Demonetisation In India
The Bharatiya Janata Party (BJP) spearheaded their 2014 general election campaign with the slogan ‘Sab ka saath and sab ka vikaas’. They are living up to it now with their boldest move since being elected to power — the demonetisation of Rs.1000 and Rs.500 notes. This move comes in light of the governments constant effort to do away with the menace of black money.
Demonetisation basically means that the Rs.1000 and Rs.500 notes will loose their legal tender and will be nothing but scrap. This isn’t the first instance of demonetisation in India. If we look back in time there have been two instances of this move being carried out with little success. The demonetisation of higher denomination banknotes was first done in January 1946, when Rs.1000 and Rs. 10,000 banknotes, which were in circulation back then were demonetised. This was done with the same intention to bring the parallel black economy under control.The higher denomination banknotes of Rs.1000, Rs.5000 and Rs. 10,000 were reintroduced in 1954. The second demonetisation of these banknotes was in 1978 with the introduction of The High Denomination Banknotes (demonetisation) act, 1978.
This year the government has demonetised the Rs 1000 and Rs. 500 banknotes and introduced new Rs.500 and Rs.2000 banknotes. There is a timeline till the 30th of December 2016 to deposit the older currency and exchange it for the new ones. This move by the government as I have mentioned earlier was done to fight the black money in our economy which is basically the unaccounted money on which no tax is paid. For example, If you go to buy a scooter worth Rs. 30,000 and the seller makes a bill of 20,000 then the difference of Rs. 10,000 is the unaccounted money which will become the sellers black money. This black money has created a “parallel economy” which has seriously undermined the GDP of our country and caused inflation.
Now let me explain what ‘parallel economy’ means. Parallel economy basically means the functioning of an unsanctioned sector in the economy whose objectives run parallel and in contradiction with the objectives of the official or sanctioned or legitimate sector of the same economy. It is basically ‘Tax Evaded’ money or money on which taxes are not paid. This parallel economy has infused a lot of currency into the economy which will in turn increase the demand in the market hence causing a rise in prices of commodities or ‘Inflation’. This price rise is because of the great amount of currency in the economy which will in turn undermine the value of the currency. The amount of black money is approximately around $1 trillion. Now, that is a ginormous amount of money. If things would continue the way they were going then maybe in the next decade or sooner we would be faced with the extreme situation of ‘hyperinflation’ of Zimbabwe. So with the sudden withdrawal of the higher denomination banknotes, which accounted for almost 86% of the total currency in circulation according to RBI, the Government has effectively curbed and successfully dealt with the situation of black money and inflation to a certain extent.
RBI data shows that in 2015-16, almost 6.5 lakh counterfeit notes were detected in commercial banks of which almost 4 lakh were in the Rs. 500 and Rs. 1000 category.The counterfeit currency causes great misbalance in an economy and also is the form in which terrorism is funded. There are reports that the ISI has great interests in the counterfeited Indian currency to create disturbances in the Indian economy. With the demonetisation of the higher denomination banknotes the Government has dealt a serious blow to the terrorist and organised criminal activities in India.
Many people question the introduction of Rs.2000 instead of the Rs.1000. The basic question is that, won’t it be easier for the corrupt people to store this higher denomination than Rs.1000 banknotes? The question of hoarding should not arise because firstly this introduction of Rs.2000 notes is just to fight with the present shortage in the currency due to the demonetisation hence the Rs.2000 banknotes will probably be demonetised with the reintroduction of a redesigned Rs.1000 banknote. There is still some need, especially among India Inc. and small businesses to use cash and the Rs. 2000 note will help. In the RBI and Finance Ministry press conference Economic Affairs Secretary Shaktikanta Das noted that the central bank would cautiously “monitor and regulate the issuance of Rs.2000 notes in the future”. This also means that the Rs.2000 notes are unlikely to be produced in large numbers. Also the production of the Rs.2000 and the Rs.1000 notes is almost similar. Hence the Government is providing higher denomination with a lower cost of production of the said banknotes. The introduction of the higher denomination will also fight the present inflation rates.
With this move the government has also forced many people to adopt digital banking. This is a move towards India becoming a cashless economy. Lesser use of currency will result in lesser black money as the transactions of the people will be monitored in a cashless economy with much ease.
There are many political parties, or I would say all parties in India which have shady ‘party fundings’ as they call it. This demonetisation is causing such a pain to the Congress and other parties because of the large amount of black money that was used in funding their elections. This move is also going to have serious consequences for many parties in the upcoming UP and Punjab elections.
Problems arising out of the Demonetisation
Prime Minister Modi mentioned in his speech that this move will cause “temporary hardships”.
- The temporary hardships will mainly be because the sudden demonetisation is a logistical nightmare for the banks to get the new currency. The RBI is in a race against time to get the currency into circulation.
- There are serpentine queues outside banks since they have opened up for exchange and transaction. The banks have to provided with sufficient currency at a faster rate to deal with the exchange.
- The people in remote areas and villages are still in total darkness about the move and the media has to act effectively to make them aware of the situation at hand.
- If the Rs.2000 banknotes issuance is not cautiously monitored then it will be logistically convenient for offenders.
- There are cases where offenders were rushing to jewellery stores to buy Gold. This has caused the prices of bullion to rise drastically. The Government must battle this issue seriously and quickly to reduce future problems due to rapid sell out of bullion.
This entire process will be successful as the International Monetary Fund commented if it is “prudently” handled. The citizens of our country should participate in this ‘mahayajna’ against black money and corruption. Let us see this through and hope for ‘Acche din’.