India In Queue
The nation is stuck somewhere. The demonetization is a major jolt on the entire fabric of the nation. Prime Minister Narendra Modi opined, “Demonetization is a dose aimed at improving health of India’s economy.” First what is demonetization? It is an act of stripping a currency unit of its status as a legal tender. Demonetization is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit.
The fact about India’s demonetization of Rs 500 and Rs 1000 that 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (millions don’t have) and the additional hardship of standing in many queues for many hours. Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 110 million Indians have mobile wallets (about 30 million have credit cards) and there are maybe 510-600 million debit cards in circulation. So access to cash is very, very important for average Indians. India is a cash economy. And 90% of all transactions are done in cash. Controlling corruption is not about blocking access to a non-traceable store of value. Breaking the problem of corruption requires deeper changes to institutions.
Demonetization is not a new phenomenon. It has happened in 12 Jan 1946 and 16 Jan 1978 too. It is the third one on 8 Nov 2016. During 1946, pre-independence period The Governor agreed that about 50 per cent of the notes would be in the Indian States and so co-operation of the State Governments was very necessary. Apparently he had some doubts about this. The ideal thing was to block high denomination notes, but this course was not favoured by either the Finance Member or the Governor. This is strange if one looks at it. In 1946, the idea was to demon but it became more of a conversion. In 2016, we are calling it demon but it is actually conversion. However, lesser the conversion, it but could become demon. Talk about going in circles with words.
Second happened in 16 Jan 1978. That time the Finance Minister H.M. Patel in his budget speech on 28 Feb 1978 said:
“The demonetisation of high denomination bank notes was a step primarily aimed at controlling illegal transactions. It is a part of a series of measures which Government has taken and is determined to take against anti-social elements. “As the then Finance Minister did not say anything about the success of the exercise, one can almost guess that it did not create much impact like in 1946.
India’s total tangible wealth is of the order of 280 lakh crores. World bank estimates at least a quarter of this is black. That means 70 lakh crores. It is possible that 10% of it is in cash, with the rest in real estate and gold. That is 7 lakh crores of black cash that is lying around. Maybe 80% of it will turn white and even with that Rs 1.4 lakh crores of black will be gone. That is big. Indira Gandhi tried this in early 1970s, but could not as the move leaked out and the bad guys quickly changed over the notes. The government had to back out of the move then. I’m even thinking if the move to ban NDTV was just a ploy to distract the whole media, to pull this off. And it was possibly scheduled on US election day likely to get the global media off the heat and attention, as foreign media has been ultra critical & condescending of any major move in India.
Nearly 40 percent of India's economy is driven by small- and medium-sized enterprises that largely run on cash transactions. This move could impact these businesses, and in turn have a knock-on effect on economic growth. Not known, how many are paying full income tax. The tax evaders better start paying tax rather than consider the unpaid tax is part of their profit. These people pollute the society of good Indian citizens. For the poor who don’t have debit/credit cards, there might not be much impact either - as most of their transaction happen under Rs. 500. Cashless economy in India , which is having a rural economy is immature stance of Mr Arun Jaitley. “Corruption, counterfeiting, terrorism funding, cashless economy, gold/silver, real estate, it will have an huge impact because of demonetisation.” – Arun jaitley said in a media conference.
We all know how to buy a house in India, 30% in cash and rest in white money. How do you get your work done around babus, just hand over a RS 500 note, smooth? Election money - cash, tax-free gold - cash, religious places - cash, marriage gifts - cash. That is all the money that government knows nothing about. I am sure not all the black money would be gone with a single stroke just as Raghuram Rajan mentioned, smart people will find a way. But they would certainly be more cautious from now on. For the general public, it would induce fear of stashing more cash at home that too if it is black. At least by 20-30%, because at the end of the day no matter how smart you are and what other ways you chose you would have to go to back to change the old currency to new, or deposit it in banks. Raghuram Rajan was aware of this process all along, and this was not a surprise for him. Of Course without blowing their own trumpet as “surgical strike on black money “ , which will deliver them great votes or boomerang on them , but if the present govt focused properly ,this would be an effective step to somewhat alleviate many of the problems in the economy. Further he added, “This is not an attempt to demonetise. It is an attempt to replace less effective notes with more effective notes. I understand people are making different interpretations. Unfortunately that should not be the interpretation."
BJP is the largest party in majority in India. There are several state level and district level leaders who would be holding black money. This move actually would hurt the party themselves in the states. Moreover, there would be a lot of supporters and benefactors of BJP that would be dealing in black money. It takes a great of guts and willpower to actually do this. Most of the erstwhile govts could not do this for this very reason. Indira gandhi tried but the information got leaked, probably when they tried to safeguard their own party and supporters before the move was publicly announced. This time however, Modi did not take into consideration the implication on his party and his benefactors in the interest of the country. In February 2015, Indian Express released the list of 1195 Indians account holders and their balances for the year 2006-07 in HSBC's Geneva branch. The list was obtained by French newspaper Le Monde and included the names of several prominent businessmen, diamond traders and politicians. The Swiss Ministry of External Affairs has confirmed these figures upon request for information by the Indian Ministry of External Affairs.
Demonetization always has had an elephantine jolt on parallel economies. This is the sizable spank on the Indian parallel economy, yet. This could easily eclipse all voluntary disclosure schemes offers by current and past governments. How substantial the bang, time will tell. We can only muse.
By – Siddhartha Shankar Mishra
( Lawyer and a Writer )