The world was stunned when the Indian Prime Minister suddenly declared demonetisation on November 8 evening. It was an evening with a turbulent JK State and a war-roaring neighbour on the border.
The UP and Punjab Assembly elections’ heat was building up. The concentration of political analysts was on the border and a UP alliance. In the international field, the much-hyped US election was capturing media headlines. Here enters into the Indian TV screen, the economic reformer Prime Minister Modi declaring demonetisation to the countrymen, the end of validity of Rs 500 and Rs 1,000 currency notes.
It was like a carpet bombing on the black money system. International business community shifted their attention from US election to the sub-continent to understand the phenomenon. As Rs 500 and Rs 1,000 currency notes were in common circulation, common people were worried too. Modi promised common men not to worry and it worked. No social turbulence was reported. Slowly, the new system began to get rooted as the public co-operated. It shall be written in golden letters in the annals of post-independent Indian history as a landmark economic reform.
Demonetisation is a mysterious subject in public finance. The world’s economists and premier economic institutions like IMF and World Bank have never emphasized on demonetisation as an effective economic reform instrument. The global premier educational institutions like Harvard Business School or london School of Economics have perhaps deleted the subject from public finance curriculum. Some nations who tried it have mismanaged the post-demonetisation era and have a negative story. Thus no expert on the subject is available. But Modi picked up the demonetisation tool to tackle the menace of black money, though he is not an economist like former PM Dr Manmohan Singh nor was he ever a Finance Minister in the Union Government. He hammered on the most dreaded zone of Indian economy, the “domestic black money” system. It is a “political” and “economic” risk which Prime Minister Modi has taken with a hope of some benevolent outcome.
Black money or parallel economy is a cancer that has infected all nations irrespective of their form of Governments and economic health. But there is no international convention on black money to eliminate the menace. It shows the absence of commitment of political parties of the world to fight black money. On the contrary, more republics have opened their homes as safe heavens to the black money kings, with greed to become economically- fat with the easy money. However, there are two international conventions which can support the action of the Indian Government.
The “United Nations Convention against Corruption” which entered into force on December 14, 2005 and the UN Convention for “Suppression of Financing of Terrorism” that came into force in April, 2002. In such pro-back money international environment, Modi’s action has raised his status as a black money- crusader in the global platform.
The Prime Minister’s first speech on the subject raised hope for a crackdown on three categories of people, such as the terrorists, the fake currency printers and the black money owners. The effect on terrorism was yielded immediately, with vaporization of protest activities in JK. The impact is also assured on left Wing Extremism (lWE). The fake currencies and the fake currency printers have been washed away for sure. It will take a lot of time for fake currency rackets to create infrastructure and rise to scale.
But there is some disagreement regarding the black money empire. It is known that the black money has been stored both inside and outside the country, though their proportion is not known. It is difficult to bring black money from abroad in absence of UN protocols. On the other hand, the domestic black money has been kept in various forms and only a part of it is cash is black. It is believed that black money usually belongs to sarkari
personnel, medium businessmen, medium politicians and such other middle category people whereas the foreign black money belongs to top corporate houses, top businessmen, top leaders, top bureaucrats and even some political parties. Thus there emerges two approaches to curb black money- Top Down and Bottom Up.
The demonetisation is one such step beyond criticism. But it should be followed up with attempts to bring back foreign black money. The Government has to take steps to remove generators of black money from mining, real estate, sarkari offices and business. The taxation systems should be tax -encouraging rather than tax-repulsive. Different income tax limits might be set for urban areas and rural areas or different occupational groups like the Government servants, the big farmers, the small businessmen and the corporate employees etc. Similar tax reform in sales tax, professional tax, and commercial tax should be also brought in. laws like
lok Pal, Anti-corruption Act and Right to Public Service Act should be implemented to check corruption.
Experts feel that the most significant outcome of the demonetization drive is the real-time assessment of total money circulation in the country. Since independence, money has been in circulation and successive Union Governments/RBI Governors used to make hypothetical assessment of the circulated currency from time to time. It hampered the anti-inflation planning. Now for the first time, the Union Government and the RBI shall be able to measure the actual status of money and shall mint currency accordingly. It will help right intervention during inflation and recession periods.
Yet another outcome is the improvement of bank health. Till yesterday, banks were suffering from NPA cancer. Demonetisation has improved their deposits. Under the disclosure schemes, the Government has planned to lock the disclosed black money for some period to feed banks. Many new accounts have been opened. More branches of different banks are expected to come up in the un-served areas. The Union Government should also ensure 100 per cent banking GPs in such a positive climate for future DBT transaction. If opening of new branch is not viable in certain inaccessible areas, then the Union Government should plan for a category of upgraded State run co-operative banks to work in such situation. The goal of cent per cent family-banking linkage should be achieved in the current climate.
The only criticism in the demonitisation context relates to the supply problem of cash. Rural areas complain of cash shortage. The Government is giving a call to public to use debit cards and make cashless transactions. Pay-TM like systems has got wide popularity now. But the question raised is the viability of cashless transaction in rural and tribal areas. Indian economy was 85 per cent cash based and it might fall to 50 per cent but may not come down below that. It is not possible to make business transactions fully cashless in India. But use of cashless system at present will reduce the scarcity of currencies. If the urban areas use less cash, then this surplus cash shall be diverted to rural areas and the currency supply crisis shall end soon.
The State Governments are natural supporters of demonetisation. Odisha and Bihar have wisely supported the demonetisation move while the West Bengal and Delhi are opposing it. Even the Odisha Chief Minister has taken support of the Prime Minister in capacity building of co-operatives and SHGs to sort out cash-transaction problems. The all-India strike by the Opposition failed to gain much public support since the people of the country have been fed up with the rampant corruption and hoarding of money in the hands of a few. Further, the Government has given the black money holders a new window to surrender the money with 50 per cent tax.
Whatever may be the political compulsion behind demonetization decision but it has made PM Narendra Modi the tallest leader in BJP and in its associated organs. If he manages successfully the post-demonetisation era, then it will be very difficult for the Opposition to prevent him from assuming office as Prime Minister in 2019.