Modi's historic move against black money brings chaos now, gains later

While Prime Minister Narendra Modi's unprecedented move to temporary demonetise Rs 500 and Rs 1,000 notes is expected to bring in a host of positives, it will also set off major administrative and logistical challenges at the outset, not to mention the plight of common people.

The government and Reserve Bank of India (RBI) will do well to come up with fresh clarifications and relaxations in the next few days as the move has already triggered chaos in households and markets.

Although the step is targeted to curb fake and black money, it is important to note that it does not demonetise high value currency notes. It's  a move that can easily nip the black money emergence in bud.

Thursday onwards people may receive new notes of Rs 500 and Rs 2,000 in exchange of their older ones. RBI has already started dispatching new set of Rs 500/2,000 notes to regional offices.

As per RBI database, currently Rs 17,54,000 crore worth of notes are in circulation, of this Rs 500 and Rs 1,000 notes constitute almost 45 per cent and 39 per cent, respectively in the value terms.

In volume, Rs 10 and Rs 100 notes constitute 53 per cent of the notes in circulation.

To put it simply, roughly Rs 6,32,000 crore circulating in the form of older notes have now turned illegal.

The push behind the bold move

Government has taken intelligence inputs on the huge influx of black money, especially in denominations of Rs 500 and Rs 1,000. RBI has discontinued Rs 1,000 note even in new series of high denominations as counterfeiters have made big hammering on it.

Going by the humongous size of black economy, the two successive efforts by government to bring out black money through voluntarily disclosure windows have failed to yield expected outcomes.

In 2015, the amnesty window for black money stashed abroad yielded a paltry Rs 2,262 crore of tax against the declarations of a mere Rs 3,770 crore. The declarations of Rs 65,250 crore under the recently concluded domestic black money disclosure scheme were also not a big success.

Flip side

According to World Bank's financial inclusion database, almost 49 per cent adults have no bank accounts in India, while only 22 per cent accounts are linked with debit cards.

On the other hand, only 3.4 per cent transactions are made via credit cards. Therefore, the move will hit farmers, daily bread winners, low paid workers and job contractor not only during the transition period but at the time of exchange of their junked cash holdings.

This will be a major jolt to farmers reaching to Mandis with Kharif harvest as majority of deals there take place in cash.

Logistics

There is an apparent shortage of low denominations currencies. Security Presses have worked overtime to enhance the supply.  Moreover, most of the ATMs are high denominations friendly. Banks will have to load ATMs with enough Rs 100 notes until newly-designed high value notes become frequent.

Rupee credibility under threat

The move will make rupee less credible for commoners for the sometime and may drive them towards safe haven gold.

India is literally gushing with black money. There is no dearth of black money estimates either. In new findings, equity research firm Ambit Capital pegged India's "black economy" at over Rs 30 lakh crore ($460 billion) or about 20 per cent of the total GDP, which is larger than the GDP of emerging markets like Thailand and Argentina.

Also read - Rs 500, Rs 1,000 notes demonetised: What you need to know