In an audacious move, the Narendra Modi government’s demonetisation of Rs 500 and Rs 1,000 currency notes at the stroke of midnight November 8, has taken the country of 130 crore people into uncharted territory, but one with noble goals. While its long-term benefits to the economy of higher tax collections, greater tax compliance and a higher share for the formal economy appear idealistically ambitious, the fulfilment of even a fair proportion of all these goals will benefit the country in higher productivity and lower cash-and-carry transactions. Apart from a direct hit at stockpiles of black money lying with politicians and their parties, corrupt bureaucrats, tax-dodging traders, smugglers and narcotics dealers, other areas too will benefit immensely from this daring move, taking out of circulation 23 billion notes that represent around 85 per cent of cash in Indian hands.
The first demonetisation exercise in 38 years since the days of Morarji Desai will also strike at the heart of terror funding with counterfeit Indian currency, estimated to be around Rs 400 crores, mostly printed in Pakistan at the behest of the ISI, that liberally funds militancy in the J&K Valley and beyond. The increased security features in the new notes that will soon be issued will hopefully deter the counterfeiters and hawala merchants for a while, at least till they master duplication of new notes. Terror wasn’t a problem in 1978, but it is now. What the move promises is a fresh start in curbing the parallel economy run with black money, and estimated to control around 20 per cent of India’s GDP. The negative impact of black money has been debated for decades without any government taking steps beyond incremental, but leaving sufficient loopholes.
The mind-boggling logistics of replacing 23 billion notes will bring pain in the short term, but the sacrifices honest tax-paying citizens will have to make may be worth it if the noose can be tightened further around those who have cheated the nation for so long. Where it might do the most damage is in the rural economy, that is almost entirely run with cash. Taking banking, plastic money and e-transfer systems to rural India and small traders will be a long process, but it must be sustained if we are to move towards a cashless economy that will change the way the nation’s wheels move, and loosen the hold of the real estate-infra businesses and its inducement of corruption.
It is important to ensure that conditions are created so that there is no longer any incentive to generate black money afresh. However, the knee-jerk reaction of stock, bullion and currency markets shouldn’t be allowed to cloud judgments on the ultimate benefits of a revolutionary step to cleanse the country of an evil that was allowed to flourish too long.
