Among the many debilitating legacies of the last seven decades of our democracy is that of the black money economy. It fuels the terrible corruption in our political system and is a threat to our democracy, economy and country.
Prime Minister Narendra Modi has long signalled his determination to tackle this menace head on. Early on in his tenure, he had taken ownership of this goal and announced his plan to compress the black economy through a carrot and stick approach.
In the two years that he has been in office, his government has rolled out several initiatives that have systematically built up this plan.
These include a special investigation team on black money, the Jan Dhan Yojana-Aadhaar-Mobile money trinity, direct benefit transfers, incentives for e-payments and a disclosure window for black money among other measures.
As a popular headline put it, Cash is no longer king. Indeed, finance minister Arun Jaitley had promised to turn India into a cashless society in his budget address in 2014.
So this past Tuesday, as people were gearing up to find out who would be the next US President, Modi rolled out the next phase of this anti-black money drive.
He announced that the 1,000 and 500 rupee notes in circulation would no longer be accepted as legal tender. It’s a no-brainer that much of the cash economy relies on the circulation of these notes, and so this was a natural step. That Modi managed to do it smoothly and surgically, without any leaks, was commendable.
That said, demonetization is never an easy process, and some disruptions in the short term are to be expected. The Reserve Bank of India and the government seem to have addressed concerns about liquidity by permitting relatively small currency swaps and allowing for a reasonable window (till 31 December) for bank deposits.
The public at large is likely to face some logistical challenges—which is why the Prime Minister has requested citizens to bear a few days of inconvenience for the sake of larger reform.
That demonetization is a game changer that has grabbed the imagination of the Indian public is confirmed by the quality of criticism by some of the political parties.
The Congress has chipped in, stating that the move was “anti-common man”, leading to questions about who the party considered to be a common man; the Left had its state finance minister claiming that all black money was stashed abroad, implying that there was none in India.
It is worth reminding ourselves of the deeply entrenched character of the black economy in India. A June 2016 study has estimated India’s black economy at over Rs30 trillion or about 20% of our multi-trillion dollar gross domestic product—which is bigger than the economies of nations such as Argentina and Thailand.
Tax evasion too is pernicious. Central bank data indicates that over the past four decades, Indians have exported goods and services worth over Rs17 trillion but have not remitted an equal amount in foreign exchange.
There is no elegant or non-disruptive way of fixing a problem that has been allowed to fester for decades and hence the need to physically remove from circulation illegal and/or counterfeit cash. This is the most efficient way to tackle the problem.
Of course, there are those who lose from this move—such as those heavily invested in and involved in the illegal economy. This includes terror financiers, political operatives and counterfeiters.
Of particular concern is the impact of the black economy on national security—given the links between terrorist attacks and hawala transactions.
After the Uri terror attack in Jammu and Kashmir earlier this year, the director of the Intelligence Bureau clearly stated that turning off the money tap was perhaps one of the most important means to fighting terrorism, especially given the high reliance of terrorist groups on fake currency.
Some of India’s political parties that have long funded elections through hoards of unaccounted cash will also be hit. These parties receive enormous sums in “cash donations” which, according to the Association for Democratic Reforms, comprise nearly 75% of total party funds. This marks the systematic unravelling of the link between elections and black money.
The real estate sector which is being forced to reform, thanks to the Real Estate (Regulation and Development) Act, will now be under additional pressure to change its cash-based business model and move to a more transparent system like in other businesses.
Demonetization at this time is a significant step. It follows the disclosure window that the government had offered to black money holders. The Prime Minister had made clear that this was the last opportunity for voluntary disclosures, and demonetization therefore was the critical next step in the fight against black money and the larger process of transforming our economy into one that is efficient, transparent and clean.
Black money was and is the bane of our country because it corrodes government, democracy and state institutions. It has shamed our country and economy for long and is the cause and effect of corporate malfeasance and corruption. It has also effectively captured policy and government.
Demonetization is an important step in our economic transformation story.
Rajeev Chandrasekhar is a member of Parliament (Rajya Sabha)
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