Curbing black money But at what cost?

When the world was busy watching the US presidential election on November 8, 2016, Indian Prime Minister Narendra Modi made a surprise televised announcement that Rs 500 and Rs 1000 bank notes would no longer be legal tender, while new Rs 500 and Rs 2000 notes would be introduced. The announcement came at the stroke of midnight. 

The decision stunned the people of the country as there was no warning, or even a rumour, to the sudden demonetisation measure. The main reason for the drastic decision was to flush out black money. People were given 50 days till the end of the year to deposit the banned notes in bank accounts or to exchange them for new ones, with a threshold of Rs 4000 per customer.
Black money is illegally obtained money, or earned money for which income tax is not paid. In both cases, the funds remain unaccounted for, but still circulated in the economy. Despite India being a large country, and the third largest economy in Asia, a very small proportion _ around only two percent _ of the entire population of 1.3 billion pays income tax. So, a colossal amount of money goes untaxed. Thus, the Indian prime minister regards black money as the ‘villain’ of the country as it impedes economic development. 
Black money deprives the government of its legitimate reserves. Implementation of the latest policy is meant to help tackle corruption and illegal transactions. It would also hit terror networks as funding of militant groups usually consists of illegal drug sales, smuggling, paying bribes, funneling of wealth by rich overseas patrons or counterfeiting of currency in other countries. 
Modi’s strategy will help to crackdown on rampant tax evasion and raise government revenue, so more can be spent on development activities in the future. It will bring the economy out of the shadow and into the banking system. And thus, the Indian economy is expected to flourish at a faster rate in the long run. All this is expected to occur in the future, but what about the present scenario? 
Cash is king in India. Around 86 percent of all Indian currency is actually defunct, and almost 90 percent of the population does not have bank accounts. Now, the whole concept of making ‘a cashless society’ seems a fringe belief. People, especially the lower and middle income groups, have felt the pinch. Long queues snaked outside banks and ATM booths to exchange the valueless bank notes with newer Rs 500 and Rs 2000 currencies. 
Normal life was thrown out of order. Shopping malls became desolate and restaurants quiet. Many people were reported dead as hospitals refused to accept the old notes. Winter is traditionally a wedding season in India, but many marriage ceremonies had to be delayed or called off as people failed to arrange the usually extravagant events with scrapped notes. Cash-strapped people wandered around streets like vagabonds. Cash-intensive businesses came to a halt. Rural and agricultural sectors, particularly the traders, faced the negative consequences. Even printing of the new notes incurred huge costs, which had to be borne by the government. In fact, the economic growth slowed down. And there is definite evidence of short-term distortion of social welfare.  
The strategy of stripping off high-value bank notes to curb black money is a master stroke. In the long run, there will be benefits. But the question is when and at what cost? The scenario resembles a Bollywood movie scene when the hero takes on the villain. During the dramatic scene, the viewers are always busy watching the fight where the hero eventually wins in the end. But we hardly notice the massive destruction and the innocent lives lost during such action scenes. Aren’t those losses of any consequence? We are always keen to see the villain defeated, ignoring the high cost involved. 
Life is certainly not like the movies, there is no assurance that the villain _ black money in this case _ will be wiped out in the end. There is no guarantee that the short term constraints will be worth the long term benefits. Modi’s demonetisation decision is an audacious gamble. And if the cost is higher than the benefit of curbing black money, then may turn to be counter-productive.

The writer is a student of Economics at East West University.

Curbing black money But at what cost?

When the world was busy watching the US presidential election on November 8, 2016, Indian Prime Minister Narendra Modi made a surprise televised announcement that Rs 500 and Rs 1000 bank notes would no longer be legal tender, while new Rs 500 and Rs 2000 notes would be introduced. The announcement came at the stroke of midnight. The decision stunned the people of the country as there was no warning, or even a rumour, to the sudden demonetisation measure. The main reason for the drastic decision was to flush out black money. People were given 50 days till the end of the year to deposit the banned notes in bank accounts or to exchange them for new ones, with a threshold of Rs 4000 per customer. Black money is illegally obtained money, or earned money for which income tax is not paid. In both cases, the funds remain unaccounted for, but still circulated in the economy. Despite India being a large country, and the third largest economy in Asia, a very small proportion _ around only two percent _ of the entire population of 1.3 billion pays income tax. So, a colossal amount of money goes untaxed. Thus, the Indian prime minister regards black money as the villain of the country as it impedes economic development. Black money deprives the government of its legitimate reserves. Implementation of the latest policy is meant to help tackle corruption and illegal transactions. It would also hit terror networks as funding of militant groups usually consists of illegal drug sales, smuggling, paying bribes, funneling of wealth by rich overseas patrons or counterfeiting of currency in other countries. Modis strategy will help to crackdown on rampant tax evasion and raise government revenue, so more can be spent on development activities in the future. It will bring the economy out of the shadow and into the banking system. And thus, the Indian economy is expected to flourish at a faster rate in the long run. All this is expected to occur in the future, but what about the present scenario? Cash is king in India. Around 86 percent of all Indian currency is actually defunct, and almost 90 percent of the population does not have bank accounts. Now, the whole concept of making a cashless society seems a fringe belief. People, especially the lower and middle income groups, have felt the pinch. Long queues snaked outside banks and ATM booths to exchange the valueless bank notes with newer Rs 500 and Rs 2000 currencies. Normal life was thrown out of order. Shopping malls became desolate and restaurants quiet. Many people were reported dead as hospitals refused to accept the old notes. Winter is traditionally a wedding season in India, but many marriage ceremonies had to be delayed or called off as people failed to arrange the usually extravagant events with scrapped notes. Cash-strapped people wandered around streets like vagabonds. Cash-intensive businesses came to a halt. Rural and agricultural sectors, particularly the traders, faced the negative consequences. Even printing of the new notes incurred huge costs, which had to be borne by the government. In fact, the economic growth slowed down. And there is definite evidence of short-term distortion of social welfare. The strategy of stripping off high-value bank notes to curb black money is a master stroke. In the long run, there will be benefits. But the question is when and at what cost? The scenario resembles a Bollywood movie scene when the hero takes on the villain. During the dramatic scene, the viewers are always busy watching the fight where the hero eventually wins in the end. But we hardly notice the massive destruction and the innocent lives lost during such action scenes. Arent those losses of any consequence? We are always keen to see the villain defeated, ignoring the high cost involved. Life is certainly not like the movies, there is no assurance that the villain _ black money in this case _ will be wiped out in the end. There is no guarantee that the short term constraints will be worth the long term benefits. Modis demonetisation decision is an audacious gamble. And if the cost is higher than the benefit of curbing black money, then may turn to be counter-productive. The writer is a student of Economics at East West University.