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Surgical strike on Black Money: Decoding the crackdown

Nov 9, 2016 18:36 IST

Black MoneyAt the stroke of midnight hour, as the world sleeps, the Indian crooks and corrupt woke up to bankruptcy and India fought back to its worst evil ‘Black Money’. This time again, 9/11 turned out to be a tragedy, but only for those who were on the wrong side of the rule book. Jokes are going around that when Americans are counting votes, Indians are busy counting notes.

The Indian Prime Minister Narendra Modi’s declaration on overnight cancellation of 86% of the currency of world’s third largest economy on 8th November is one of the boldest move to curb black money, ever since he took over the reign of power.

In a surprise address to the nation he said that Rs. 500 and Rs. 1000 would cease to be a legal tender and subsequently, withdrawn from the circulation at midnight. The decision was taken to uproot the menace of black money and corruption. However, the other denomination of notes like 100, 50, 20, 10, 5, two and one will remain legal tender and will not be affected by this decision.

The PM said this step will make sure that the five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. Therefore, all these anti-nationals and corrupts will be brought to the rule book. He also said that the rights and the interests of honest, hard-working people will be fully protected, “your money is ultimately yours” as he quipped.

This move is expected to reduce inflation as conspicuous consumption will come down. According to him the “tumour of corruption could not be fought through tried, tested and failed methods” and it was time to employ new methods to defeat the enemies of India. Till March 2016, Rs. 14 lakh crore out of Rs. 16 lakh crore worth currency issued by RBI were in denominations of Rs. 500 and Rs. 1,000, as per the central bank’s official data.

Why this De-monetization?

The suggestion of a transition to a cashless economy and reduced cash transaction to help improve tax collections, has been floating around for some time now. Over the span of things, there may be some thought that there are heaps of money lying around that can be taken advantage of, through such a move together with the disclosure scheme. Maybe, not long after this move, there might be an acquittal plan, which will help the government to have significantly more money.

So, more than past governments, Modi is considering enhancing the tax revenue, as he clearly needs to spend more on infrastructural development in the next two years of his office. Any move of this sort will undoubtedly have a political measurement. As media reports state, it is practically similar to a 'surgical strike', flagging the message of an extreme man who has the capacity to take choices that should have been taken much before.

Secondly, it will put political parties that are going into the election battle in the coming four months into somewhat problems, as everybody would have gathered a considerable amount of money and, clearly, they would not have just ‘sau rupay ka’ (100 rupee) notes.

Other than these, there are many other reasons associated with this bold and decisive step. These are very serious concerns for any government of the day. Some of these reasons are-

Fake Indian Currency Notes (FICN) in circulation in these denominations are very high. For a common person, the fake notes look similar to genuine notes. Use of such notes directly contribute to funding of terrorism and drug trafficking. These high denomination notes are known to facilitate generation of black money.

The second reason is The World Bank in July 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rose to 23.2% in 2007. A parallel shadow economy leads to inflation which adversely affects the poor and the middle classes more than others. It deprives Government of its legitimate revenues which could have been otherwise used for welfare and development activities.

 

Demonetization:

Demonetization is the act of stripping a currency unit of its status as legal tender. For us it means that RBI has withdrawn all the old Rs. 500, 1000 currency notes as legal tender i.e. official mode of payment.

Why demonetization is used in general?

It is necessary whenever there is a change of national currency. The old unit of currency must be retired and replaced with a new currency unit. It is also used to tackle black money into the economy.



Is it all sudden or well planned?

No, it is not at all sudden! In fact, this decision is well crafted and well-planned move by this government. To see the pattern, we have to connect all the dots right from the time this government took over.

