Demonetization of Rs 500 and Rs 1000: The Ultimate Brahmastra on Parallel Economy
- In Economics
- 07:00 PM, Nov 14, 2016
- Ramaharitha Pusarla
In an unprecedented move, Prime Minister Modi on his first televised address to nation declared a full-blown war on the parallel economy by demonetizing high value currency notes Rs 500 and Rs 1000. The move which will come into effect after the midnight of November 8th can be the ultimate panacea against scourge of terrorism, black money, counterfeit currency and corruption. The multiheaded monster of parallel economy rooted through the black money had crippled the growth of Indian economy. As per World Bank estimates in 2010, the parallel economy in India rose from 20.7% of GDP in 1999 to 23.2% in 2007. The parallel economy besides corroding the vital economic indicators like inflation, widens the income inequalities, throttles the government policy making and deprives the country of the valuable tax revenues which can be invested in welfare and development of the country.
The press release issued by the Ministry of finance noted that the decision was taken “with a view to curbing the financing of terrorism through the proceeds of the Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India and for eliminating black money which casts a long shadow of parallel economy on our real economy”. For long the subversive channels and the sponsors of terrorism have availed many channels to pump in FICN that has facilitated the financing of terrorism and drug trafficking. The press note also indicates that higher denominations which are easy to carry and circulate have been infused into the country in large amounts to derail the Indian economy. Law enforcement agencies have been recovering stashes of the counterfeit notes. It was observed that while the total number of bank notes in circulation rose by 40% between 2011 and 2016, spike in the Rs 500 denomination was 76% and that of Rs 1000 was 109% reflecting the humongous scale of circulation of counterfeit notes in India. Since the common man could barely make out difference between the genuine notes and fake notes, this FICN had become an indispensable disruptive tool for the anti-nationals especially for those operating from across the border (1).
After assuming power, Modi government had relentlessly toiled to curb the menace of black money. So far, Modi government had instituted several measures and these include- constituting Supreme Court monitored SIT ( Special Investigation Team) on black money; renegotiation of tax treaties and automatic information exchange agreements with countries like Switzerland and Mauritius; rolled in The Black Money and Imposition of Tax Act; 2015 for foreign black money; Income Declaration Scheme for unearthing the domestic black money; penalty on real estate transactions for cash exceeding Rs 20,000; nominal 1% tax collection at source on purchases above Rs 2,00,000, amending Double Taxation Avoidance Agreement between India and Mauritius & India and Cyprus followed by amending the benami transactions bill (2). Besides, Modi during in his interview to Times Now has warned the tax evaders to come clean. Despite the above measures, Modi government was incessantly targeted for failing to act on curbing black money. Reiterating his irresolute commitment, Modi delivered a master stroke to curtail the parallel economy. While the Old High Denomination Notes are scrapped, to facilitate easy storage new Rs 500 and Rs 2000 with advanced security features are introduced.
Demonetization of high denomination notes is not new to India. Highest denomination notes ever printed by Reserve Bank of India were Rs 10,000 in 1938 and again in 1954 which were subsequently demonetized in January 1946 and in 1978 respectively. In fact, in 1978 notes of Rs 1000, Rs 5000 and Rs 10000 denomination were demonetized. The Rs 1000 note made a comeback in November 2000 and Rs 500 was introduced in 1987. Indeed, Rs 2000 are for the first time introduced by the present government. (3). The new design is part of the Mahatma Gandhi (new) series and has a motif of Mangalyaan on the reverse side. Even the new series of Rs 500 with the image of the heritage site Red Fort comes with enhanced security features and both Rs 500 and Rs 2000 are braille compliant.
Till now political parties have made loud proclamations about annihilating the menace of corruption but none had ever displayed the conviction and commitment. With this historic courageous move, Modi blew a death knell on black money, terrorism and corruption. While business leaders, economists, bankers and industrialists welcomed the move and pronounced it as a ‘gamechanger’, Politicians have shied away from openly congratulating and commending the bold initiative. This move was overwhelmingly embraced by the middle class, salaried people who constitute the huge chunk of the tax payers in India. It is a great moral booster for all the honest tax payers. Besides, curbing the black money, it will strengthen rupee which will augur well for the economy. It will have a deflatory impact in general and more specifically on the real estate business and homes will become affordable. The artificial bubble of escalatory pricing prevailing in real estate will burst. This major structural change would help in putting the necessary ecosystem in place for boosting the economy. India’s macroeconomic indices will be revitalized. Economy will slowly register an increase in cashless transactions, savings would increase and interest rates will come down. Thus, substantial growth can be attained. To facilitate cashless transactions, RBI had launched a payment app, Unified Payment Interface (UPI) wherein cash can be instantly transferred to the sender. Unlike other e-transfers, which mandates entry of the card no, CVV code, password etc., this app just requires UPI id of the beneficiary.
India’s promising growth story suffered a huge set back under the decade long UPA government, which had become synonymous to corruption. Humongous amounts of funds were stashed in banks abroad. India’s fiscal deficit steadily increased and economy reeled under financial burden. Modi government has steadily revived the economy. But the woes of parallel economy continue to drain the economic gains. With this bold move, Modi has not only reinvigorated new hopes about India’s growth story but also stifled the clandestine agenda of our western adversary. Pakistan’s deep state with its entrenched roots and financial conduits have been inundating Indian markets with fake currency to destabilize Indian economy. Demonetization of high denomination currency will now disrupt the terror operatives in India from accumulating funds and thereby internal unrest can be averted (Orchestrated Kashmir insurgency is the classic example). By announcing a major assault on black money Modi has strangulated the aspirations of political parties that have been thriving on note for vote. With his strident and scrupulous action against parallel economy Modi has checkmated the moves of both internal and external adversaries. While the move might inconvenience people initially, in the long term Modi will earn the good will of middle class which might translate into electoral gains. Conversely, the party must reap the wrath of hoarders of black money (political parties included) too. But despite the net gains or losses BJP and Modi will go down the history as valiant crusaders of black money.