-By Sanya Singhal and Kushwaha Ranu Prasad
Talks of surgical strike on occupied Kashmir were still round the corner when on November 8th 2016, PM Modi announced the demonetization of INR 500 and 1000 notes. The news spread like wildfire. The aim of this bold step was manifold like to deal with Parallel Economy, Counterfeit Currency in circulation and terror financing, to get rid of black money and corruption, etc. This step had changed the scenario of the Indian economy as it moved towards Digital Economy. The decision affected every strand of the economy – from a farmer to the Corporate CEO.
Demonetization is an established practice in monetary policy to tackle black money. The idea of demonetization is good but it has to be taken into consideration that the most of the black money is kept in the form of land, buildings or gold or kept abroad. Demonetization does not tackle corruption per se or the Government does not say that 100% corruption would be tackled.
India is not alone when it comes to demonetization of currency. Various other countries have also successfully carried out demonetization like The European Union which switched to Euro in 2002. The United States of America stopped printing $1000 and larger denominations of currency by 1946, but these bills continued circulating until The Federal Reserve decided to recall them in 1969. Zimbabwe, in 2015, demonetized the Zimbabwean dollar as a way to combat the country’s hyperinflation.
Prior to PM Modi’s announcement of demonetization of higher denominations, there were two similar instances in India. The first instance was in 1946 and the second in 1978 when an ordinance was promulgated to phase out notes with denomination of Rs. 1,000; 5,000; 10,000. The media in terms of numbers was limited in 1946 and 1978 when compared to 2016. But given the importance of the decisions, it did trigger coverage.
The Demonetization step taken by PM Modi led BJP government was much needed for a very long time to remove the tumor of corruption which was killing the society. But one cannot ignore the dark face as well because it makes the situation even more difficult. BUT was it really a sudden decision or was a planned one? In the succeeding paragraphs, an attempt will be made to locate this historical action under the ruling government.
The answer is simple to the above question. It was not at all a sudden action. The period to be accounted for should have been some months prior to demonetization. Mr. Modi has appropriately taken all the safeguards and warned the people about his decision and its pros and cons.
In 2014, when National Democratic Alliance came into being, the Union Cabinet at its first meeting formed a team named SPECIAL INVESTIGATION TEAM headed by former Supreme Court Judge, M.B. Shah to investigate black money. He said that it is a “surgical Strike” on black money because there is a tendency among people not to pay income tax and that is why it was a major evil which paved the way to the birth of other monsters in society.
Similarly, at G20 Summit 2014, with other global leaders, PM Narendra Modi gave a strong push to government agenda on black money and he said unaccounted money was also linked to security challenges and added that there is a high need for positive political and economical environment to achieve all goals. He also forced in his speech that it is our priority to bring back all black money stacked in foreign banks which shows that he was concerned to eradicate corruption and issue of black money because that had reached at its highest point and were day by day moving upwards..
Another watershed act came into being on 1st July, 2015 called the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 to deal with the problem of the black money (within three months by paying 60 percent tax) that is undisclosed foreign income and assets, the procedure for dealing with such income and assets.
Major steps also include the formation of a Multi- Agency Group (MAG) on the Panama Paper Leaks listed some 500 Indians who have allegedly stashed money in offshore entities. Another move was the introduction of Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha on May 13, 2015. This Act prohibits Benami transactions and provides for confiscating Benami properties.
To track assets nationals of either country hold in the other nation without reporting them to their respective home-country tax authorities, India and US in July 2016 struck a bilateral deal. The information sharing agreement between India’s income tax department and the US’ Internal Revenue Service (IRS) under the US Foreign Account Tax Compliance Act (FACTA) became operational from September 30, 2016.
India has Double Taxation Avoidance Agreement (DTAA) with 88 countries, but presently 85 has been in force. The DTAA treaty has been signed in order to avoid double taxation on the same declared asset in two different countries. The recent in the list is the revised Agreement between India and Cyprus and India and Mauritius. It will replace the existing DTAA that was signed by two countries in June 1994. The provisions of new DTAA will enter into force after completion of necessary internal procedures in both countries.
India joined the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (AEOI) to reduce the possibility for tax evasion and unearth black money. Another major step was the Income Declaration Scheme (IDS) to unearth black money and bring it back into the system and Black Money worth Rs.65,250 crore disclosed under IDS. PM warned during his “Mann Ki Baat” address to the nation that the time is up for black money hoarders.
This was all about political and documental strategy that the government had adopted prior to the demonetization. Now let us see the “Notes Replacement Strategy” of the government i.e. Had the RBI and the government actually printed the amount of notes required for demonetization?
Demonetization has sucked out massive amounts of liquidity from the system in terms of old currency notes of Rs. 500 and Rs. 1000 demonetization. RBI data reveals that before demonetization, a little over 9000 crore pieces of currency notes were in circulation. Around 86 per cent of that value of currency was sucked out in the form of Rs. 500 and Rs. 1000 notes.
The government insisted that adequate amount of notes were printed in advance to ensure the liquidity sucked out of the system is restored with the new currency quickly. The RBI and the government said that the printing Rs. 2000 notes started much in advance. The infusion of Rs. 500 was somewhat late, but the preference still seemed to for Rs. 2,000 notes both in ATMs and banks. The trouble with the Rs. 2,000 notes is that citizens are not easily able to find shopkeepers, vegetable sellers and other vendors willing to part with precious change of smaller denominations as balance for payments made with the high-value notes.
The currency after printing has to travel from the press to currency chests maintained by the RBI across several locations in the country. The money then travels from these chests to banks and ATMs. Manpower is an issue and logistics is another hurdle given the secrecy and high security needed.
Three weeks after Prime Minister Narendra Modi’s stunning announcement, the printing of the new Rs. 500 note has been grounded to a near-halt at the Nashik and Dewas printing presses. RBI sources revealed that a series of glaring errors on the mew Rs. 500 notes. The exercise was shifted to the Mysuru press. And in order to cause no more chaos, the government announced that the “printing-defective” notes would still be a legal tender.
In conclusion, November 8,2016 will be hailed as the day when the Indian Economy resonated with cashless exuberance. BUT as well said by Max De Pree that “Change without continuity is chaos. Continuity without change is sloth- and very risky.” So, this change in economy was a need of a time as continuity without any changes is not good and to change anything, sudden decisions are not appropriate. It was this decision which is not an overnight step but a long process. Demonetization is a positive step, one can’t ignore its dark face especially in the rural areas. Although India faced many problems earlier so for this one, India will definitely tackle it.