legal tender is a medium of payment recognised by a legal system to be valid for meeting a financial obligation. It can be anything which when offered in payment extinguishes the debt. Demonetisation is defined as the act of stripping a currency unit of its status as legal tender. Coins and banknotes are usually defined as legal tender whereas personal cheques, credit cards, and similar non-cash methods of payment are not considered legal tender as debt obligations. They are relieved only when the payment is tendered. In India, black money refers to funds earned on the black market, on which income and other taxes have not been paid.
In recent past European Union, Australia, Zimbabwe, libiya have experienced demonetization on various ground. On November 8, Government of India declared demonetization of Rs500 and Rs1000 currency notes, primarily as a tool to fight the black money in the system. To most of us, it appeared as a sudden declaration. For the next Three weeks I observed a series of events. There is continued debate on two key fronts. First, if Demonetization was at all necessary to weed out corruption at cost of such great pains. Second, If Digital economy and transition to cash less society is a well timed possibilityIJ let us try to find a few answers and further implications based on available data on hand.
The selected denominations of Rs500 and Rs1000 consists 85 per cent of total high value notes in Circulation. As per credit Suisse report, 2014, In India top 10 per cent of wealthy population holds around 75 per cent of the wealth. As per census 2011, around Rural Population consists around 70 per cent (83.3 Crore) of India’s Total Population. World Bank estimates put the size of the black economy in India at about 24 per cent of GDP in 2007. And, 40 per cent of black money is stowed away in hard currency. Following a report by liveMint.com India’s GDP is estimated to be $2.1 trillion in 2014-15. As per 2014 data Agriculture contributes to only 17% of the GDP, while service and industry sector those are mostly related to the urban sections, and contributes the rest 83 per cent of GDP. India's urban sector constitutes 63 per cent of India's GDP. There were also observations that circulation of high value notes has been on the increase since year 2000. So, in all probability Figures of unaccounted money with selected denomination seems to be higher or equal to WB observation in 2007.
All these information point us to few noticeable facts. Rural India overall owns insignificant wealth in terms of hard currency compared to urban India. Now that Rural India houses more than double the population of urban India, effect of Demonetization in Rural India is minimalistic in comparison to urban India. So, the whole effort appears to be pro-poor who are any way part of a ‘less cash’ economy.
Now, coming back to the second question, the option before the Government after Demonetization was to circulate new currency. Again thinking from the point of view of less privileged 90 per cent of Indians, one had option of either bringing in notes of smaller denomination or shift to a less biased transaction system. like all other major economy in the world, share of electronic payments in India were increasing, but in a minimal rate with a strong digital divide. A welfare and sovereign Democratic state has a responsibility to offer such services at an affordable cost to common people who constitutes the majority of the population, which are otherwise available to a select few because of economic and financial divide. I understand printing notes of smaller denomination was not required. Printing of Higher denomination to replace the total volume in circulation is any way a cumbersome task with least benefit reaching to 90 per cent of the population. In such scenario, promoting digital transaction in a mission mode is a much needed futuristic step as was Industrialization, Nationalization of banking, Computerization and opening the door of economy earlier.
When we have a choice to make and the choice is about going one step backward and reinventing the wheel or taking a leap forward, I would like to choose the second option essentially when it’s not hard-hitting major share of population. This would create an era of transparent transactions and a supportive ecosystem for programmes like Make in India. The drive shall act as an effort to touch the often ‘Forgotten’ Rural Informal Sector and bring them within the fold of Formal Economy. While reaching every Individual may take time, linking every women self help groups with a Panchayat level transaction point using Adhar enabled facilities may be an effective way to reach the underserved. The hue and cry over business drops is genuine but it would certainly regain its strength and perform better as the Digitization improves.
The author is a Management Consultant and alumni of Institute of Rural Management Anand .He is based at Ranchi, Jharkhand and can be reached at kallosh74@gmail.com