The decision to form SIT (Special Investigation Team) over black money in May 2014. Enacting a law regarding undisclosed foreign income and assets; amending the Double Taxation Avoidance Agreement between India and Mauritius as well as India and Cyprus; reaching an understanding with Switzerland for getting information on bank accounts held by Indians with HSBC; encouraging the use of non-cash and digital payments; amending the Benami Transactions Act; and implementing the Income Declaration Scheme 2016.
Apart from these tactical moves, the government was very much in command to take this decision with the announcement of Jan-Dhan Yojna, under which aims was to provide No-frills accounts to all unbanked population. It ensured that EVERY Indian had a bank account. Crack down on hoarders /foreign accounts, resulted into collection of Rs. 80,000 Cr., Income Declaration Scheme which gave a platform to defaulters to convert black money to white by giving some tax punishment to the government. Through this step which lasted till Sept. 2016, the government collected Rs. 65,000 Cr.

And then came this D-day of 8th November, when high denomination notes became non-legal tender.

One only needs to connect the dots, to believe that there was always a plan. Modi himself warned twice about impending hard decisions. If we still did not connect the dots, then we are at fault. If someone has Black Money, this move will ensure that either they declare and become mainstream or else that they are ruined!

 

What the laws say?

The demonetization notification of 8th November empowers the government to only scrap a ‘series of bank notes’ under Section 26 (2) of the RBI Act of 1934 and not the “entire existing currency” of Rs. 500 and Rs. 1000 denomination.
Even the use of indelible ink marks to prevent repeat exchanges is not found anywhere in the legal provisions.
There are also some making the argument that payment by the bank is a guaranteed act under the law. Banks are only trustees of a person’s money. Anyone can withdraw any amount of money. Under no law anyone can restrict citizen’s right to withdrawal.
All these concerns regarding validity of demonetization have to be looked by Supreme Court of India.


Flashing Points of this decision:

•    After this decision, Rs.500 and Rs. 1000 currency notes became invalid from 9th November.
•    All these high denomination notes are to be deposited in banks and post offices between Nov. 10 and Dec. 30
•    After 30th December 2016, all these notes will only be accepted by RBI along with a personal declaration.
•    All the high-value transactions will go under the tax department’s scanner.
•    Till 30th December, all cash deposits made by people, more than Rs2.5 lakh in a bank account will be audited by Tax authority.
•    Then, it will be equated with the bank account holder's IT returns and there after suitable action shall be taken.
•    If the cash deposits of more than Rs.10 lakh is made which is not explained by the income declared in the IT returns, Tax authority will consider it as tax evasion and the tax amount plus a penalty of 200% of the tax payable would be levied.
•    Post announcement, ATMS were not functional for two days i.e., 9th and 10th November
•    RBI has released new Rs. 500 and Rs. 2000 notes. Rs. 2000 notes will be a pink colour bills.

Features of  new series of Rs 500 & Rs 2000 notes

The Reserve Bank of India issued new series of notes for 500 rupees and 2000 rupees denomination with improved features and newer sizes. Both the designs will be very friendly towards the visually-impaired by having features which make it accessible for all sections.

The RBI said, 2000 rupees note, which is a first under the denomination, will be called as the 'Mahatma Gandhi (New) Series' and has a design of the low-cost mission to Mars, the Mangalayan, on the reverse. It said that the base colour of the note will be magenta.
2000 Rupees denomination banknotes in the Mahatma Gandhi (New) Series
These banknotes in the Mahatma Gandhi (New) Series will not carry the inset letter and will be bearing the signature of Dr. Urjit R. Patel, Governor, Reserve Bank of India. The year of printing '2016' printed will be available on the reverse of the banknote.
The Motif of Mangalayan on the reverse will depict the country’s first venture into the interplanetary space.  The note has other designs, geometric patterns aligning with the overall colour scheme, both at the obverse and reverse.
500 rupees denomination banknotes in the Mahatma Gandhi (New) Series
The new design in the 500 rupee denomination will be in a different colour, size, theme, design and location of security features. The note will be in a stone grey colour and the predominant theme will be Delhi's Red Fort.

