PM Modi has taken a bold step and must be thanked for demonetisation

Lot of water has flown into the Yamuna since November 8 when Prime Minister Narendra Modi announced demonetisation of Rs 1,000 and Rs 500 currency notes.

While the ruling BJP is terming it as a masterstroke to curb the menace of black money, the united opposition is raising the issue of inconvenience to the common man. Sadly, the important aspects which should have been discussed openly are sitting on the backside and both sides are relying on rhetoric.

Nobody can deny that public is facing issues in exchanging the old notes and there are long queues at the banks. The issue got aggravated due to drying up of ATMs, and prima facie it appears that either the government didn’t estimate the scale of chaos which can emerge out of this decision, or they lacked preparedness.

However, it must be understood that every big decision has an impact on the routine life of common man. A recent example is the “odd-even” scheme launched by the Delhi government, which drove away almost half of the vehicles out of the road. The public was left with no option but to rely on public transport with huge rush at stations and bus stops.

A similar situation had arisen in 1978 when then PM Morarji Desai demonetised Rs 10,000 and 5,000 notes, and a three-day time limit was given to exchange the old currency.

The public is in panic mode but this is not due to demonetisation per se. Transitional problems are short-term but this initiative will have a lasting impact on the entire economy. Panic and chaos is primarily due to under-preparedness of the government agencies. The fact that 86 per cent of currency in circulation was going to be withdrawn from the market should have been given a proper thought.

Also, availability of currency notes of smaller denominations should have been ensured to avoid the inconvenience.

However, media is exaggerating the issue and disproportionate reporting is adding fuel to the fire. This is evident from the fact that a leading English daily published a corrigendum for misreporting an incidence in Mumbai. In a nutshell it’s a short-term pain which is worth taking for long-term gains.

There are no differing opinions that demonetisation will wipe out counterfeit notes from the economy and will also impact terror financing which is thriving on smuggling, hawala and similar other illegal means. This entire exercise is branded as a war on black money and the outcome of this exercise will be known only after closure of the time limit given for exchanging the old notes.

However there are certain points which need to be looked upon before declaring that demonetisation will wipe out the ill-gotten money:

1) Data published by Income Tax department a few years back shows that only 6 per cent of black money is in the form of cash, and large part of ill-gotten money is invested in real estate, bullion and other assets. This crackdown will help checking the circulation of black money to some extent but it can’t stop further generation of illicit money which is parked in various assets, including benami properties.

2) As per the data given by RBI, approximately little more than Rs 3 lakh crore (~25 per cent of overall Rs 1,000/500 notes) of old currency notes were exchanged at bank and post office counters in the first four days. Going by this trend, it appears that the informal estimate of wiping out Rs 5-6 lakh crore of the overall Rs 14 lakh crore may not be achievable.

3) It is being reported that persons are hired to exchange old notes on a commission basis. There should have been a proper check (like introducing ink mark on finger) to ensure that illegal money is not getting recycled.

4) A similar pattern can be seen in Jan Dhan accounts to route the funds and terrorists can use these accounts to launder their fund.

5) Currency withdrawal is going to hit hawala operators badly because they keep hard cash with them and that too of higher denominations. However, they can also recycle part of their holdings by hiring middlemen.

Apart from the temporary disruption in the economy, there is a fear that currency withdrawal will impact the demand in an already sluggish consumer market. However, price correction is expected in the real estate and bullion market in the medium term. Capital formation process is expected to accelerate as idle money will come to the banking channel which will improve liquidity.

An increase in Saving:GDP ratio is also expected in this financial year. Demonetisation will encourage the use of plastic money which leaves trail, and thereby, puts an automatic check over generation of black money.

Terror financing is a cross-border issue but demonetisation drive will impact internal elements also who are a threat to national security. Left-wing extremists (Naxals) will face the music of currency ban because they have stashed their money in notes of larger denomination. Security forces will keep a watch on those who will approach the bank in Naxal-effected zones.

It would be easy for the security forces to launch a crackdown on these anti-national elements after weakening them financially.

In 1927, the US Supreme Court said in its judgement that "taxes are what we pay for a civilised society".

Tax base is already small in India and it is reasonable to expect that everyone is abiding the law and discharging his obligation. When a common man is paying the full value to the trader while purchasing any goods/services, then there is no point not taking that revenue to the books and not remitting the government’s share to the exchequer.

The government gave an opportunity to come clean by September 30, 2016 and this step will send a clear message that non-compliance and evasion can’t be taken for granted. Business community has no reason to fear at all if they are complying with the law of the land.

It is the dichotomy of Indian politics that every political party talks about corruption, but when it comes to taking any action, they start crying foul. Winter session has started from Nivember 16 and political leaders from almost entire opposition cutting across political ideology have come together to oppose the government's move.

As a matter of fact, it may be noted that a survey conducted by a leading english business daily shows that 82 per cent of people are happy with the decision taken by the government. If this indicates the mood of the nation, then it’s a cause for concern for all the politicians who wish to harvest the issue of inconvenience to common man by raising it disproportionately.

The above-mentioned survey also indicates that the common man is fully aware of the political gimmicks. Contrary to the claims of the politicians, it is surprising to see that those who are affected by this decision are praising the government’s move (Naushad Forbes, CII president and almost every industrialist praised the government).

The outcome of this step will be known in the coming months but PM Modi should be thanked for taking a courageous decision and pursuing national interest over the risk of alienating his core voters.

The statement given by an emotional PM in Goa that currency withdrawal is not the end and benami transactions are the next target shows the decisiveness and determination of the man sitting at the helm of affairs.

Also read - What I learnt about India standing in an ATM queue, thanks to demonetisation