On 22nd Nov morning when I opened Economic Times newspaper I saw an eye catching headline that read “Banning notes will not curb black money, says think tank that called for demonetization.” Anil Bokil is the mind who proposed the idea of demonetization to the Prime Minister Modi. Anil further adds “This is not what we proposed,” and “The government has only taken one part of our five-point plan.
To understand this, we need to look in to retrospect, how these things have started since the evening of 8th nov 2016 with the PM Modi’s speech on National Television. In the speech, he declared the 500 and 1000 rupees note as illegal tender and told public to exchange old currencies with new ones from the banks and post offices within 50 days period.
Recently, the Huffington post article ” Barter Economy Is Reborn in Villages as India Cancels Cash” reported ” how rural households are going back to traditional barter economy. The people are exchanging vegetables for honey in the absence of paper money.
Suddenly the economy and normalcy got interrupted and people were rushing to their nearest banks to deposit old currency and getting new ones. But, it seemed like another political gimmick to the poor, because there was no sign of cash neither in bank nor in the ATM. Long snake like queues were formed outside banks and people spent hours without food or water in hope to go home with new currency. Commoners were still in the hope to get clean white money but slowly – slowly their patience was waning with no cash scenario.
Supreme Court has told government to take care of the people’s unease and further warned that if the condition is not controlled then it can result in riot like situation. This situation is apparently not ideal condition as more than 70 people have died in the demonetization process.
Government is saying it will weed out the black money from the Indian economy. This is something which sounds good but how does the introduction of the new 2000 rupees notes will help in achieving this goal is not clear so far. For example, the new currencies will easy to counterfeit and people will be able to take bribe with less number of notes.
Before forming any opinion, we must first see what is a black money and what lessons other countries have learned from their demonetization steps.
According to the investopedia.com, “Black money is money which is earned through any illegal activity controlled by country regulations. Black money proceeds are usually received in cash from underground economic activity and, as such, are not taxed. Recipients of black money must hide it, spend it only in the underground economy, or attempt to give it the appearance of legitimacy through money laundering.”
Other countries experimented with the Demonetization and what were the outcomes.
The list of countries tried demonetization and mostly failed in their attempt.
Ghana
Ghana in 1982 has demonetized its 50 cedi note which was an attempt to control corruption, minimize tax evasion and maintain liquidity. But, it terribly went wrong and public lost faith in the banking system and they moved towards real estate and foreign currency.
Nigeria
In 1984, the Muhammadu Buhari government did demonetization of old currency and to replace them with the new color currency notes but in a limited time period. Hence, the debt free and inflated economy became a dream.
Myanmar
In 1987, to attack black money, the country’s military demonetized the 80 percent of their current currency which led to massive student protest against them.
Soviet Union
Mikhail Gorbachev in January 1991 also withdrew 50 and 100 Ruble notes to curb black money and inflation. This move was followed by another move of currency change which became highly unsuccessful.
Zaire
Dictator Mobutu Sese Seko’s tried to withdraw outdated currency in 1993. This resulted in public outrage and economic disruptions. Finally, the Mobutu lost power in 1997.
In the above examples, demonetization was unsuccessful and resulted in public unrest, investment in physical assets or foreign currency.
What can we infer from these examples? It is left on you to decide judiciously.
Indian past with demonetization
Now, Let us peek into the history of Indian demonetization which took place in 1946, and 1978.
In “The cycles of demonetisation: A look back at two similar experiments in 1946 and 1978” article written in the Economic Times Newspaper by Vikram Doctor crucial facts are highlighted such as:
“On January 16, 1978 it was announced that Rs 1,000, Rs 5,000 and Rs 10,000 notes were being withdrawn from circulation.” And the next day was declared as bank holiday to prepare banks for the move just like occurred in the present scenario.
Hence, the long queues were formed at RBI and State Banks Offices from early morning, and additional counters were put in place to help public. As per RBI history, “ January 18 “started with utter confusion over the issue of declaration forms at the Reserve Bank headquarters at Bombay and working hours were stretched to 6.30 pm.”
Opponents then said the move was targeted towards political opponents rather than the economy. Same sentiments and voices can be heard now also from opposition and even government alleys such as Shiv Sena’s march with opposition parties to protest their fury against the Modi’s demonetization act.
In 1946, the demonetization resulted in the less than 10 crores rupees in tax revenue from tax evasion and other thought illegal sources. Read the statements in the RBI Document disclosed in the TOI blog by Sanjiv Shankaran and also shown below:
“Sir Chintaman Deshmukh (governor) felt that we may not get even as much as Rs. 10 crores as additional tax revenue from tax evasion and that the contemplated measure, if designed to achieve such a purpose, has no precedent or parallel anywhere. If value is going to be paid for value (no matter whether such value is in lower denomination notes), it is not going to obliterate black markets. His advice is that we should think very seriously if for the object in view (as he deduces from the declaration form) whether this is an opportune time to proceed with the scheme. Provided Government are satisfied on the points of (i) sparing harassment to the unoffending holders and (ii) a worthwhile minimum of results in the shape of extra tax revenue, he does not wish to object to the scheme as drafted, if Government wish to proceed with it notwithstanding the administrative difficulties involved.”
And In 1978, the Janta Party’s demonetization drive resulted in a massive slowdown of trade and economy. AS reported in the Janta Party’s Ordinance which was published by TIMES OF INDIA report on 17th Jan 1978, quoted that
“A press note issued tonight said that the ordinance had been promulgated because there was reason to think that high-denomination notes were facilitating the illegal transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes. There has been concern in recent months over the behaviour of agricultural prices particularly of edible oils. In spite of a bumper harvest agricultural prices are ruling much higher than after the poor harvest of 1976- 77. Massive imports of edible oil have failed to bring down prices and the mustard oil price control order has failed miserably to give the consumer his requirements at the specified rate. There has been a feeling that a considerable amount of black money has gone to finance hoarding and speculation. The demonetisation of high denomination currency notes will hit black money hard.”
Present condition of India
The article “ 86% of currency by value in India are of Rs 500 & Rs 1,000 denominations” published in the Business Standard Newspaper briefs about the present currency circulation. It says that “Currently Rs 17,54,000 crore worth of notes are in circulation according to the RBI’s database on the Indian economy. Of this Rs 500 notes constituted almost 45% of the currency in circulation while 39% of the notes were of the Rs 1,000 denomination. “
According to the Ritesh Pai, Senior President and Country Head of Digital Banking for Yes Bank, in a conversation with Gadgets 360 NDTV said “Cash will never be eliminated in India,”
The problem with India is that 80 of the economy is cash based or say nearly 2/3 of India’s GDP is cash economy which is wiped off due to currency ban of 1000 and 500 rupees notes. And people are badly hit by this move as it slowed down economy disclosed in the “Demonetisation has turned India into world’s fastest slowing economy” article on the Dailyo.in website.
The puzzling question is how much black money is in the market? How this currency ban will benefit our future, only the time will tell. Is it a boon or bane for the economy as we can’t utter a word about it now? Wait for the distant future. But now one thing is clear that presently it has slowed down the economy and it will take months to revive the growth and come on track and ride the horse. So just hope for the best and wait for outcome.