The salient features of the banknotes will be as under

Obverse (Front)
• See through register with denominational numeral 2000
• Latent image with denominational numeral 2000
• Denominational numeral २००० in Devnagari
• Portrait of Mahatma Gandhi at the centre
• Micro letters ‘RBI’ and ‘2000’ on the left side of the banknote
• Windowed security thread with inscriptions ‘भारत’, RBI and 2000 on banknotes with colour shift. Colour of the thread changes from green to blue when the note is tilted
• Guarantee Clause, Governor’s signature with Promise Clause and RBI emblem towards right
• Denominational numeral with Rupee Symbol, 2000 rupees in colour changing ink (green to blue) on bottom right

Obverse (Back)
• Ashoka Pillar emblem on the right
• Mahatma Gandhi portrait and electrotype (2000) watermarks
• Number panel with numerals growing from small to big on the top left side and bottom right side
• For visually impaired
• Intaglio or raised printing of Mahatma Gandhi portrait, Ashoka Pillar emblem, bleed lines and identity mark
• Horizontal rectangle with 2000 rupees in raised print on the right
• Seven angular bleed lines on left and right side in raised print
Reverse (Back)
• Year of printing of the note on the left
• Swachh Bharat logo with slogan
• Language panel towards the centre
• Motif of Mangalayan
• Denominational numeral २००० in Devnagari
• Dimension of the banknote will be 66 mm × 166 mm

 

Immediate impact of this decision

The demonetization will have a serious impact on the overall economy. Some of the sectors will see positive impact and some will see negative. Overall this step has not been taken only to put the economy in place, but it is also targeted at Pakistan protected terrorist organizations who harbour terrorism and actively participate in destabilizing the India’s economy by injecting fake currencies. Enemies from across the border run their operations using these fake currency notes.
However, the overall impacts depend on how much money is being pumped up in the economy to smoothen the process of economic transactions. Here we’ll see how it impacts the economy in general:

Positive Impact
1.    Inflation: Inflation is when too many money chasing too few goods. After this decision ‘too many’ money would be flushed out from the market, hence goods and services would become cheaper.
2.    Banks: Bank would benefit with higher CASA growth. This decision will make the owner of these notes to deposit the legal money into their bank account, which in result will be cumulated approx. $190 billion cash pile.
3.    Loans: Housing loans and other credit loans are expected to become cheaper.
4.    Credit Cards: Credit cards market is expected to gain a little momentum for quite some time.
5.    Investment: Demand for investment avenues such as gold, silver, diamonds is likely to soar.
6.    Economy: Black Money would be flushed out from the economy, which will create a clean economy.
7.    Farmers: With the black money going off from the market, it will also eradicate the middle man. In the end, farmers will be rewarded with big cash.

Negative Impact
1.    Consumption Expenditure: It will be down as new cash injection is slow due long pending logistics issue.
2.    Informal Economy: They are not linked with the banking system, and they also keep high-value notes as a store of value. They are essentially neither black money hoarders nor tax evaders. They are financially excluded people and therefore they may face huge negative shock.
3.    Share Market: Market always behaves abruptly, whenever any disruptive decisions are forced. The recent trend is showing that share market is bleeding.
4.    Real Estate: It is estimated that real estate business is booming because of black money whose share in the entire business is calculated at 70 percent. At the moment, this sector seems to be the biggest loser of the move.
5.    MFI and NBFC: The collection cycle could get disrupted temporarily due to cashless-ness.
6.    Consumer staples i.e. Household personal goods
7.    Liquor stock and Tobacco, Restaurant, Casino, Jewellery

Unaffected
1.    Cheque or electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards.
2.    IT services
3.    International Trade
4.    Hospitals
5.    Petrol Pumps

Is it first ever de-monetization?
De-monetization is a process in which high denomination notes are taken away from the market in an attempt to counterfeit. But this time, this decision was taken to deal with black money.
Earlier, it has been done twice in India till date. The government in January 1946, in order to deal with counter forgery, had withdrawn the notes of Rs.1000 and Rs.10000. However, these notes were again reintroduced with new denomination value of Rs.1000, Rs.5000 and Rs.10000 in 1954.
Again these notes were demonetized in 1978 when Janta Party government came to the power.

