November 21, 2024

The first banking day of the transition following the demonetization of Rs 500 and Rs 1000 currency notes passed off smoothly all over the country. Belying misplaced concerns about chaos and ugly scenes, people deposited their old notes or exchanged them with utmost discipline, a welcome first for India for an exercise of this magnitude. Barring stray incidents of abnormally long queues, frayed tempers and heated exchanges, the exercise was conducted in the most orderly manner all over the country. This has been made possible by the common man’s acceptance of the logic put forward by the government for the demonetization. Some politicians had tried to inject poison in the minds of already apprehensive citizens, but in the end, the people’s anger at widespread corruption and hoarders of black money made them see the necessity of such a move. Common people realized that the inconvenience they were facing for a couple of days was a small price to pay to rid the nation of several malpractices.

This was evident in the small talk being conducted by people queuing up to deposit or exchange their notes. Almost everyone agreed on one point: that it was the corrupt politicians, bureaucrats, businessmen and the professionals who are going to suffer and the common man had nothing to fear from this move. While it takes thousands of large and small rallies, massive advertising in the media, festoons, wall-writing, leaflets and door-to-door contact to get the message across during elections, it just took a televised address to the nation by the prime minister to get his message across to millions of his countrymen in the most effective manner. It confirms the belief that when it comes to the benefit of the nation, the common man is a wise judge. Indians - educated or otherwise, middleclass or poor, white collar or daily labourer – have shown the world that they are ready to put personal inconveniences on the back burner and help the government eradicate the black money, corruption and fake currency menace through such extreme measures.

For those skeptics who think that this is just “drama” or “headline management” by Narendra Modi and that after unnecessarily spending a huge amount in exchanging old currency for new, India will be back to its old corrupt ways, a few things needs to be highlighted to prove that it will not be so. Of course it will take time to crush the incorrigibly corrupt at the grassroots level (the peon in the government office who demands Rs 500 from you as “speed money” to place your file before the concerned officer, for instance), but demonetization, coupled with increased vigilance, transparency in government departments, clear cut rules to eliminate red tape and fear of further actions will reduce corruption at the higher levels. As for political corruption, a report from Bareilly, where sacks-full of burnt, demonetized currency notes were found in a field shows that the game is up for them as of now. They were hoarding the cash for the upcoming UP elections and burnt it once they ceased to be legal tender. But to prevent the politicians from indulging in their corrupt ways again, the government will now have to supplement demonetization with comprehensive reform of election funding laws, including making it mandatory for parties to get funding through banking channels even if it is below Rs 20000 and increasing the laughable spending limits fixed for candidates. The election spending by candidates should also mandatorily be made through banking channels. It should not be an excuse that the mike-wallah or the decorator in rural areas will not accept cheques as payment. If the government is pushing for a cashless society, it is the duty of politicians of all hue to instill the banking habit in all persons whom they do business with.

At the other end of the demonetization spectrum, the fake currency menace that destabilizes the economy and helps in funding terror has also been hit hard. A report in the Times of India (see picture ) shows how there is matam (mourning) in the prominent fake currency hub in India – 18-odd villages in Kaliachak area of Malda district in Bengal, bordering Bangladesh – as their trade has been stamped out as of now. Poor villagers of this area cross the river and bring back fake currency notes from Bangladesh, which are then delivered to agents. The going rate was anywhere between Rs 48000 to Rs 60000 per lakh, depending on the quality of the notes. Security agencies estimate that this area supplied nearly 80% of the fake currency that enters the Indian economy every year. In one fell swoop, injection of fake currency and terror funding has been eliminated for the time being. If, and by the time the operators copy the new notes, enough checks can be put in place in the area to ensure that they do not have an easy route hereafter, the menace will be minimized if not eradicated completely.

The hoarders of black money are also in a spot. After it became clear that deposit of old currency in bank accounts above a limit that did not match stated incomes or was not shown as cash held in hand would attract scrutiny by the Income Tax department and a possible 200% penalty, their faces dropped. Some tried to get the cash deposited in accounts of family members of their staff, but even there they faced resistance as everyone has now become wary of possible harassment by tax officials. It is estimated that there are notes worth Rs 14.1 lakh crore in the denomination of Rs 500 & Rs 1000 circulating in the economy. At 86 percent of the total notes in circulation, it is an absurdly high figure. The government has informed that although it is going to issue Rs 500, Rs 1000 and Rs 2000 notes in a new series and with a new and better design, it will keep their circulation at an acceptable level. Abnormally high circulation of high denomination notes facilitates the parallel economy and the hawala trade as they do not use the banking channels. Hence, low circulation of such new notes will go a long way in scuttling these nefarious activities. Also, one is sure that after the deadline for depositing the cash is over, it will be found that almost half of this amount failed to show up in banking channels. Sucking out such a huge amount of black money from the system will be healthy for the legal economy and will also ease inflationary pressures.

There is another legal way of converting the ill-begotten pile of cash. It is an expensive way and will involve a lot of back-end paperwork but it is safe and foolproof for the evader and immensely beneficial for the economy and the nation. Also it is a lot cheaper than the recently concluded Income Declaration Scheme. One can deposit any amount of cash in one’s bank account; pay 50 percent of the 30 percent tax levied on income above Rs 10 lakh by December 15 and show it as income earned in the current financial year. The rest of the tax will have to be paid by March 15, 2017. Of course it will be a herculean task to arrange the back-end papers to support the source of the income, but if one can manage it, this way is foolproof. It will benefit the economy because what was black money outside banking channels will now come in the legal economy and the government will get its share of taxes. Further, the amount will then be invested in socially gainful and legal channels.

Apart from the areas pointed out by Prime Minister Modi in his address to the nation – namely, combating corruption, black money, fake currency menace, hawala trade, unscrupulous funding of real estate trade and terror funding – there will be immense collateral benefits to the economy and the society. Already, raids have started on jewelers accused of accepting demonetized currency and selling gold at a premium. Raids have also been conducted on hawala operators and currency note exchangers. Sonapatty, in Kolkata’s Burrabazar, a hub for illegal gold, hawala and currency exchange trade, wore a deserted look as increased vigil and fear of raids made operators keep a low profile. In order to reap the rewards of this bold demonetization action, the government will need to follow it up with a series of measures to curb corruption, further generation of black money and election funding reforms, to name a few and keep the circulation of high denomination notes at acceptable levels as promised. This is a historical moment for the country. If Modi can muster up further courage to take these other bold steps to supplement demonetization, he will show the world that he indeed has a 56-inch chest along with a shrewd political brain and a propensity to take huge political risks for the betterment of the nation.