Tag Archives: Indian currency

Demonetisation is nothing but a wild chase for black money

First, the surgical strike and now the demonetisation – the impression being manufactured is that these are innovations of the incumbent government that were never a part of history; and secondly, that such “panacea” would solve all of India’s problems.

Neither India is the only country in the world to demonetise specific currency notes nor was it done for the first time in our country. In the past, India has resorted to demonetisation twice; first in 1946 and then in 1978, without evidence of any impressive results.

Black money is an evil. It is necessary to prevent illegitimate income generating activities and to stop generation of black money. Starting from the Voluntary Disclosure Scheme, 1951 to economic liberalisation in 1991 and the introduction of several other measures like the Prevention of Money Laundering Act, 2004, successive governments have made a series of sustained efforts to curb the menace. So, the prime minister cannot be credited with the invention of a new economic tool against black money.

money-blackk_111416091140
It was a step taken with the right intentions, but with inadequate preparations. Credit: Reuters

The decision of the Modi government to demonetise the Rs 500 and Rs 1,000 denomination notes and to introduce new Rs 500 notes and Rs 2,000 notes has to be seen from three perspectives: first, whether the government has followed due procedure; secondly, whether any contingency plan was put in place so there is no inconvenience to the general public till banking activities are normalised because the entire exercise involves enormous administrative work for the RBI and other banks; thirdly and the most importantly, to what extent will it address the problem of black money in India?

It was a big procedural blunder to declare the demonetisation drive and introduce new currency without resorting to legislative routes, with mere executive decision. The last time it was done was the year 1978 through the proclamation of an ordinance, which later became the High Denomination Bank Note (Demonetisation) Act, 1978.

By avoiding the ordinance route, the government has made an attempt to bypass the legislative scrutiny of its executive order. Given the circumstances, the matter will be, at best, discussed Parliament, but not be subjected to vote. This is not the first time the Modi government has bypassed the legislature. Recently, the Cabinet approved the proposal for the merger of the railway budget with Union budget without the concurrence of the Estimates Committee, which was otherwise a must.

But, in this case, Parliament was bypassed intentionally, knowing full well that it does not have the numbers to ratify the ordinance in both the houses.

The unusually long queues at banks and the empty ATMs are enough to summarise that the government announced the decision without any contingency plan with the belief that the system will take care of itself.

People are committing suicide, dying of heart attacks, patients are being traumatised in hospitals, marriages called off and many Indians continue to live without everyday essentials. Many ATMs are yet to be made functional, leading to chaos in banks. The poor citizens who are outside the banking system are the worst sufferers as they have nowhere to go change the few thousands they have to keep their lives going.

Keeping in view that only one-third of India’s population has bank accounts, it would have been appropriate to put in place an interim arrangement before going for such a critical change.

Therefore, it was a step taken with the right intentions, but with inadequate preparations.

Coming to the most important point, that is the extent to which this measure will address the problem of black money in our economy, demonetisation as a policy intervention has its limitations.

Even though there are serious differences among the theories regarding the estimated value of black money in the Indian economy, one thing is certain: the quantity of black money in the country is a volatile concept. Black money is not limited to black currency, it goes beyond cash.

When we talk of demonetisation, it consists only of notes and not wealth in other forms. So, only the black currencies can be demonetised but not black wealth, which has a substantial share in the black economy.

The black money which is in flow or circulation, running the parallel economy, is also outside the domain of demonetisation. The scheme is limited to tapping people who hold their black money in cash on the date of demonetisation. Secondly, withdrawing certain high-value notes and replacing them with ,more of the same denomination and of higher value defeats the purpose.

By changing the colour of the money, you cannot dent the parallel economy. Thirdly, what  about the black money stashed in tax havens? Why is the government silent on the recovery of this huge stock of money?

Fourthly, the policies of the Modi government are not in consonance with its claim regarding black money. Corruption is the propeller of black money and the the government is living with the devil. By amending the Prevention of Corruption Act, it is encouraging corruption and the generation of black money. Black money is a serious challenge that requires concerted and determined efforts towards tackling its source – which is nowhere to be seen. Demonetisation alone is not going to solve the problem.

On the other hand, the effects of demonetisation on the economic system as a whole may be disastrous. It would shake the public confidence in the nation’s currency, with serious repercussions on its international value as well.

This confidence factor becomes more important considering the fact that 86 per cent of the total currency value in circulation was in 500 and 1,000 denominations. Secondly, if all black money in stock will become white, prices would indeed rocket sky high, causing inflationary pressure. Hope the remedy will not be worse than the disease itself.

The real solution for the evil of black money lies in not in lopping off its branches with an exercise like demonetisation, but in attacking at its roots. Reducing the burden of taxation is an effective solution to curb black money in the economy. We have the GST, even though it is no longer the law that was introduced in its earlier avatar. The government should revive the Direct Tax Code proposal, which will go a long way in direct tax reform.

Link : http://www.dailyo.in/politics/demonetisation-rbi-atm-chaos-rs-500-rs-1000-note-ban-black-money-gst/story/1/14037.html