Currency note ban: Walking the talk in fight against black money, corruption
PM Narendra Modi stuns India by scrapping high-value currency notes of Rs 500, Rs 1000 denominations in a crackdown on wealth hidden from the taxman. An analyses of implications of the demonetization drive
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New Delhi: The first word that Prime Minister Narendra Modi would be addressing the nation at 8pm on 8 November came just 14 minutes in advance. “PM @narendramodi will address the nation at 8 PM today. The address will be first in Hindi followed by English,” the Press Information Bureau posted on Twitter at 7.46pm.
After a few perfunctory words about how he hoped the nation had ended the festive season of Diwali with joy and a sense of new hope, Modi got down to the brass tacks.
“There comes a time in the history of a country’s development when a need is felt for a strong and decisive step. For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development,” the 55-year-old prime minister said.
“Terrorism is a frightening threat,” he went on. “So many have lost their lives because of it. But have you ever thought about how these terrorists get their money? Enemies from across the border run their operations using fake currency notes. This has been going on for years. Many times, those using fake five hundred and thousand rupee notes have been caught and many such notes have been seized.”
Then came the bombshell—Rs500 and Rs1,000 bank notes would cease to be legal tender from midnight. At one fell swoop, 16.5 billion Rs500 and 6.7 billion Rs1,000 bank notes in public circulation were reduced to worthless pieces of paper.
According to data collected by Bloomberg, currency in circulation was worth Rs17.773 trillion, as of 28 October, up from Rs15.16 trillion a year ago.
People effectively got less than three hours notice of the move—an attempt to curb the hoarding of unaccounted-for and untaxed wealth generated through corruption. For 72 hours, government hospitals and drug stores, railway and airline ticket counters, petrol and diesel stations, consumer cooperative stores and milk booths and crematoria and burial ground would continue to accept the notes, Modi said.
The announcement shocked the nation, and sent people, both the rich and the poor, scrambling to get rid of their high-denomination bank notes. With the benefit of hindsight, it is clear that the move had been in the making for many months.
On 30 September, a three-month window closed for people to declare their illegal wealth and escape prosecution by paying a total tax and penalty of 45%. More than Rs65,000 crore of black money was declared by 64,000 people under the government’s income disclosure scheme, which Modi in June warned was the last chance for the corrupt to come clean.
Modi’s Bharatiya Janata Party (BJP)-led government in 2015 won Parliament approval for a law called Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, which provides for up to seven years imprisonment for failure to disclose foreign assets and a penalty on the fair market value of the assets.
And this year, Parliament passed the Benami Transactions (Prohibition) Amendment Bill, 2015, which provides for the confiscation of benami properties—assets held in the name of another person or under a fictitious name to avoid taxation and conceal wealth.
In 2014, the government initiated a programme to ensure every household has a bank account so that the poor have access to financial services. Around 254.5 million accounts have been opened in which Rs45,302 crore has been deposited, according to the website of the Pradhan Mantri Jan Dhan Yojana, as the financial inclusion plan is called.
New and transparent avenues to access financial services and move the country towards a cashless economy have been launched—payments banks and small finance banks and a unified payments interface allowing customers to transfer money and make payments almost as easily as they send a text message, will go live in April.
The anti-corruption drive was in keeping with the popular mandate that Modi won in 2014 on the plank of rooting out black money after a slew of corruption scandals, ranging from malfeasance in the conduct of the 2010 Commonwealth Games to the award of telecom spectrum and coal blocks, beset the Congress-led United Progressive Alliance regime.
“Prime Minister forewarned the people, given enough time to declare their money and pay taxes,” information and broadcasting minister M. Venkaiah Naidu tweeted after the demonetization of high-value bank notes. “War on black money started, be aware it will continue.”
“It’s perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments, which, in turn, will help the formal economy to grow at a faster clip in the long term,” said ICICI Bank Ltd managing director and chief executive officer Chanda Kochhar.
The World Bank in July 2010 estimated the size of India’s shadow or parallel economy at 20.7% of gross domestic product (GDP) in 1999 and rising to 23.2% in 2007.
“A parallel shadow economy corrodes and eats into the vitals of the country’s economy. It generates inflation, which adversely affects the poor and the middle classes more than the others. It deprives government of its legitimate revenues, which could have been otherwise used for welfare and development activities,” the government said in a statement, justifying the demonetization of high-value bank notes.
The move would curb financing of terrorism through fake Indian currency notes and funding of espionage, smuggling of arms, drugs and other contraband into India, besides eliminating black money, it said.
“India will become a more tax compliant society,” finance minister Arun Jaitley said. “There is a premium now that this decision has created on honesty and dispremium on dishonesty.”
In his monthly radio talk in June, Modi said India, with a population of 1.25 billion, had only 150,000 taxpayers, who declared an annual income of more than Rs50 lakh. “This cannot be digested by anybody,” he said.
To be sure, it isn’t the first instance of a government resorting to demonetization to unearth black money in a country where greasing of palms to gain access to basic government services has been a way of life. Berlin-based corruption watchdog Transparency International (TI) ranked India 76 out of 168 countries on its latest Corruption Perception Index.
In January 1946, 18 months before India gained independence from British rule, Rs1,000 and Rs10,000 notes were withdrawn.
In 1954, the government of Jawaharlal Nehru reintroduced the Rs1,000 and Rs10,000 notes and issued Rs5,000 notes as well. These notes were demonetized again, in 1978, by a short-lived coalition government in a move that then Reserve Bank of India governor I.G Patel did not favour, as revealed by him in his memoirs.
Most people who accept illegal gratification or are otherwise recipients of black money rarely keep their money in the form of currency for long, he wrote. The idea that black money or wealth is tucked away in pillow cases is naive, he argued.
Modi’s move could upset the ruling BJP’s key support base—traders and small and middle-level business people who transact mainly in cash—ahead of elections due in five states—Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur—over the next six months.
“The whole political economy of elections runs on black money. There could be backlash from politicians and the propertied class. It will be an electoral dividend for the government if they succeed,” said Ashutosh Kumar, a professor in the department of political science at Panjab University. At best, said a senior BJP leader who asked not to be identified, it would be a “short-term loss”. “The big worry is we can’t fathom how it will impact us in the long-run,” this person added.
For the middle class, it means short-term pain. A day after the demonetization, automated teller machines were shut. In the first few days, withdrawals will be limited to Rs2,000 per day per card. From 10 to 24 November, people would be allowed to exchange their old Rs500 and Rs1,000 notes for new ones up to a limit of Rs4,000.
Modi conceded honest people may face temporary hardships.
“Experience tells us ordinary citizens are always ready to make sacrifices and face difficulties for the benefit of the nation,” he said, citing the examples of a poor widow giving up her cooking gas subsidy and a retired schoolteacher contributing his pension to the Clean India mission, a soldier donating Rs57,000 to make his village clean and a poor mother selling her goats to build a toilet as part of the same mission. “So, in this fight against corruption, black money, fake notes and terrorism, in this movement for purifying our country, will our people not put up with difficulties for some days?” he asked.
They may. The people who have hoarded wealth without paying tax, whether they are politicians or business people, may be less forgiving. “The lower/middle class, who are traditionally BJP supporters, will not find it tough to account for or exchange the currency. The real fear will be for those who have unaccounted money,” said Sandeep Shastri, a Bengaluru-based political scientist and pro-vice chancellor of Jain University.