CASHLESS INDIA

The Central government’s decision to demonetize the notes of rs500 and rs1000  is being hailed by most of us and is being widely glorified as a “master stroke” and “surgical strike” on black money. It is being publicised as a panacea to end all the evil of the culture of Black Money and the industry of Fake Currency and the gullible citizens tend to be believing this.
Is it really that easy to flush out all the “black Money” in one go?.

Gone are the days when ‘Black Money’ consisted of undeclared wealth in the form of piles of cash hidden under pillowcases, mattresses or safe of Almirah or beneath the ground. Today, none or little portion of this Black Money finds itself in cash. Idle cash does not fetch profit so it is circulated. In the  present developed financial ecosystem, most ‘Black Money’ is stashed away in domestic or foreign Bank Accounts, or are invested in Gold, share market or are used in buying stocks or assets or invested in real estate or some kind of business. Even Government agrees to this fact and Tax data reflects this.

Income-tax probes from April 1 to October 31 this financial year, black-money holders accepted having stashed Rs 7,700 crore worth of ill-gotten assets. The cash component was merely Rs 408 crore or 5%. The remaining was invested in business, stocks, real estate and benami bank accounts, the data show. Financial year 2015-16 saw the highest black-money detection in the period, of which 6% was cash.The actual proportion of cash would be even lower as the tax department’s classification of seizures considers currency and ornaments as one unit.(Source: Hindustan Times).

The small fishes will be disturbed to an extent and forced to find some innovative ways and jugaad for this temporary inconvenience. Nevertheless, The big sharks have little to worry as they hardly keep illegitimate wealth as cash.

Black Money: a vicious cycle

It is important to understand that Black money is an outcome of corrupt black practices and the money thus generated feeds other practices which in turn generates more black money.Thus, the real evil that has been jeopardising the economy is the whole set of black activities which are either entirely illegal,such as smuggling, or drug-running or the undeclared activities mixed with declared legal activities. If actually 100 tonnes of minerals are extracted but only 80 tonnes are declared to be extracted, in order to reduce tax payment, then we have a case of “black money” being generated.If $100 of goods are exported but only $80 are declared, and the remainder $20 are kept abroad in Swiss Banks, then we have a case of “black money” being generated.

Unearthing “black money” lies therefore in tracking down and checking these 'black activities' and this requires honest and systematic monitoring and investigation and patient and efficient tax administration and Data collection. Attacking the holdings and stockpiles of stashed cash is like giving a painkiller for temporary relief.

Aftermath of this decision
Demonetisation is not a strategy that the present government has thought out of the box.In the past, It has been implemented in many countries including India but with limited success. Morarji Desai government had demonetized 1000, 5000 and 10000 rupee notes from the midnight of January 16, 1978.But this had caused no hardships for the ordinary people, since most of them had hardly ever seen such a note, let alone possess one.The hardships that this decision has been causing to the public is being ignored by the government. The worst hit by demonetisation are people belonging to the low income groups ,farmers, daily wage-earners, labourers, domestic workers — who entirely depend on petty cash and who, unlike us, don’t have a digital wallet or a debit or credit card.

Given that more than half of the population don't even have bank accounts,what about the low-class people who do not have a bank account or people who do not have an Identity-proof. How would they exchange their hard-earned money?

90% transactions take place in this country offline. All the transactions of small and medium enterprises are done in cash. Will the government compensate for the huge loss these business are suffering?

If the government is of the view that terminating the currency of larger denomination makes it hard to stockpile wealth, how can it justify the introduction of rs2000 notes. Given that. Rs 1 crore in Rs 1,000 notes, if stashed evenly, occupies one sq ft and weighs 13 kg, notes of Rs 2000 will make the task of hoarding wealth easier.

What about middle-income people who have been saving each month a chunk of their taxed salaries for marriage, admission or medical purpose? In spite of their saved cash being legal, they would have tough time legitimising it  and answering tax authorities when depositing their saved cash in their accounts . 

This demonetisation decision would certainly serve a s blow to the fake currency system and to a little extent, turn the accumulated unaccounted cash into piles of worthless paper but it is like a temporary medicine which does not hit the root cause of the menace. Offendors would soon find ways of Counterfeiting Rs2000 notes and corrupt practices that generate black money will still rot the economy  An artificial shortage of new currency notes will give a boost to counterfeiting.Even if we assume that the demonetisation strategy would have some long-term benefits, it is sure that  these would be outweighed by the inconvenience ,disruption and hardships it has been causing to the public in general.