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demonetization

The announcement of withdrawal of Rs. 500 and Rs. 1000 notes is being described as a masterstroke, a surgical strike on the Black money holders and one tough decision in Indian economic history which will change the world. It is being said that this will put an end to Black money and hit the backbone of terror. The logic that is being used is – black money is held in cash usually in the form of Rs. 500 /1000 notes, are usually kept at home and not deposited in banks – this decision will make black money holders to deposit in banks – the increased bank balance will raise alarm bells – income tax authorities will track and catch hold of excess money. As some commentators have described, black money is not necessarily stored but is in circulation or may take a converted form – a property disproportionate to income, gold or other form of assets. It may also be invested in stock exchanges, businesses etc. Hence the assumption of stagnant black money does not remain valid.

The question that arises is a) whether there is a hidden agenda behind the decision leave apart its impact on reduction of black economy; b) is it being done for the sake of promotion of a cashless economy – where corporates dealing with credit cards, debit cards, ecommerce would get an opportunity to grow as consumers would be made to make shift to cashless transactions – is  a facilitative environment being created for them; c) is it being done for encouraging larger retail enterprises where cashless transactions dominate in place of smaller retailers where cash transactions dominate  –  it is to be noted that India allowed 100% FDI in retail ; d) will it lead to a change in financial behavior of middle class consumers – as they make shift from Rythu Bazaars to Reliance Fresh, Kirana stores to Big bazaars / Walmarts; e) will it affect the small traders, street vendors and large sections of poor who largely deal with cash based transactions and who will find it consumers being lesser attracted to them.

Going by the logic of surgical strike on Black Money is concerned, the following question arises: –

  • Does Black Money essentially exist in the form of Rs. 500 / 1000 notes only?
  • If existence of excess fake Rs. 500 / 1000 currency in the economy is the reason for the same, what is the guarantee new fake note with excess denomination (Rs. 2,000) will not emerge later?
  • What if the black money has been converted into a foreign currency and invested in Banks outside? How can this decision help in bringing it back?
  • What if the black money has been utilized to build assets in India or abroad or invested in businesses? How can this decision help in checking that?
  • Does Black money exist only in paper form in the form of notes? Does it not exist in paperless form? Is not existence of surplus money in Banks disproportionate with cash flow a Black money? Does a shift from currency (500/1000) to a paperless form make it white?
  • As per the claims of the Government, for every 10 lakh Rs. 500 notes, there are about 250 Rs. 500 notes which are fake? This is about 0.00025% of the total currency available? No doubt this too has to be definitely curbed. But will it not lead to inconvenience to large population who fall outside the Black economy
  • The exchange process (Rs. 500/1000 to Rs. 100) in the coming days will mean that there has to be sufficient supply of Rs. 100 notes. Is the supply sufficient enough?
  • If the black money has been accumulated due to corruption and financial misappropriation through usage of genuine currency, how can these decisions put an end to the same? Can the usage of genuine currency (with black transactions) will make it white?
  • What about those who are in the list of Panama papers? Will they be targeted? Are they in the list because of fake 500 / 1000 notes?
  • Will the Black money lying in Swiss Bank be brought back? This was promised during 2014 election campaign? Will the decision help in bringing it back?
  • How will the tax evasions be controlled through this action? While on the one hand government incentivizes conversion of black money into white through voluntary disclosure scheme, on the other hand it talks of fighting black economy?

The current decision seems to be to make a shift to a cashless economy rather than a surgical strike on Black Money.

Jayashubha is a Teacher and is a Post Graduate in Organic Chemistry

One Comment

  1. K SHESHU BABU says:

    The current measure favours corporates and high class people who have access to technology and internet banking. Since the people possessing the knowledge of such technical banking education are very low, large number of under- privileged classes would face difficulties. Also, many small households have deposits in higher denomination for domestic exigencies, they are the most sufferers.
    Ironically, another higher note of higher denomination is being introduced . Will this stop black money? No guarantees …
    The ‘ surgical’ strike should aim at the top one percent of the rich… but it is being aimed at bottom ninety- nine percent of lower class and dalits who neither have bank accounts or technical know-how to face cashless economy.