Banning Rs 500/1,000 notes won't help recover black money

Prime Minister Narendra Modi’s decision to scrap notes of Rs 500 and Rs 1,000 denomination to combat corruption and terrorism is being appreciated by most Indian citizens.

Within hours, notes that accounted for Rs 14 lakh crore or 86 per cent of the value of Indian currency in circulation had become useless. Modi claims the move will also put an end to circulation of fake notes around the country.

But actually, Modi is not the first one to take this step. Four decades ago, when the Janata Party was headed by PM Morarji Desai, he had made the decision of scrapping Rs 1,000, Rs 5,000 and Rs 10,000 denomination notes to check illicit transfer of money, which was harmful for the economy.

The common understanding is that "black money" consists of loads of cash which are stored in trunks or pillowcases or buried under the earth.

With this understanding, it is then proposed that if Rs 500 and Rs 1,000 notes are demonetised, or, in other words, discontinued, then people going to banks to exchange large amounts of cash for the new legal currency would make the banks suspicious; and banks would in turn pass on their doubts to the tax authorities who might then catch the offenders.

In this way, "black money" would get uncovered, and this would discourage corruption in the future.

I find this concept totally absurd. Black cash is a fraction of black income, which itself is a fraction of black wealth. Destroying a further fraction of that black cash will not be a huge setback to the black economy.

If someone has black money, they are likely to keep it either as investment in land, gold, shares and other assets, or they would have pushed it out of the border through the "hawala" route.

It is too early to comment that this step will combat the menace of black money. We will surely come to know about its results later. Some (and perhaps a lot) of the black cash will get laundered through benami transactions and deposits by businesses which operate in cash and do not have to keep detailed accounts.

The Reserve Bank of India has confirmed the Rs 2,000 note will be available November 11 onwards. Wouldn’t the Rs 2,000 note pace up corruption at the double rate? People who were capable of hiding Rs 200 crore will now be able to stash Rs 400 crore more conveniently.

Congress spokesperson Randeep Surjewala said: "While Modiji withdraws the Rs 1,000 note on one side, he introduces the Rs 2,000 note on the other? Does it not defeat his own argument?"

Just within hours of the announcement made by Modi on November 8, everyone rushed to the jewellery store. The price of gold has surged by Rs 4,000 as of now. Previously, it was Rs 30,000 for 10gm but ended at Rs 34,000. This shows how quickly black money can be converted into "golden money".

What needs to be addressed is that there’s no good estimate for how much of India’s black money is in forms other than liquid money, such as gold, diamond and gemstones, land or any other form of wealth.

Hence, banning the Rs 500/1,000 note will tackle black money in the form of hard cold cash, but won’t have any effect on other forms of illicit money.

By the PM’s own confirmation, the main part of black money generation and storage is in foreign bank accounts. Counterfeit money can be produced for any denomination.

The declaration of a Rs 2,000 note alongside another Rs 500 note does not prevent future possible circulation of counterfeit cash. We are living in a technologically advanced world where counterfeiting Rs 2,000 denomination notes wouldn’t be a great deal.

The recently leaked Panama Papers revealed that a number of high net worth individuals in India have large sums of money stashed abroad, taking advantages of legal loopholes outside the country.

We don't even know whether the government made any effort to trace the sources of this money and punish the culprits. Renowned actor Amitabh Bachchan is one of such people. Modi didn’t take any action against him, instead he was invited to host the celebration of two years of his government.

The demonetisation move is also made on suppositions that Pakistan prints a considerable measure of counterfeit money and funds terrorist activities in India.

There are no figures accessible about this amount, regardless of the possibility that it is valid.

Even if it is true, the amount is probably going to be meagre. Nobody would expect Ajmal Kasab or Masood Azhar and his counterparts to carry a trunk full of Indian currency for surviving in India. It is a known fact that terrorist reserves move through electronic exchange and not cash exchange.

Economist and professor Prabhat Patnaik said: "What the Modi government has done is unprecedented in the history of modern India. Even the colonial government had shown greater sensitivity to the convenience of people than the Modi government has done by demonetising only those notes which were possessed by the super-rich and not those possessed by the people at large."

The step may seem positive but it will also create some problems. There are many who get their salaries in cash and do not possess any bank accounts.

This move profoundly impact the working sections of society: drivers, maids, cooks, electricians, plumbers,etc - anybody who provides services in the informal or unorganised sector and depends on daily,monthly or bi-monthly cash payments.

Almost 300 million people, who are not a part of the banking sector in rural areas, will get crippled by high value cash transactions. At the same time, Indian students who are pursuing higher education abroad and have Indian currency are helpless.

It will also be harder for farmers trying to sell produce in wholesale markets, where most dealings take place in cash. India’s peak agrarian period is now, when farmers pick crops such as rice, lentils, cotton and sugarcane that were planted in the summer, and start to sow winter crops. Farmers are going to the market to buy fertilisers and seeds and need money for the inputs. What will they do now?

Whatever its long-term benefits be, those relying upon cash, whether for daily wages or as payment for commodities or services they offer, are probably going to be in for tough times in the coming days.

In the long-term also, all this does is partially take out some black money stock without fixing the processes that lead to the creation of black money.

After being the brand ambassador for Reliance Jio and the official mascot of the Incredible India campaign, Modi was seen on the front page of an English daily endorsing Paytm.

One of the thoughts which came to my mind after connecting it with the present scenario is that he wants to drive citizens into a cashless economy.

Developed countries have, over time, eliminated notes of larger denomination and moved to card/bank-based transactions. This would further help in controlling black money, corruption and crime.

Yet, is India prepared for a cashless world?

If India hopes to be a cashless economy, it is not enough that everyone has a bank account (crores of people still do not have them); it is important that facilities exist to transform every transaction into a cashless transaction.

What number of shops have credit/debit card machines? What number of individuals have credit/debit cards? What number of individuals have knowledge about net-banking?

At this point when India is not prepared for a cashless world, the untimely presentation of measures for a cashless economy will only adversely affect the poor and working classes of society. We require progressive and better management of steps if we aspire to go cashless.

This is a measure to cover up the utter failure of the Modi government on the economic front, on joblessness, high prices and no pick-up in domestic demand, crippling all sections of our population, especially the working classes, and ruining the peasantry.

Also for the next few days, no one is going to care whether missing JNU student Najeeb Ahmed’s mother gets her son back or not. Everyone will eventually forget the gag attempt on NDTV and the fuel price which is rising every weekend.

BJP supporters are under the impression that scrapping Rs 500 and Rs 1,000 notes will cause trouble for the Congress, Samajwadi Party and Bahujan Samaj Party in the upcoming UP elections.

This was exactly the stand Morarji Desai took in 1979 when he demonetised Rs 1,000, 5,000 and 10,000 denomination notes. An unfortunate piece of information for the BJP supporters - Indira Gandhi was re-elected in a massive victory in 1980.

The main failure of the Janata Party government was the economic failure.

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