In an unprecedented move that has taken the whole nation by a huge, and of course, a pleasant surprise, PM Narendra Modi on the night of November 8, in his first televised broadcast to the nation, announced the complete demonetisation of all ₹500 and ₹1000 currency notes with effect beginning midnight.
As an immediate and perhaps one of the first consequence of it is a major blow to those who are in possession of large volumes of black money which most likely consist of multitudes of ₹500 and ₹1000 notes.
So far, the current government has recovered 1.25 lakh crores of black money, and with this move, this number is expected to rise. Earlier, the voluntary disclosure scheme saw money hoarders declaring their income and cash in large numbers, results of which were visible in the jubilant spikes across the market and in general sentiments of the public.
A second important effect it will have is to help dismantle the latent albeit nation-wide nexus of fake currency exchange (fake currency is pivotal in terror-sponsoring) that is sourced from and proliferates many other crimes such as drugs, narcotics trafficking and other related crimes, (for e.g. drug trafficking through the Golden Crescent region in the north-west and even worse, the golden triangle in the north-east).
Besides, extortion, smuggling of consumer goods, tax, tariff and sanctions evasion and official corruption that continue to be major sources of many illegally gained proceeds in India is seen as the third major victim of this move.
As far as its long-term implications on the consumer, market and economy as a whole are concerned, it will be a matter of time to see how it pans out but with the help of policies like these and technology like the Nano GPS chip, political instrumentalization of black money check and illegal vote buying (the next U.P elections are around the corner) is possible now, that no one has doubts.
The menace of black money is not exclusive to India. The US, Britain and many European nations suffer an equal and in many aspects, even worse consequences of it.
Money laundering activities and terrorist financing, in many central Asian countries and not just India, primarily occur through trade-based fraud and bulk cash carriers. Use of laundered black money in recent attacks in Europe by local terrorists, in the dastardly Mumbai attack and more, is proven beyond doubts and India’s current AML (Anti Money Laundering) laws are not completely immune to such terror funding either.
As a result, an indirect but crucial aspect of this move is also to strengthen India’s PMLA (Prevention of Money Laundering Act) to check money laundering at its source itself (rather than the destination).
Consider if the ‘dirty’money obtained through various financial and non-financial crimes becomes difficult to layer and integrate (hence launder) – assuming that laundering using other financial instruments such as digital currency (India is still far from becoming a cashless economy), and securities (thankfully to SEBI) is still not a major concern, then those involved in the crimes would be highly discouraged to perform it until they are assured that their money can be safely moved in and out.
Although this is where hawala (or Hundi) could come to help, if the new currency movement is tracked via satellite, then Hundi transfer will also be ineffective.
The world has already acknowledged that money laundering as a crime is synonymous with terror financing (especially after Sep 11, 2001 and even though its technically incorrect but that’s the reason why major AML laws in the world are named as AMLCTF laws which is counter-terror financing) and in India, no abuse of financial systems is possible without large volumes of cash exchange.
What We Need To Worry About
With respect to inflation and deflation worries that seem a bit genuine if money lending and loans become easier for banks to give away due to large deposits, RBI has already said in its press conference that they have thought this through and the economy will be monitored both on macro and micro level to check any such anomalies it may cause.
Another important sector where the changes could translate more rapidly is the Real Estate industry, which presumably has the maximum number of black money traders. Buying properties using black money may go up, but with no one taking the cash for it, the market prices may go down. Given how entrenched the system of black money is in India, this, and similar consequences in other sectors may happen over a period of time before they finally get used to the new changes.
The general public will face the heat to some extent but only in certain specific cases – urgent shopping that needs to be done for marriages or other social functions will all have to stand in long queues outside banks to exchange their money.
The core reason for corruption in India is the ease with which black money obtained can be saved and moved domestically and internationally without being checked. One area where this step may not be very effective if the money has already been layered and has become part of the economy in the form of hard assets. Because that money does not exist in the form of notes anymore.
However, once, sufficient cleanup has been done, and all safe routes to tax havens are closed (Note: routes to Swiss banks have already been closed). I am hopeful that even hard assets, a secondary problem, will be brought under the scanner.
Besides, it will help India, a full-fledged member of the FATF (Financial Action Task Force), to enhance its compliance with the global standards thereby improving our corruption and AML rankings as well.
The Road Ahead
First, what needs to be done is to check that small traders, farmers and vendors do not suffer any loss and that they are made aware of this change as soon as possible, so that and they don’t transact in the 500/1000 tender anymore.
In his 40 minutes of address, the PM has already appealed to the citizenry, political parties, workers, social organisations and the media to help the government implement this move successfully.
India is virtually opening all its gates to foreign investments through initiatives like Make in India, updated FDI norms, building economic corridors nationwide including even in the remotest corners of India as part of its Look-East and BCIM policies which would translate into a lot of business.
At 8:00 p.m., when the Prime Minister’s address to the nation began, hardly anyone would have thought that they were going to witness a historic announcement.
Desperate times calls for desperate measures.
In times when the whole world – from credit agencies, the IMF, the World Bank and, UN agencies – acknowledges that with a 7% growth, we are the fastest growing economy and are predicting a massive potential of a transformative progress in Indian economy amid slow global cues, November 8 could as well become a date that would be pinned to the second top spot like a magnet to the shelf of Indian stories (For me, GST continues to be the first sweeping measure).
Wrapping up, let us review the highlights of this breaking as we know it now. (More details and guidelines can be read on the RBI website).
From midnight Tuesday, all the old Rs. 500, Rs. 1000 notes will render illegal, and hence all transactions involving these would come to a stop. The only temporary exceptions being the government hospitals, crematoriums and cemeteries, ticket bookings at railway bus and airport counters, that will continue to accept old currency until midnight of November 11.
The time to replace your old notes of Rs 500 and Rs 1000 and get the new hi-tech Braille compliant currency issued is within 50 days from Nov 10 to December 30 at banks, post offices. To accommodate the number of requests, additional counters and working hours will be extended at banks.
Those unable to deposit ₹1000 and ₹500 notes by December 30 for some reason, can change them until March 31, 2017, by furnishing ID proof. Within this period, cheques, debit cards, e-transactions will continue as normal.
Banks and ATMs will be monitoring all the deposits and withdrawals for this period, and the FIU will share the same information. Any deposit of fake/illegal money through ATMs or tail deposit will be caught and dealt with.
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