SHISHIR BAJORIA
Demonetisation, whenever or wherever it is done, brings about an unsettling impact on the daily life a nation. I would like to make a basic difference between withdrawal and demonetisation of a currency, though the words may appear to mean similar. Withdrawal of a currency is a regular exercise done by most central banks gradually over a period of time where the objective is to introduce newer legal tender in place of older ones. In this case it is life and business as usual the paper simply gets changed over a prescribed period of time. In the case of demonetisation it has to be an abrupt stopping of currency and re-monetizing with newly issued legal tender. In this exchange process there is an inbuilt accounting. What gets left behind is the black money which will automatically be expunged from circulation.
At the stroke of midnight of November 8, 69 years and 85 days after independence, India took its first sure-footed step towards independence from black money. Prime Minister Narendra Modi in his address to the nation announced the withdrawal of 500 and 1,000 as legal tender. All these years, for reasons best known to those at the helm of affairs, we had side-stepped the issue and with each passing year the juggernaut kept growing bigger and bigger. Based on rumours, the Congress-led UPA Government had planned the step but ultimately developed cold feet.
This step was not in isolation as it was preceded by many steps such as the Pradhan Mantri Jan Dhan Yojana under which more than 25 crore bank accounts were opened. The foreign black money disclosure by paying 60 per cent tax, agreement with the US Government for sharing banking information to flush out black money overseas, a new law passed in August 2016 to curb benami transactions, and then the Income Disclosure Scheme which ended on September 30, where Indians could disclose their undisclosed income by paying 45 per cent tax. Despite the tax rate being much higher than the prevailing rate the IDS mopped up 67,000 crore of black money yielding a revenue of 30,000 crore. The total of all the above steps taken by the Modi Government in a little over two years, resulted in black money moping up of the tune of 1,25,000 crore.
This historic step of demonetisation meant that 13,60,000 crore worth of currencies were no longer legal tender and needed to be changed with new currency notes in an orderly and prescribed manner. The hue and cry that followed was not unexpected, when people found that most cash with them cannot be tendered and only exchanged.
The exchange would naturally be a time-consuming process and in the first seven days, it met with a lot of criticism. Some of those standing in the long snaking queue expressed their displeasure at the fact they had to queue up but no one spoke against the idea. It is a tribute to the perceptible people who immediately deciphered the good from the bad and stood with the good.
On the other hand, many political parties jumped on the bandwagon to oppose the move. Some tried by visiting people standing in queues to provoke them but quickly left when they found the mood in favour of the Modi Government, despite their immediate hardship. In the case of a few, the decibel were so high and shrill which exposed that their reasons for opposition were not above the table.
The task of replacing nearly 2,000 crore currency notes is itself huge task. Since the last date has been set as December 30, the average daily exchange has to be 40 crs notes. This number will get altered depending on the quantum of 100, 500 and 2,000 notes being released and the amount of black money which will ultimately not get changed and expunged from the system.
Based on various reports that have been published, it can be safely assumed that the extent of black money or unaccounted money in the 500 and 1,000 denominations is 30 per cent. Hence a staggering amount of 4,00,000 crore will go out of circulation. This will result in surplus financing in the books of the RBI, which would reduce the inflation between one per cent and 1.5 per cent. The consequential impact of this will be drop in lending rates, which will make monthly installment payments much easier for people, reduce project cost resulting in a massive push for Make in India and Start up India programmes. The real estate market will cleanse itself of all the black money and become more affordable, generating a greater demand.
The currency in circulation to Gross Domestic Product shows that the Indian currency is at a very high end. In the UK and the US, it is four per cent and eight per cent respectively, whereas, in India it is 12 per cent, which should reduce to nine per cent post this mopping up. The euro in circulation, at 11 per cent, is nearly at levels as India, but this is not really comparable as the euro covers 19 countries, each of which has a different monetary policy.
A lot has been said about the implementation of this demonetisation followed by monetisation exercise, and many prescriptions have been written or discussed around the table. Since the fundamental goal was to target the black money, there was no alternate to the element of surprise. The slightest of hint, in any form, would have resulted in a flight of black money to safe heavens only to reappear once things settled down.
What has been baffling is the reaction of some of the political parties, who till November 7, were very vocal about the huge black money in circulation, often asking what the Prime Minister was doing about it. Now they are being heard asking: Why were 13.60 lakh crore worth of currency demonetised when black money was only one lakh crore rupees? They even justify this new-found low figure by quoting various reports.
At a recent round table event, the representative of a political party wanted to know from the Government how much black money had been deposited in the 12 days. The simple answer is that the black money will never get deposited and will get out of the system as worthless paper.
In the 12 days from the historic announcement, we have seen many changes in the process of deposit / exchange / withdrawal of currency. One has to admire the very close monitoring of the Union Finance Ministry, which constantly plugged loopholes that the ‘ingenious minds’ would try to exploit and simultaneously took effective steps to reduce the hardship of the people.
(The writer is an entrepreneur, expert on trade issues and member of the BJP State executive of West Bengal. Views expressed here are personal)