Modi’s daring War on Bribery and Black Money

The stunning announcement by Prime Minister Narendra Modi that from midnight of November 8, 2016, the presently circulating currency notes of Rs 1000 and Rs 500 denominations will cease to be legal tender is the boldest attack on the scourge of black money that has been devastating the Indian economy for decades. The measure called for secrecy at all levels, and the government must be first congratulated for ensuring confidentiality despite the fact that it would have involved consultations at various levels. Now look at some data.

The total currency with the public is close to Rs 16 lakh cr now. It was a little over Rs 4 lakh cr in 2006. Cash with the public has risen phenomenally in recent times. The proportion of the two high denomination notes in the total currency in circulation is over 85%. It means that the Rs 1000 and Rs 500 notes account for over Rs 13.5 lakh cr. The extraordinary rise of cash economy through high denomination notes, was powered by generation of black money in real estate, stocking of gold, bribery and corruption. While the high denomination notes made illegal businesses, including hawala transactions to transfer money out of India easy to execute, it has facilitated huge tax evasion even in the otherwise lawful businesses. High denomination notes have made it easy for the bribe taker to handle huge bribes with ease. The hardest hit by the Modi missile against black money is the corrupt — particularly the political class and bureaucracy which accounted for bulk of the corrupt money. He has fatally hit at both bribery and black money.

It is not that those who have Rs 1000 and Rs 500 notes will lose their money represented by the cash on hand in the two denominations. They will have to deposit the two denomination note cash into banks and post offices. They have the time to do it till December 31, 2016. The Prime Minister has said that the people’s money in the two high denomination notes will be theirs and they will not lose it — actually what is cash in their hands in the two denominations will transform into bank deposits in their names. But those who have the two denominations cannot use them as currency notes after midnight of November 8. Common people who have limited and legal amount of cash with them will not be affected in any way. But what about the buccaneers who have sacks and sacks of cash in Rs 1000 and Rs 500 notes and deposit it in banks? They will have to pay tax on the black money they possess. It will not be too surprising if the government rakes lakhs of crores of tax from the fraudsters. The corrupt who have sacks of cash may have to lose their money as they will not be able to deposit it in their names or in the name of their near and dear.

It is not just a surgical strike against black money. It is also a significant measure to protect national security as high value currency notes in circulation also consists of substantial fake currency printed by ISI, which will all go up in smoke. No one can deposit those notes and get genuine currency in return. Yes, as the Prime Minister said, for couple of days, there will be discomfort for the people, traders and others who use cash on daily basis but for a huge national effort against black money of this scale, that is a small price to pay. With a substantial part of the Indian economy being transacted in cash it is not an easy decision to take and execute it.

There is downside to this war. There will be short term liquidity crunch as huge cash part of the economy is sterilised — and will remain so for few months. This will mean that there will be erosion in cash funds that currently finance consumption, working capital and investment. The government needs to replenish this deficit forthwith. One way of doing it is to ensure that the explanation of those who deposit up to Rs 2.5 lacs in bank account will be accepted by the Income Tax department. This will ensure that bilateral transactions where the parties agree to deal in old high denomination notes may continue to finance genuine business transactions. Also the government must come out with an amnesty for those who deposit high denomination notes held by them in black so as to bring the money back into circulation. The limits on withdrawals of money deposited must also be withdrawn as cash economy will continue. Hopefully this will not turn into black economy and this may be ensured by the nano technology used for printing new notes to replace the old ones which can be tracked.

The nation owes a standing ovation to the Prime Minister for taking this unprecedented and high risk political decision which is a game changing multidimensional effort to take on corruption, black money, protect national security and prevent capital flight out of the nation by hawala.

At one stroke Modi has established beyond doubt that he means business against both corruption and black economy.