Events & Issues
New
Delhi, 16 November 2016
Demonetising
Currency
WILL IT
CHECK BLACK MONEY?
By Dhurjati
Mukherjee
The Congress’ allegation that the
demonetisation of Rs 500 and Rs 1000 currency notes is just a ploy by Modi to
cover his failure to deliver on his election promise of cracking down on black
money, doesn’t really hold good. Notwithstanding that the Prime Minister hasn’t
kept his promise of bringing back Rs 80 lakh crores within 100 days of coming
to power and to deposit Rs 15 lakh in every account, most economists believe
that the step is in right direction and much-needed.
The decision has so far been rightly
called a surgical strike to curb the menace of corruption, black money and
terror funding. Modi stated this was a decisive war as despite several steps
taken by his Government over the last two-and-a-half-years, India’s global
ranking on corruption had moved only to 76th position from 100th earlier. Even
Vinod Rai, former CAG and presently Chairman, Banks Board Bureau (BBB), has opined
that this was a master stroke to prove that there is “zero tolerance for lack
of probity”.
The World Bank, a few years back (in
July 2010), estimated the size of shadow economy of the country as high as 20.7 per cent of GDP in
1999, which rose to 23.2 per cent in 2007 and may presently be around 27 to 28 per cent, if
not more. The demonetisation of high currency notes may help curb the rise.
Moreover, this is not the first time that such currency notes have been
demonetised. In January 1978, the Morarji Desai-led Janata Party government had
demonetised Rs 1000, Rs 5000 and Rs 10,000 notes to curb black money.
However, there is a difference in
the present decision. At that time, currency notes were used by the rich and
super rich but presently most people, even the economically weaker sections,
including daily labourers and very small traders (of kirana shops etc.) use Rs
500 currency notes quite shops frequently. Though there may be temporary
difficulty for some sections, adjustment in the greater interest has to be undertaken.
Some economists have questioned the
justification of the move in unearthing black money. According to Left
economist, Prasenjit Bose, real estate, land, gold and investments in shares
are the favoured options where the rich and the super rich park their
unaccounted money. These sectors have not been affected and it is believed that
the rich may also not come to exchange their higher denomination notes.
Moreover, reports point out that these notes are selling in the market at a discount
of 20 per cent.
However, it has to be admitted that
the move to curb high currency notes in circulation, will make a dent in black
money market. As per official sources, during 2004-14, the circulation of notes
of Rs 1000 and Rs 500 denomination increased at an annual rate of about 30 per
cent and 20 per cent in contrast to the circulation of notes of Rs 100
denomination, which remained unchanged while those of Rs 50 declined.
Thus one can expect that the measure
would affect those involved in printing fake notes, illegal terror funding,
storing money for dubious purposes or evading taxes etc. as these have been
gravely affecting the economy, both in the short and long term. Moreover,
inflation is expected to come down as demand slows in the short term as it is estimated
disclosure of 1.2 per cent of GDP. Already the reality index has fallen by
around 12 to 13 per cent as this sector is notorious for the use of black
money.
India is still one of the most
cash-intensive economies in the world with a cash to GDP ratio of 12 per cent
about four times as much as other economies such as Brazil (3.93 per cent),
Mexico (5.3 per cent) and South Africa ( 3.73 per cent), according to a report
‘Cost of Cash in India’, commissioned by Master Card. A boost to electronic payments
would curb black money but India
still being largely unbanked, the switch to plastic cards may take some time.
One has to admit the fight against
black money has to be a continuous process and cannot end only by discontinuing
high denomination notes. Earlier the Supreme Court appointed special
investigation team had proposed a ban on cash transactions above Rs 3 lakhs and
to declare such transactions illegal.
As is well known, black money gets
generated due to detection issues and structural problems in the economy. Stamp
duty and registration fees are more than 6 to 7 per cent of the property value
in our country and thus needs to be reduced to anything around 2 to 3 per cent
to ensure that most transactions are carried out in white.
On the other hand, some savings
accounts in banks have several lakhs and even crores of rupees which are never
monitored. The source of these funds needs to be checked as well as whether
these are shown in the returns of the individual and/or the company.
While political parties have
criticised Modi’s move, it is a well-known that black money plays a significant
role during elections. The practice of political parties mopping up large amount
of election funds through unaccounted contribution pushes businesses to
generate black money. This may probably be the reason why some political
leaders have raised a hue and cry against this demonetisation.
It is common knowledge that a
parallel shadow economy corrodes and eats into the vitals of the country’s
economy. This had been continuing for a long time, affecting the lower income
and the economically weaker sections in particular due to inflation etc.
Moreover, the government being deprived of legitimate revenue faces a resource
crunch and cannot spend to the required extent for social and physical
development activities that need focal attention.
The sincerity in the Prime
Minister’s move cannot but be appreciated. It needs to be mentioned here that
the spread of black money clearly proves the dishonesty of the business class
though we talk of ideals and refer to our great heritage. Unless basic honesty
is inculcated among the business class and concerted efforts made by all
sections of society, unearthing black money and rooting out corruption will not
become a reality.
The government has already swung
into action and the Enforcement Directorate and the Director General of Central
Excise Intelligence (DGCEE) are conducting raids of unaccounted gold stocks,
hawala operators etc. The present measure is just the start of more stringent
action being contemplated by the NDA government to tackle the menace of black
money.
Modi has already warned that after
December-end stringent measures would be taken, adding that those faking to be
clean should realise that he would “pore through documents dating back to
independence” to certify their claims. According to him, the special focus
would to go after those holding benami properties. Apart from all this, if
around 25-to 30 per cent of money hidden in overseas banks can be brought to
the country, the Government would have accomplished wonders. ---INFA
(Copyright,
India News and Feature Alliance)
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