money and fake currency, even as it raises quite a few intriguing questions. If high denomition notes like Rs 500 and Rs 1000 are stores of uccounted money and need to be junked, then why is a Rs 2000 note sought to be introduced? There are indications that a new Rs 1000 note may also be re-introduced with additiol security features. The government may flush out the spurious cash now, but what is the guarantee that the earlier pattern of illegal transactions and tax evasion will not be repeated with the new currency? It is being given out that the Rs 2000 notes will be ‘monitored and regulated’ by the RBI. The joke is that these notes will come seeded with a ‘no GPS chip’ to be tracked by tax sleuths through satellite! The secrecy and suddenness of the Prime Minister’s Tuesday evening announcement was obviously done to trap black money holders and give them little room to maneuver. If they deposit their cash into their bank accounts or exchange it in other banks or post offices, the information will be recorded and sent to the taxman. Not only must they pay 60 percent tax now, they will have to explain where their money came from. Fince minister Arun Jaitley has already warned that depositing cash at this juncture shouldn’t be taken as an ‘amnesty scheme’ for undisclosed income — that ‘the law will take its course if the deposited cash is found illegal’, which means there could be prosecution. So if cash holders keep their cash stowed away to turn into useless paper, it will be lost to the system. As per Reserve Bank data, as much as 86 percent of the value of Indian currency in circulation was in Rs 500 and Rs 1000 notes. This amounted to Rs 14 lakh crore, so the loss of a significant part of this currency flow will is expected to cause deflatiory pressures and hurt growth in the short term. The NDA government has obviously decided to bite the bullet and go ahead, which in turn brings us to the complaint raised by CPI(M) general secretary Sitaram Yechury — that the move will cause ‘harassment to millions not connected to the banking system’.
It is a fact that rural areas with poor access to formal banking, deal largely in cash. Unorganized laborers along with domestic workers, who make up over 90 percent of the country’s labor force, are mostly paid in cash. Despite the Prime Minister’s Jan Dhan scheme to bring the poor into bank coverage, there are gaps aplenty, particularly if the poor also happen to be illiterate. This has been particularly true in Assam, or else chit funds would not have flourished here to mop up small savings. As for enterprises, nearly 40 percent of the country’s economy is driven by small-and medium-sized enterprises which largely rely on cash transactions. As of now, all these people can exchange the old high denomition notes with them at banks by furnishing ID proofs. Among them will also be housewives, who had saved money on which the householders may have paid tax. It is now being asked how will taxmen distinguish between savings and uccounted money. Union Fince minister Arun Jaitley has argued that the currency shake-up will weed out corruption, banking deposits will rise and there will be a positive impact on tax collection. India remaining a primarily cash-based economy comes with significant costs —use of uccounted money has been rising rapidly, while the Reserve Bank devotes considerable energy to maintain and keep tabs on the currency flow. Another worrisome aspect has been counterfeit notes, which in turn is inextricably linked to terror funding. A study conducted by the Indian Statistical Institute has been widely quoted in media, saying that 250 out of 10 lakh notes in circulation are fakes; that such notes with a total face value of Rs 70 crore are injected into the system every year. Other reports have cited the increasing sophistication of the counterfeiters, pointing to the involvement of Pakistan’s spy agency ISI. This would be part of Islamabad’s twin objective of economic warfare and funding jehadi activities on Indian soil to bleed it dry.
To be fair, Prime Minister Modi has been giving ample warning that the chop will fall on people failing to declare uccounted income after the amnesty window is closed for good. Laws like Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and Bemi Transactions (Prohibition) Amendment Bill, 2015 were put into place; the Income Declaration Scheme (IDS) was kept open from June 1 to September 30 this year. After this, he had warned of ‘tough decisions’ to follow. The Supreme Court appointed SIT too has recommended laws to make high volume cash transactions illegal, while supporting proposals for payment through cheque, bank draft or electronic clearing system through bank accounts. PM Modi’s political opponents are now denouncing him for adventurism and ‘Tughlaq’-style impulsiveness, while his supporters are arguing that he is only delivering on his 2014 campaign promises to act against black money. He has also set much in store with his dream of Digital India, in which a cashless economy is expected to play a far bigger role. E-commerce players are already gung-ho about their prospects in the new scheme of things, while some economists have called upon the government to watch out for sectors like real estate or gold bullion where black money could move in large quantities in the next few days. However, it remains to be seen how political parties, which are mostly opaque when it comes to funding, respond to this drive to flush out uccounted cash. Unless the election process is not cleaned of black money at the source, such reforms will be difficult to carry through in the long term.