Dinesh Kamath's Editorial 'One of the boldest moves by Government of India' that was published in Newsband

One of the boldest moves by Government of India

Prime Minister Narendra Modi made a powerful move to curb unaccounted cash, or black money, circulating in the Indian economy by withdrawing the highest-value currency notes of Rs.500 and Rs.1,000 as legal tender. Illicit black money fuels inflation as well as terrorism. It becomes difficult for honest taxpayers to buy a house. The introduction of new Rs.500 and Rs.2,000 notes, the government argues, would not only check counterfeit currency, a problem that has assumed serious dimensions, but also purge India’s economy of the black wealth amassed in the form of high-value notes.

World Bank had estimated India’s shadow economy in 2007 to be nearly $479 billion in unaccounted wealth, according to rating agency Crisil. Hence this is one of the historical reforms of the economy of India. This is indeed one of the boldest moves by the Government of India

This scheme has received mixed reactions till now. The majority of industry and commoners alike reacted to this decision with overwhelming support. Whereas some sections are of the opinion that it is a draconian scheme causing hardships to people. It has also been argued that it would’ve been better if two to three days’ notice had been given. That would, in fact, have defeated the entire purpose of the scheme because by then the money would have been circulated. Overall, this scheme is going to impact the businesses, the aam admi, and financial institutions – all at some level or the other.

With this move in play, black money holders are left with just two options – either route this money through banks, declaring it to be their income or burn the stashed file. In case they opt for the first option, they will have to declare it as income. Consequently, the question arises that how did they earn that income? Their files would be subjected to scrutiny and a minimum tax of 60 percent would be payable.

PM Narendra Modi also said militants operating against India were using fake notes of Rs 500, worth about $7.50 at current exchange rates. “Terrorism is a frightening thing. Enemies from across the border have run their operations using fake currency notes. This has been going on for years,” Modi said.

Hence, withdrawing the entire series of these high-value notes and introducing new notes definitely tantamount to a surgical strike on these groups.

People in rural India who have a significant amount of Rs 500 and Rs 1000 notes, but no official form of identification, will have a tough time in exchanging their notes.

The logic behind this demonetisation is to curb the use of these high-value notes in the black money market. However, earlier demonetisation only impacted the super rich, big black marketers, and smugglers/hawala operators as only they kept high denomination notes. Now, almost everyone has Rs 500/1,000 notes. How do you expect people running grocery shops, chaiwallas, and maids to leave their businesses and stand in a queue to deposit these notes in the bank? Tax havens and foreign accounts are still untapped. The big fish will be left out whose black money is in the form of foreign currency, gold, and stashed away in tax havens.  How the government plans to nab these offenders is yet to be seen. And what about Illegal election funds of political parties. We all know how much black money is used by political parties. It will be a very tough task to use trucks of money at least for the upcoming five state elections.

There will be favourable impact too. Bank deposits will spike and there will be positive Impact on jewellery and real estate business.