Why Modi killed black bucks
Black money and corruption are the biggest obstacles to socioeconomic development
in India
Rebecca Bundhun
In a surprise late-evening televised address on Tuesday, Indias Prime Minister Narendra Modi announced demonetisation of 500- and 1,000-rupee currency notes, instantly rendering them invalid. Modi said these notes can be exchanged for new 500- and 2,000-rupee notes at banks. The deadline for doing so has been belatedly set as March 31, 2017. Proof of identity will be required for each transaction.
Meanwhile, old notes can be used until November 11 at hospitals and crematoriums, and to buy air, train and bus tickets.
Its a dramatic move aimed at stamping out corruption and flushing out illegal cash from the economy. But how?
Let us consider that someone has a stash of cash. Lets assume that all the notes are of Rs1,000- rupee denomination. Now that Rs500 and Rs1,000 notes have been scrapped, they will have to exchange their Rs1,000 notes for smaller denominations. But the problem is that they will have to declare the source of that cash holding and open up that money to scrutiny and the countrys taxation system.
There is another problem the limit for exchange is Rs4,000 per visit to the bank. For each transaction, one will have to produce a PAN card (permanent account number, a unique 10-digit alphanumeric identity allotted to each taxpayer by the tax department) or Aadhar card (which serves as a proof of identity and address, anywhere in India). All this means that a person holding large amounts of illegal money in Rs500 and Rs1,000 denominations will not be able to exchange money easily or use their remaining notes at all.
This move will not just bring down the amount of illicit or black money, but is expected to reduce inflation as well.
The question is why these two denominations?
According to the government, black money is mostly kept in Rs500 and Rs1,000 notes and its these denominations which counterfeiters most often produce. This explains why the government has got rid of Rs1,000 notes even while introducing a new series of high denominations.
Black money has been a matter of concern in India for many years.
Yet, the focus of attention has always been on funds stashed abroad, especially in Switzerland. Domestic black money, which is easier to retrieve owing to the fact that its governed by rules of the country unlike the black money kept offshore, has been wilfully ignored by successive government. This is what makes Modis move so significant. The shadow economy in Mumbai is so rampant it is hard to imagine the city functioning without it.
From developers asking for under-the-table part payments in cash for properties, customers in jewellery shops seen handing over huge wads of rupees, street traders who will exchange money at rates that beat the banks, to bribes being paid left, right and centre. Such dealings involving so-called black money are all commonplace and part of Indias rich parallel economy.
Black money has come into sharp focus recently with the government handing over the names of 627 Indians believed to be holding untaxed cash in foreign bank accounts. Narendra Modi, Indias prime minister, has promised to recover all of Indias money illegally stashed overseas, estimated to run into hundreds of billions of dollars, so the funds can be used to support the countrys poor.
