Demonetisation – Whether it helps in Controlling Corruption and Black Money

The Modi Government sent shockwaves across the nation on November 8, 2016, where it took the bold and unprecedented step to demonetise the Rs. 500 and Rs. 2000 notes effective from the same day midnight. Never had any nation taken such a step in the recent times where the legal tender which marked the major share of the currency and economy in the country would become pieces of junk paper from the same day itself. The two denominations of currency account for 86% of all the currency in circulation (equivalent to 11% of GDP), hence one can well imagine the chaos and hardship the common man has faced with the sudden withdrawal of these notes from circulation.

The announcement was welcomed by half the population with jubilation as our Prime Minister echoed a sentimental and patriotic essence in our hearts were the major reasons for the demonetisation was to eliminate corruption and black money from our nation which has forever been riddled with such social perennial problems. The BJP welcomed the move and labelled anyone criticizing demonetisation to be someone who was hoarding black money. A lot of debate has been going on since then by the top economists, the experts and the thinkers and while the common man may believe that this move will help in eliminating black money and corruption, majority of the learned people believe that demonetisation is not necessarily an effective tool to eliminate and curb out black money or corruption from the country.

What exactly is black money?

Black money is a term used to denote “undeclared money”. Basically it is the money which a person does not declare to the government and hoards it by not paying tax on it. It may be received either by legal activities or illegal activities.

This move is highly debatable and let us first examine how this will help in controlling black money and corruption:

1. India predominantly is a cash economy As a country, the economy of India is mainly controlled by cash. The poor and illiterate people use cash for their daily living and earnings. The poor labourers who are daily wagers do hard work throughout the day and earn money in cash at the end of the day. Similarly all the lower levels of economy such as house maids, servants, vegetable vendors, small roadside shops – use cash as a means of earning money. But it is not only these people who use cash but even the rich and the corrupt people deal in cash as there is no account of such inflow of money. A person taking a bribe will prefer to take cash rather than a cheque or deposit in a bank. Hence, since the whole economy of India is predominantly a cash economy, there would be many people hoarding such cash in their homes or hiding it away.

2. Parallel economy The hoarding of black money, corruption, counterfeit currency and terror financing have resulted in creation of a parallel economy where unaccounted cash is being used for these harmful activities. These activities have hampered and derailed our growth and development as a nation and economy. The demonetisation move will help check these activities.

3. Check on black money By demonetizing the 500 and 1000 Rs. notes, the Government has taken a bold step which will force the people hoarding black money or using counterfeit notes to either destroy them or declare it to the banks while depositing them. Stringent rules have been put by the Government into effect which will keep a track on a person’s income and their previous tax records and whether their deposits are coming from an accounted source or are unaccounted for.

4. Terror financing One of the biggest menaces of the country in recent times is the problem of terrorism especially in Jammu and Kashmir. The terrorists are usually financed by their terror fund groups with counterfeit currency thus introducing into our economy counterfeit currency to buy weapons and carry out dangerous activities. By declaring the 500 and 1000 Rs. notes illegal, the terror funding will be hit to some extent for a short period of time till they again start printing counterfeit notes.

5. Controlling inflation Black money also increases inflation in the country. Black money and counterfeit currency is used to purchase real estate and land and by demonetisation, the inflation in the real estate sector can be checked to a large extent. This will prove to be beneficial for the middle class and common man who wish to purchase properties as the prices of the properties will come down as there will be less people using their black money to purchase properties.

6. Check on hawala transactions Hawala transactions deal in illegal transfer of money though informal remittance systems. It is estimated by the Interpol that the hawala transactions rake in 40% of the country’s GDP. This is done usually by cash and counterfeit currency. Hence, the demonetisation will help check hawala activities.

There are also many arguments against the move. Some of them are:

1. New methods of money laundering Nowadays, people do not stack money at homes or in hidden places in gunny bags. There are more new ways to use the black money where people can stash it in offshore bank accounts in Panama or Switzerland or buy benami properties or purchase foreign currency. People usually buy real estate properties or purchase assets such as paintings or gold with the black money. Only a limited number of people store their ill gotten wealth in cash. Hence this move will not affect the majority of black money hoarders.

2. Demonetised bank notes form 86% of legal tender The demonetised Rs. 500 and Rs. 1000 note form 86% of the legal tender in the country and one can well imagine the plight of the nation when these banknotes goes off circulation. The worst hit are not the black money hoarders but the common man and the poor daily wage labourers in both the urban and rural areas. Also, majority of the middle class population does not still use digital banking methods or cards for transactions. Therefore, it is the common population that is affected the most.

3. Voluntary disclosure of income schemes Giving incentive to the people is probably the best way to eliminate black money. The Voluntary Disclosure of Income Scheme which was implemented by the NDA Government had a provision of 45% total tax and penalty and had raked in Rs 65,000 crore of black money by September 2016. This not only brought back undisclosed and unaccounted income back to the banks but it also provided for revenue to the Government. In the present case, the Government has spent a lot of money on the printing costs and whole implementation of change.

4. Previous demonetisation Demonetisation was carried out in 1978, where the then RBI Governor IG Patel was also not in favour as he believed it was being done to target some members of the opposition. He was of the thought process that the black money hoarders would not keep the black money in currency form and this thought is still being widely supported.

5. Government introduces Rs. 2000 note On one hand, the Government wants to make the economy cashless and become digital while on the other hand, it introduces a large denomination note of Rs. 2000. It is difficult to understand as to how the introduction of this high denomination note will help in curbing black money. It will become easier for people to stash more notes in this denomination as it will require less space and weight.