Challenges for Government:
So far, the bank branches have been the nerve centre of the government's demonetization drive. Bank branches in metro areas are struggling to cope with demand for new currency notes. For customers banking on branches in rural areas, it could be worse. About 93% of the 595,000-odd rural areas remain `unbanked’, they have no physical branch. And there are 629 million Indians, or about 81% of the population in rural areas, residing in these 554,000 odd unbanked centres. This unbanked number should be tempered by two new supply channels. The first is the 125,000 'Bank Mitras’ bank agents assigned to a fixed unbanked area under the Pradhan Mantri Jan-Dhan Yojana.

The second is the 531,000 roving banking correspondents in rural areas, whose coverage details are unavailable. Both these sets and the post offices need to come into play in rural areas. If they don't, the yawning gap in branch coverage between rural areas and other areas can greatly inconvenience rural Indians during this period of transition.

However, there are other challenges associated with this move. Some of them are:


1.    Printing the new currency notes: Supplanting all the Rs. 500 and Rs. 1,000 high values notes with different denominations, as requested by the authority, could cost the Reserve Bank of India approx. Rs. 15,000 cr.-20000 Cr., in terms of the quantity of notes available for use and the cost, incurred in printing them.
2.    Replacing of old notes: According to the RBI report on cash flow in the economy, more than Rs 15 lakh crore worth of high-value currency notes are being withdrawn from circulation. Mostly these currency notes will be deposited in banks by people. Therefore, outright replacement of 2,300 crore banknote pieces will be an obvious logistical nightmare.
3.    Introduction of Rs 2000 note is still a puzzle how will it prevent generation of new black money
4.    Disruption to trade: The temporary disruption to trade (Excluding real estate transactions) of ordinary purchases of household items like vegetables and other important things in markets, which require the dealing in cash, would be badly impacted.

5.    Since the last demonetization in India had failed big time hence, it’ll still be a challenge for the government to make it a success story and achieve its goal.

6.Recalibration and reactivation of ATMs: The dispensing of  new series notes Rs. 500 and Rs. 2000 requires recalibration of all ATM machines. Re-calibration of ATMs involves multiple agencies – banks, ATM manufacturers, National Payment Corporation of India (NPCI), Switch Operators, etc., and multiple activities making it a complex operation requiring immense coordination among these agencies. With a view to providing direction and guidance in this regard, it has been decided to set up a Task Force under the Chairmanship of Shri S. S. Mundra, Deputy Governor, Reserve Bank of India.

However, the opposition have their own share of criticism for the government. Their argument is that, India, as the currency based economy where even the farmers and daily wage earners are paid in Rs 500 and Rs 1000 denomination. They will be unable to comprehend the new mechanism and will wind up knocking on banks in the days to come. Small traders and vendors need to pick goods and pay money, to sell in the market or to support their livelihood. They would not know how to respond to this move or how to survive in the following few days.

Another criticism coming from some people is regarding the timing of the announcement was little odd. It came during the late hours in evening, when most shops had shut down their shutters. They had no option to get some change for high denomination currencies.

These arguments, however, don’t hold water. When we make some tough decision, initially it looks bizarre but in the longer period of time it brings goods for society. Larger interest of the society is always bigger than individual interest. As Nehru said in his famous speech

“At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance.
It is fitting that at this solemn moment we take the pledge of dedication to the service of India and her people and to the still larger cause of humanity."


At the moment, this speech would hold true for nation in the years to come and somehow it also depends upon how we lead our society.

Is this article important for exams ? Yes31 People Agreed
Read more Current Affairs on: Black Money , 500 rupees , 1000 rupees , ATM limit , Bank deposit limit

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